Popular, Inc. 2007
Annual Report
Informe Anual
1
2
5
6
8
17
Letter to Shareholders
Popular, Inc. At-a-Glance
Institutional Values
25-Year Historical Financial Summary
Board of Directors /
Corporate Leadership Circle /
Our Creed / Our People /
Corporate Information
Financial Review and
Supplementary Information
9
10
13
14
16
Carta a los Accionistas
Un Vistazo a Popular, Inc.
Valores Institucionales
Resumen Financiero Histórico – 25 Años
Junta de Directores /
Círculo de Liderato Corporativo /
Nuestro Credo / Nuestra Gente /
Información Corporativa
Popular, Inc. is a full service financial institution based in
Popular Inc. es un proveedor de servicios financieros completos
Puerto Rico with operations in Puerto Rico, the United States,
con operaciones en Puerto Rico, Estados Unidos, el Caribe y
the Caribbean and Latin America. As the leading financial
América Latina. Como institución financiera líder en Puerto
institution in Puerto Rico, with over 300 branches and offices,
Rico, con más de 300 sucursales y oficinas, la Corporación
the Corporation offers retail and commercial banking services
ofrece servicios bancarios comerciales y a individuos a través de
through its franchise, Banco Popular de Puerto Rico, as well
su franquicia, Banco Popular de Puerto Rico, así como servicios
as auto and equipment leasing and financing, mortgage loans,
de arrendamiento y financiamiento de vehículos y equipo,
consumer lending, investment banking, broker/dealer and
préstamos hipotecarios, financiamiento individual, corretaje
insurance services through specialized subsidiaries. In the
y banca de inversión y seguros a través de subsidiarias
United States, the Corporation operates Banco Popular North
especializadas. En los Estados Unidos, la Corporación opera
America, including its wholly-owned subsidiary E-LOAN, and
Banco Popular North America, incluyendo su subsidiaria
Popular Financial Holdings. Banco Popular North America,
E-LOAN y Popular Financial Holdings. Banco Popular North
a community bank, provides a wide range of financial services
and products and operates branches in New York, California,
America, un banco comunitario, provee una amplia gama de
servicios y productos financieros y opera sucursales en Nueva
Illinois, New Jersey, Florida and Texas. E-LOAN offers online
York, California, Illinois, Nueva Jersey, Florida y Texas. E-LOAN
consumer direct lending, while Popular Financial Holdings is
provee financiamiento en línea directo al consumidor, mientras
dedicated to mortgage servicing. The Corporation, through its
que Popular Financial Holdings se dedica a préstamos
transaction processing company, EVERTEC, continues to use
hipotecarios manejados a terceros. La Corporación, a través
its expertise in technology as a competitive advantage in its
de su compañía de procesamiento de transacciones financieras
expansion throughout the United States, the Caribbean and
EVERTEC, continúa usando su experiencia en tecnología como
Latin America, as well as internally servicing many of the
una ventaja competitiva para su expansión en Estados Unidos,
Corporation’s subsidiaries’ system infrastructures and
el Caribe y América Latina, y prestando internamente servicios
transactional processing businesses. The Corporation is
a las infraestructuras de sistemas así como procesamiento a las
exporting its 114 years of experience through these regions
subsidiarias de la Corporación. La Corporación está exportando
while continuing its commitment to meeting the needs of retail
sus 114 años de experiencia a estas regiones mientras continúa
and business clients through innovation, and to fostering
su compromiso con satisfacer las necesidades de clientes
growth in the communities it serves.
individuales y comerciales por medio de la innovación, y con
fomentar el crecimiento en las comunidades donde sirve.
Popular, Inc.
2007 Annual Report
1
Decisions we made during 2007 were
extremely difficult, but will place us in
a better position moving forward.
Letter
2007
to Shareholders
Popular’s financial performance in 2007 was significantly influenced by the negative
impact of the mortgage industry downturn in the results of our non-banking opera-
tions in the United States and by actions we undertook to address that situation.
These decisions, while extremely difficult, place us in a better position going forward
as we focus on our core banking franchise in the mainland. In Puerto Rico, our finan-
cial services business continued delivering strong results, despite an economic recession
and deteriorating credit quality. EVERTEC, our processing business, showed steady
earnings growth and made progress on several strategic fronts.
Popular reported a net loss of $64.5 million for 2007, compared with a net income
of $357.7 million in 2006. Basic and diluted net loss per common share for the year
was $0.27, compared with a net income per common share of $1.24 for 2006. These
losses represented a negative return on assets (ROA) of 0.14% and a negative return on
common equity (ROE) of 2.08%, compared to 0.74% and 9.73% in 2006, respectively.
Our results for 2007 were negatively affected by (i) a $274.9 million increase in
the provision for loan losses in 2007 as compared to 2006, driven by the slowdown
in the United States housing sector and weak economic conditions in Puerto Rico; (ii)
a $90.1 million pre-tax loss related to the recharacterization of several on-balance sheet
securitizations at Popular Financial Holdings (PFH); (iii) a reduction of $85.1 million
in the fair value of residual interests recognized by PFH in previous securitizations;
2
Popular, Inc. At-a-Glance
Letter to Shareholders, continued
Banco Popular de Puerto Rico
> Approximately 1.4 million clients
> 204 branches and 111 offices throughout
Puerto Rico and the Virgin Islands
> 6,442 FTEs as of 12/31/07
> 615 ATMs and 28,000 POS throughout
Puerto Rico and the Virgin Islands
> #1 market share in Total Deposits
(34.9% - 9/30/07) and Total Loans
(23.0% - 9/30/07)
> $27.1 billion in assets, $16.6 billion in
loans and $18.8 billion in deposits
as of 12/31/07
Banco Popular North America
> 147 branches throughout six states
(Florida, California, New York, New
Jersey, Texas, and Illinois)
> 24 leasing offices with a presence
in 15 states
> 2,923 FTEs as of 12/31/07
> 5th SBA lender in the United States
in terms of dollars of loans
> E-LOAN held $1.5 billion in deposits
and originated $3.6 billion in loans
during 2007
> $13.4 billion in assets, $10.3 billion in
loans and $9.8 billion in total deposits
as of 12/31/07
EVERTEC
> 11 offices throughout the United States
and Latin America serving 15 countries
> 1,765 FTEs as of 12/31/07
> Processed over 1 billion transactions
in 2007, of which more than 535 million
corresponded to the ATH® Network
> 4,944 ATMs and over 100,500 POS
throughout the United States and
Latin America
Popular Financial Holdings
> 135 offices in 16 states as of 12/31/07
> Total originations amounted to $3.4
billion in 2007
> Mortgage portfolio serviced for others
of $9.4 billion as of 12/31/07
> 930 FTEs as of 12/31/07
> $3.9 billion in assets and $3.3 billion
in loans
secondary market. In the case of Banco
Popular North America (BPNA), we
embarked on a process to focus our
resources to improve the profitability
of our retail franchise.
Popular Financial Holdings
PFH recorded a net loss of $269.4
million in 2007. These results reflect
the deterioration of the sub-prime
mortgage business as well as charges
related to some of the initiatives we
undertook during the year.
In January of 2007, we adopted a
restructuring plan for PFH which
included the decisions to exit the whole-
sale sub-prime origination business, to
consolidate support functions with its
sister United States banking entity, Banco
Popular North America, and to focus on
profitable businesses.
As a result of the restructuring plan
and the decision to exit the wholesale
sub-prime business, we completed the
recharacterization of certain on-balance
sheet securitizations that allowed us to
recognize these transactions as sales.
Consequently, we removed approxi-
mately $3.2 billion in mortgage loans
and $3.1 billion in related liabilities
from our balance sheet. The impact of
the recharacterization was a pre-tax loss
of $90.1 million. The removal of these
mortgage assets from our books
improves capital and credit quality ratios
and reduces the amount of sub-prime
mortgages on our books.
Most of PFH’s remaining portfolio
amounting to approximately $1.5 billion
and $287 million of bond certificates
associated with on-balance sheet securiti-
zations will be presented at market value
based on FAS 159 (Fair Value Option
for Financial Assets and Financial
(iv) $16.6 million in restructuring
charges at PFH; and (v) $231.9 million
in restructuring and impairment charges
at E-LOAN. These negative variances
were partially offset by a pre-tax gain of
$118.7 million stemming from the sale
of the Corporation’s shares of common
stock of Telecomunicaciones de Puerto
Rico, Inc. (TELPRI) in March of 2007.
Our stock price fell 41% during
2007, closing the year at $10.60. We
are extremely disappointed with our
financial results as well as the perform-
ance of our stock. We recognize these
results are unacceptable and have begun
a process to realign our operations in the
United States to take them to acceptable
profitability levels.
United States
At Popular Financial Holdings (PFH),
our mainland United States sub-prime
lending operation, we reduced the size of
the business and took measures to lessen
our exposure to the sub-prime mortgage
market. At E-LOAN, we adapted the
business model and right-sized our
infrastructure to reflect a market with
significantly lower volumes, higher
delinquencies and a practically illiquid
Popular, Inc.
2007 Annual Report
3
Liabilities). The adoption of FAS 159,
which will be implemented on January
1st, will result in a negative pre-tax
adjustment that could range between $280
million and $300 million that will have
no impact in the income statement since
it will be deducted from retained earnings.
At the time of the January 2007
restructuring, we decided to continue
the operations of Equity One and its
subsidiaries, which are dedicated to origi-
nating and servicing consumer finance
loans through a network of over 130
offices. However, given increasing funding
costs stemming from the disruption in the
capital markets that began in the summer
of 2007, we became convinced that it
would become progressively more diffi-
cult to generate an adequate return on the
capital invested at Equity One. In January
2008, we announced the signing of an
agreement to sell certain assets of Equity
One to American General Financial, a
member of the American International
Group (AIG). As part of the agreement,
American General acquired a significant
portion of Equity One’s mortgage loan and
consumer loan portfolio approximating
$1.4 billion as well as 24 of Equity One’s
branches. We will be closing the remain-
ing branches. The transaction which
closed on March 1st, 2008, resulted in
restructuring charges of $19.5 million,
most of which will be recorded in the first
quarter, and generated a pre-tax gain of
approximately $50 million.
The combined effect of the aforemen-
tioned initiatives is a reduction of PFH’s
mortgage loans held-in portfolio from
$6.9 billion in the beginning of 2007
to approximately $1.3 billion as of
December 2007, of which $1 billion is
sub-prime compared to a sub-prime
portfolio amounting to $4.6 billion as of
December 2006. Also, these initiatives
enable us to present a clearer picture of
Popular’s real exposure in this business.
Banco Popular North America
Banco Popular North America (BPNA),
which includes E-LOAN as a subsidiary,
reported a net loss of $195.4 million in
2007. This loss was driven by a net loss
of $245.7 million at E-LOAN.
BPNA’s banking operations generated a
net income of $50.5 million, which, even
though positive, was 50% below 2006.
BPNA’s results were adversely affected by
increased credit costs and lower net inter-
est income. BPNA’s provision totaled $77.8
million, 106% higher than in 2006, due
to the higher non-performing assets in the
construction loan and mortgage portfolios.
Net interest income was $14.5 million
below 2006 levels due to tighter margins.
Given the challenges we face, we took
action to focus and prioritize resources.
In October 2007, we announced the sale
of six of our Houston, Texas branches to
Prosperity Bank. Prosperity Bank paid a
premium of 10.10% for approximately
$125 million in deposits, and purchased
certain loans and assets attributable to
the branches. We will focus our efforts
on improving the performance of the
branch network we have built in the
United States to enhance the value of
our retail franchise.
E-LOAN incurred a net loss of
$245.7 million in 2007, which includes
restructuring charges of $20.1 million
and goodwill and trademark impairment
charges amounting to $211.8 million.
We will focus our efforts
to enhance the value
of our retail franchise.
E-LOAN’s business continued to be
severely impacted by market conditions
during 2007. A general decline in
mortgage origination volume, significant
increases in delinquencies and foreclo-
sures and reduced liquidity in the
secondary markets prompted us to
restructure E-LOAN. In November 2007,
we adopted a restructuring plan that
substantially reduced marketing and
personnel expenses and focused E-LOAN
in the origination of agency conforming
first mortgage loans. This plan resulted
in restructuring charges of $20.1 million
in the fourth quarter of 2007 and is
expected to reduce operating expenses
by $77 million in 2008.
Given the changes to the business
model and the challenging environment
faced by the mortgage industry in the
United States, we conducted an assess-
ment of the value of E-LOAN’s recorded
goodwill and trademark. The review
resulted in the recognition of an impair-
ment. This charge was a non-cash
transaction and did not impact Popular’s
liquidity or regulatory capital ratios.
E-LOAN continues to be an important
element for Popular given its technology
platform, the wide geographic reach of its
products, its ability to raise deposits for
the Corporation and its widely known
and respected brand.
4
Letter to Shareholders, continued
Puerto Rico
Our financial services operations in
Puerto Rico, which consist of Banco
Popular de Puerto Rico and other special-
ized subsidiaries, performed very well in
2007 despite an economy in recession,
deteriorating credit quality and aggressive
competition. These results confirm our
capacity not only to withstand these nega-
tive forces, but to strengthen our position
even in the most challenging of times.
Net income for the Puerto Rico circle
totaled $327.3 million, $28.6 million
lower than in 2006. Financial results
were impacted by deterioration in credit
quality, which translated in a provision for
loan losses of $243.7 million, 73% higher
than the previous year. Net charge-offs
rose by 69%, reaching $191 million,
mostly in the commercial, credit card
and personal loan portfolios. Throughout
the year, we focused on proactively
managing credit quality by tightening
underwriting standards, anticipating
possible losses, increasing spreads and
improving collection efforts.
Notwithstanding our careful approach
in the credit arena, we were able to
defend and increase our market share
across the board. Market share gains get
tougher every year, considering we are
already the top player in seven out of the
nine key product categories we closely
track. During 2007, we improved our
position in eight out of the nine categories,
accounting for 23% of total loans and
35% of total deposits in the market.
We will continue to focus on profitable
market growth to further solidify our
leadership position in Puerto Rico.
In addition to growing our existing
business, we strengthened our franchise
with the acquisition of Citibank’s local
retail business and Smith Barney’s local
retail brokerage operations. The retail
business acquisition included 17 branches
(seven of which were consolidated),
approximately $1 billion in deposits,
mostly core deposits, and over $220
million in loans. Including these deposits,
Popular’s market share rose to approxi-
mately 38%. We welcomed over 200
new colleagues and a solid client base
which offers great potential to cross-sell
additional Popular products. The local
securities business is highly concentrated,
with 60% of assets under management
(AUM) controlled by the top two players.
The Smith Barney transaction strengthens
our sales force and provides additional
business volume ($1.2 billion in AUM),
significantly closing the gap between
Popular Securities and the second player.
Improving cost efficiency remained
one of Banco Popular’s priorities in 2007.
Expenses were 4.7% higher than in
2006, in great part due to costs related
to the conversion of Citibank’s retail and
brokerage operations. However, even
though these costs were not in the origi-
nal budget, total expenses for the year
were below budget due to disciplined
spending in other areas. As a result of
our cost efficiency efforts throughout the
last three years, we have improved our
efficiency ratio from 55.8% in 2005 to
52.9% in 2007.
We expect the tough economic scenario
to persist well into 2008, but as we proved
in 2007, discipline, a focus on execution
and a strong franchise can not only get us
through the toughest times, it can make
us emerge even stronger than before.
As we proved in 2007,
discipline and focus
on execution can make
us emerge stronger.
EVERTEC
EVERTEC, our processing unit with oper-
ations in Puerto Rico, the Caribbean and
Latin America, increased revenues, net
income and transaction volume in 2007
despite a recession in its main market,
Puerto Rico, and increased competition
from larger processing companies across
all regions.
EVERTEC’s net income in 2007
reached $31.3 million, an increase of 20%
over 2006. These results were driven by
good revenue growth, mainly from clients
other than Popular companies, combined
with tight expense management.
In addition to solid financial results,
EVERTEC made important progress in
several of its key strategic areas, such as
enhancing the competitiveness of the
ATH® Network. For over 20 years, ATH®
has been the preferred, as well as the
most secure and cost effective payment
method for Puerto Ricans. During 2007,
the ATH® network processed over 535
million transactions through 4,944 ATMs
and 100,500 POS terminals. In recent
years, ATH® has experienced increased
competition from Visa and MasterCard
due to the rise in signature debit cards.
In response to this challenge, the ATH®
Network in Puerto Rico updated its
price structure to give greater financial
Popular, Inc.
2007 Annual Report
5
Institutional Values
Social Commitment
We are committed to work
actively in promoting the social
and economic well-being of the
communities we serve.
Customer
We achieve satisfaction for
our customers and earn their
loyalty by adding value to each
interaction. Our relationship with
the customer takes precedence
over any particular transaction.
Integrity
We are guided by the highest
standards of ethics, integrity
and morality. Our customers’
trust is of utmost importance
to our institution.
Excellence
We believe there is only one way
to do things: the right way.
Innovation
We foster a constant search
for new solutions as a strategy
to enhance our competitive
advantage.
Our People
We strive to attract, develop,
compensate and retain the most
qualified people in a work
environment characterized by
discipline and affection.
Shareholder Value
Our goal is to produce high
and consistent financial returns
for our shareholders, based on
a long-term view.
incentives to member banks while
remaining the lowest-cost alternative for
merchants. These changes will solidify
and protect the ATH® brand and foster
long-term growth of the business.
In Puerto Rico, we added several
financial institutions to our client roster as
well as expanded the services offered to
existing clients. EVERTEC now processes
approximately 75% of all checks and
electronic interchange in Puerto Rico.
We expanded our workforce management
business with the acquisition of SENSE,
a software development company that
provides solutions for human resources,
payroll, and time and attendance. The
health systems business acquired a port-
folio of medical providers and increased
the number of processed transactions
by approximately 20%. EVERTEC Latin
America had an excellent year, signifi-
cantly increasing revenues and adding
important customers in the region,
despite the entry of international proces-
sors resulting from the acquisition of local
banks by large international players.
EVERTEC’s results and strategic
accomplishments during 2007 corroborate
the strategy we laid out four years ago of
leveraging our existing infrastructure to
generate additional revenues and further
diversify our sources of income.
Moving Forward
Throughout this challenging year, the
guidance and support of our Board of
Directors has been very significant and
greatly appreciated. I would like to recog-
nize José B. Carrión (Pepe) for his service
in the Banco Popular and Popular, Inc.
Boards. For seven years, this organization
greatly benefited from his counsel and
insight. Pepe retired in 2007 upon reaching
the mandatory retirement age. At the
same time, we are extremely pleased to
welcome Michael Masin to our Board
of Directors. I know that Michael’s vast
experience as part of the management
and the Boards of some of the top
corporations in the United States will
be of great value to Popular.
Also, after serving Popular for 30 years,
our Executive Vice President in charge of
People, Communications and Planning,
Tere Loubriel will retire in March. Tere
held a wide variety of positions through-
out the years, all of them with the same
level of dedication and commitment to
excellence. We will miss her tremendously
and wish her the best. Eduardo Negrón,
our Deputy Chief Legal Officer for
seven years, will direct the People and
Communications area going forward.
In retrospect, 2007 was definitely
one of the most challenging years that
our Corporation has faced to date.
Unprecedented conditions and turmoil
in the financial services industry have
put our organization to the test. Our
people responded as they always have,
focusing their attention and energy to
define and execute what was necessary
to tackle the issues at hand. Now, more
than ever, we are confident about our
ability to go forward and return Popular to
the growth and profitability levels that have
characterized this organization’s history.
Richard L. Carrión
Chairman, President
and Chief Executive Officer
6
25-Year Historical Financial Summary
(Dollars in millions, except per share data)
Selected Financial Information
Net Interest Income
Non-Interest Income
Operating Expenses
Net Income
Assets
Net Loans
Deposits
Stockholders’ Equity
Market Capitalization
Return on Assets (ROA)
Return on Equity (ROE)
Per Common Share1
Net Income – Basic
Net Income – Diluted
Dividends (Declared)
Book Value
Market Price
Assets by Geographical Area
Puerto Rico
United States
Caribbean and Latin America
Total
Traditional Delivery System
Banking Branches
Puerto Rico
Virgin Islands
United States
Subtotal
Non-Banking Offices
Popular Financial Holdings
Popular Cash Express
Popular Finance
Popular Auto
Popular Leasing, U.S.A.
Popular Mortgage
Popular Securities
Popular Insurance
Popular Insurance Agency U.S.A.
Popular Insurance, V.I.
EVERTEC
Subtotal
Total
Electronic Delivery System
ATMs2
Owned and Driven
Puerto Rico
Caribbean
United States
Subtotal
Driven
Puerto Rico
Caribbean
Subtotal
Total
Transactions (in millions)
Electronic Transactions3
Items Processed
Employees (full-time equivalent)
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
$
$
$
$
$
144.9
19.6
127.3
26.8
2,974.1
1,075.7
2,347.5
182.2
119.3
0.95%
15.86%
0.19
0.19
0.06
1.24
0.83
94%
5%
1%
100%
112
3
6
121
$
$
$
$
$
156.8
19.0
137.2
29.8
3,526.7
1,373.9
2,870.7
203.5
159.8
0.94%
15.83%
0.21
0.21
0.06
1.38
1.11
91%
8%
1%
100%
113
3
9
125
$
$
$
$
$
174.9
26.8
156.0
32.9
4,141.7
1,715.7
3,365.3
226.4
216.0
0.89%
15.59%
0.23
0.23
0.07
1.54
1.50
92%
7%
1%
100%
115
3
9
127
$
$
$
$
$
184.2
41.4
168.4
38.3
4,531.8
2,271.0
3,820.2
283.1
304.0
0.88%
15.12%
0.25
0.25
0.08
1.73
2.00
92%
7%
1%
100%
124
3
9
136
121
125
127
136
113
113
51
51
164
30
30
30
0.6
102.1
3,832
78
78
6
6
84
4.4
110.3
4,110
94
94
36
36
130
7.0
123.8
4,314
$
$
$
$
$
207.7
41.0
185.7
38.3
5,389.6
2,768.5
4,491.6
308.2
260.0
0.76%
13.09%
0.24
0.24
0.09
1.89
1.67
94%
5%
1%
100%
$
$
$
$
$
232.5
54.9
195.6
47.4
5,706.5
3,096.3
4,715.8
341.9
355.0
0.85%
14.87%
0.30
0.30
0.09
2.10
2.22
93%
6%
1%
100%
$
$
$
$
$
260.9
63.3
212.4
56.3
5,972.7
3,320.6
4,926.3
383.0
430.1
0.99%
15.87%
0.35
0.35
0.10
2.35
2.69
92%
6%
2%
100%
$
$
$
$
$
284.2
70.9
229.6
63.4
8,983.6
5,373.3
7,422.7
588.9
479.1
1.09%
15.55%
0.40
0.40
0.10
2.46
2.00
89%
9%
2%
100%
$
$
$
$
$
407.8
131.8
345.7
64.6
8,780.3
5,195.6
7,207.1
631.8
579.0
0.72%
10.57%
0.27
0.27
0.10
2.63
2.41
87%
11%
2%
100%
$
$
$
$
$
440.2
124.5
366.9
85.1
10,002.3
5,252.1
8,038.7
752.1
987.8
0.89%
12.72%
0.35
0.35
0.10
2.88
3.78
87%
10%
3%
100%
$
$
$
$
$
492.1
125.2
412.3
109.4
11,513.4
6,346.9
8,522.7
834.2
1,014.7
1.02%
13.80%
0.42
0.42
0.12
3.19
3.88
79%
16%
5%
100%
126
3
9
138
14
14
152
136
3
139
55
55
194
126
3
10
139
17
17
156
153
3
156
68
68
224
128
3
10
141
18
4
22
163
151
3
154
65
65
219
173
3
24
200
26
9
35
235
211
3
214
54
54
268
161
3
24
188
27
26
9
62
250
206
3
209
73
73
282
162
3
30
195
41
26
9
76
271
211
3
6
220
81
81
301
165
8
32
205
58
26
8
92
297
234
8
11
253
86
86
339
8.3
134.0
4,400
12.7
139.1
4,699
14.9
159.8
5,131
16.1
161.9
5,213
18.0
164.0
7,023
23.9
166.1
7,006
28.6
170.4
7,024
33.2
171.8
7,533
1 Per common share data adjusted for stock splits.
2 Does not include host-to-host ATMs (2,186 in 2007) which are neither owned nor driven, but are part of the ATH® Network.
3 From 1981 to 2003, electronic transactions include ACH, Direct Payment, TelePago, Internet Banking and ATH® Network transactions in Puerto Rico. Since 2004, these numbers were adjusted to include ATH® Network
transactions in the Dominican Republic, Costa Rica, El Salvador and United States, health care transactions, wire transfers, and other electronic payment transactions in addition to those previously stated.
Popular, Inc.
2007 Annual Report
7
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
$
$
$
$
$
$
$
$
$
$
535.5
141.3
447.8
124.7
12,778.4
7,781.3
9,012.4
1,002.4
923.7
1.02%
13.80%
0.46
0.46
0.13
3.44
3.52
76%
20%
4%
100%
$
584.2
173.3
486.8
146.4
15,675.5
8,677.5
9,876.7
1,141.7
$ 1,276.8
$
681.3
205.5
541.9
185.2
16,764.1
9,779.0
10,763.3
1,262.5
$ 2,230.5
$
784.0
247.6
636.9
209.6
19,300.5
11,376.6
11,749.6
1,503.1
$ 3,350.3
1.04%
14.22%
1.14%
16.17%
1.14%
15.83%
$
$
$
0.53
0.53
0.15
3.96
4.85
75%
21%
4%
100%
$
$
$
0.67
0.67
0.18
4.40
8.44
$
$
$
0.75
0.75
0.20
5.19
12.38
74%
22%
4%
100%
74%
23%
3%
100%
166
8
34
208
73
28
10
111
319
262
8
26
296
88
88
384
166
8
40
214
91
31
9
3
134
348
281
8
38
327
120
120
447
178
8
44
230
102
39
8
3
1
153
383
327
9
53
389
162
97
259
648
201
8
63
272
117
44
10
7
3
2
183
455
391
17
71
479
170
192
362
841
43.0
174.5
7,606
56.6
175.0
7,815
78.0
173.7
7,996
111.2
171.9
8,854
$
$
$
$
$
873.0
291.2
720.4
232.3
23,160.4
13,078.8
13,672.2
1,709.1
4,611.7
$
953.7
372.9
837.5
257.6
25,460.5
14,907.8
14,173.7
1,661.0
$ 3,790.2
1.14%
15.41%
1.08%
15.45%
0.83
0.83
0.25
5.93
17.00
71%
25%
4%
100%
198
8
89
295
128
51
48
10
8
11
2
258
553
421
59
94
574
187
265
452
1,026
130.5
170.9
10,549
$
$
$
0.92
0.92
0.30
5.76
13.97
71%
25%
4%
100%
199
8
91
298
137
102
47
12
10
13
2
4
327
625
442
68
99
609
102
851
953
1,562
159.4
171.0
11,501
982.8
464.1
876.4
276.1
28,057.1
16,057.1
14,804.9
1,993.6
3,578.1
$ 1,056.8
491.8
926.2
304.5
30,744.7
18,168.6
16,370.0
2,272.8
$ 3,965.4
$
1,160.2
543.8
1,029.0
351.9
33,660.4
19,582.1
17,614.7
2,410.9
$ 4,476.4
$ 1,284.7
626.0
1,113.1
470.9
36,434.7
22,602.2
18,097.8
2,754.4
$ 5,960.2
$
1,375.5
608.8
1,171.0
489.9
44,401.6
28,742.3
20,593.2
3,104.6
$ 7,685.6
$ 1,424.2
785.3
1,328.2
540.7
48,623.7
31,710.2
22,638.0
3,449.2
$ 5,836.5
$
1,427.9
809.5
1,485.1
357.7
47,404.0
32,736.9
24,438.3
3,620.3
$ 5,003.4
$
$
1,449.4
694.3
1,704.6
-64.5
44,411.4
29,911.0
28,334.4
3,581.9
2,968.3
1.04%
15.00%
1.09%
14.84%
1.11%
16.29%
1.36%
19.30%
1.23%
17.60%
1.17%
17.12%
0.74%
9.73%
-0.14%
-2.08%
0.99
0.99
0.32
6.96
13.16
72%
26%
2%
100%
199
8
95
302
136
132
61
12
11
21
3
2
4
382
684
478
37
109
624
118
920
1,038
1,662
199.5
160.2
10,651
$
$
$
1.09
1.09
0.38
7.97
14.54
$
$
$
1.31
1.31
0.40
9.10
16.90
$
$
$
1.74
1.74
0.51
9.66
22.43
$
$
$
1.79
1.79
0.62
10.95
28.83
$
$
$
1.98
1.97
0.64
11.82
21.15
$
$
$
1.24
1.24
0.64
12.32
17.95
-$
-$
$
0.27
0.27
0.64
12.12
10.60
68%
30%
2%
100%
66%
32%
2%
100%
62%
36%
2%
100%
55%
43%
2%
100%
53%
45%
2%
100%
52%
45%
3%
100%
196
8
96
300
149
154
55
20
13
25
4
2
1
4
427
727
524
39
118
681
155
823
978
1,659
206.0
149.9
11,334
195
8
96
299
153
195
36
18
13
29
7
2
1
1
5
460
759
539
53
131
723
174
926
1,100
1,823
236.6
145.3
11,037
193
8
97
298
181
129
43
18
11
32
8
2
1
1
5
431
729
557
57
129
743
176
1,110
1,286
2,029
255.7
138.5
11,474
192
8
128
328
183
114
43
18
15
30
9
2
1
1
7
423
751
568
59
163
790
167
1,216
1,383
2,173
568.5
133.9
12,139
194
8
136
338
213
4
49
17
14
33
12
2
1
1
8
354
692
583
61
181
825
212
1,726
1,938
2,763
625.9
140.3
13,210
191
8
142
341
159
52
15
11
32
12
2
1
1
12
297
638
605
65
192
862
226
1,360
1,586
2,448
690.2
150.0
12,508
59%
38%
3%
100%
196
8
147
351
135
51
12
24
32
13
2
1
1
11
282
633
615
69
187
871
433
1,454
1,887
2,758
772.7
175.2
12,303
8
Board of Directors
Richard L. Carrión
Chairman, President, Chief Executive Officer,
Popular, Inc.
Juan J. Bermúdez
Partner, Bermúdez & Longo, S.E.
María Luisa Ferré
President, Grupo Ferré Rangel
Michael Masin
Senior Partner, O’Melvany & Myers
Manuel Morales Jr.
President, Parkview Realty, Inc.
Francisco M. Rexach Jr.
President, Capital Assets, Inc.
Frederic V. Salerno
Investor
William J. Teuber Jr.
Vice Chairman, EMC Corporation
José R. Vizcarrondo
President and Chief Executive Officer
Desarrollos Metropolitanos, S.E.
Samuel T. Céspedes, Esq.
Secretary of the Board of Directors, Popular, Inc.
Corporate Leadership Circle
Richard L. Carrión
Chairman, President, Chief Executive Officer,
Popular, Inc.
David H. Chafey Jr.
Senior Executive Vice President, Popular, Inc.
President, Banco Popular de Puerto Rico
Roberto R. Herencia
Executive Vice President, Popular, Inc.
President, Banco Popular North America
Amílcar Jordán, Esq.
Executive Vice President, Risk Management, Popular, Inc.
Jorge A. Junquera
Senior Executive Vice President,
Chief Financial Officer, Popular, Inc.
Tere Loubriel
Executive Vice President,
People, Communications and Planning, Popular, Inc.
Brunilda Santos de Álvarez, Esq.
Executive Vice President,
Chief Legal Officer, Popular, Inc.
Félix M. Villamil
Executive Vice President, Popular, Inc.
President, EVERTEC, Inc.
Our Creed
Banco Popular is a local institution dedicating its efforts
exclusively to the enhancement of the social and economic
conditions in Puerto Rico and inspired by the most sound
principles and fundamental practices of good banking.
Banco Popular pledges its efforts and resources to the
development of a banking service for Puerto Rico within
strict commercial practices and so efficient that it could
meet the requirement of the most progressive community
of the world.
These words, written in 1928 by Don Rafael Carrión Pacheco,
Executive Vice President and President (1927–1956), embody
the philosophy of Popular, Inc.
Our People
The men and women who work for our institution,
from the highest executive to the employees who handle
the most routine tasks, feel a special pride in serving
our customers with care and dedication. All of them feel
the personal satisfaction of belonging to the “Banco
Popular Family,” which fosters affection and understanding
among its members, and which at the same time firmly
complies with the highest ethical and moral standards
of behavior.
These words by Don Rafael Carrión Jr., President and
Chairman of the Board (1956–1991), were written in 1988
to commemorate the 95th anniversary of Banco Popular de
Puerto Rico, and reflect our commitment to human resources.
Corporate Information
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Annual Meeting
The 2008 Annual Stockholders’ Meeting of Popular, Inc.
will be held on Friday, April 25, at 9:00 a.m. at Centro
Europa Building in San Juan, Puerto Rico.
Additional Information
The Annual Report to the Securities and Exchange
Commission on Form 10-K and any other financial
information may also be viewed by visiting our website:
www.popular.com
Popular, Inc.
2007
Informe Anual
9
Decisiones tomadas durante el 2007
fueron muy difíciles, pero nos colocarán
en mejor posición para ir hacia adelante.
Carta a
2007
los Accionistas
La ejecutoria financiera de Popular en el año 2007 se vio significativamente influida por
el impacto negativo del deterioro de la industria hipotecaria en los resultados de nuestras
operaciones no bancarias en los Estados Unidos, y por las acciones que tomamos para
hacerle frente a esta situación. Aunque fueron extremadamente difíciles, estas decisiones nos
posicionan mejor para salir adelante, mientras nos enfocamos en nuestra franquicia bancaria
en los Estados Unidos continentales. Nuestros servicios financieros en Puerto Rico continua-
ron rindiendo resultados sólidos, a pesar de la recesión económica y del deterioro en la
calidad de crédito. EVERTEC, nuestra compañía de procesamiento, reflejó un crecimiento
consistente en ganancias y realizó avances en varios frentes estratégicos.
Popular registró una pérdida neta de $64.5 millones en el 2007, en comparación con
un ingreso neto de $357.7 millones en el 2006. La pérdida neta por acción común básica y
diluida en el año fue $0.27, comparado con $1.24 de ingreso neto por acción en el 2006.
Estas pérdidas representaron un rendimiento negativo de activos (ROA) de un 0.14% y
un rendimiento negativo sobre capital (ROE) de 2.08%, comparado con un rendimiento
positivo de 0.74% y un 9.73%, respectivamente en el 2006.
Nuestros resultados del 2007 se vieron afectados negativamente por (i) un aumento
en la provisión para pérdidas en préstamos de $274.9 millones en el 2007 comparado con
el 2006, que fue impulsado por la contracción en el sector de la vivienda en los Estados
Unidos, así como la débil situación económica en Puerto Rico, (ii) una pérdida antes de
contribución sobre ingresos de $90.1 millones asociada con la recaracterización de varias
titulizaciones en el estado de situación de Popular Financial Holdings (PFH), (iii) una
10
Un Vistazo a Popular, Inc.
Carta a los Accionistas, continuación
Banco Popular de Puerto Rico
> Aproximadamente 1.4 millones de clientes
> 204 sucursales y 111 oficinas a través de
Puerto Rico e Islas Vírgenes
> 6,442 empleados (equivalente a tiempo
completo) al 31/12/07
> 615 cajeros automáticos y 28,000 termina-
les de punto de venta a través de Puerto
Rico e Islas Vírgenes
> Primer lugar en participación de mercado
en total de depósitos (34.9% - 30/09/07) y
volumen de préstamos (23.0% - 30/09/07)
> $27,100 millones en activos, $16,600
millones en préstamos y $18,800
millones en depósitos al 31/12/07
Banco Popular North America
> 147 sucursales a través de seis estados
(Florida, California, Nueva York, Nueva
Jersey, Texas, e Illinois)
> 24 oficinas de arrendamiento con
presencia en 15 estados
> 2,923 empleados (equivalente a tiempo
completo) al 31/12/07
> Como prestamista de SBA, ocupa la
quinta posición en los Estados Unidos
en términos de volumen de préstamos
en dólares
> E-LOAN tuvo $1,500 millones en
depósitos y alcanzó $3,600 millones
en originaciones en 2007
> $13,400 millones en activos, $10,300
millones en préstamos y $9,800
millones en depósitos al 31/12/07
EVERTEC
> 11 oficinas a través de los Estados Unidos
y Latinoamérica, sirviendo a 15 países
> 1,765 empleados (equivalente a tiempo
completo) al 31/12/07
> Procesó más de 1,000 millones de
transacciones en 2007, de las cuales
más de 535 millones correspondieron
a la Red ATH®
> 4,944 cajeros automáticos y más de
100,500 terminales de punto de venta
a través de los Estados Unidos y
Latinoamérica
Popular Financial Holdings
> 135 oficinas in 16 estados al 31/12/07
> El total de originaciones alcanzó
$3,400 millones en 2007
> Al 31/12/07, la cartera de préstamos
hipotecarios manejados a terceros
ascendió a $9,400 millones
> 930 empleados (equivalente a tiempo
completo) al 31/12/07
> $3,900 millones en activos y $3,300
millones en préstamos
mercado con volúmenes notablemente
más bajos, mayores niveles de morosidad, y
un mercado secundario prácticamente sin
liquidez. En el caso de Banco Popular North
America (BPNA), hemos emprendido un
proceso de enfocar nuestros recursos para
mejorar la rentabilidad de nuestra franquicia
de banca individual.
Popular Financial Holdings
Popular Financial Holdings (PFH) registró
una pérdida neta de $269.4 millones
en el 2007. Estos resultados reflejan el
deterioro del negocio de hipotecas de alto
riesgo, así como cargos asociados con
algunas de las iniciativas que llevamos a
cabo durante el año.
En enero del 2007, adoptamos un plan
de reestructuración para PFH que incluyó
las decisiones de salir del negocio mayorista
de originación de hipotecas de alto riesgo,
consolidar las funciones de apoyo con
Banco Popular North America, su entidad
bancaria afiliada en los Estados Unidos, y
enfocarnos en negocios rentables.
Como resultado del plan de reestructura-
ción y de la decisión de salir del negocio de
hipotecas de alto riesgo, completamos la
recaracterización de ciertas titulizaciones en
el estado de situación que nos permitieron
reconocer estas transacciones como ventas.
Por consiguiente, removimos aproximada-
mente $3,200 millones en préstamos
hipotecarios, y $3,100 millones en pasivos
relacionados de nuestro estado de situación.
El impacto de la recaracterización fue una
pérdida antes de contribución sobre ingre-
sos de $90.1 millones. La eliminación de
estos activos hipotecarios de nuestros libros
mejora las métricas de capital y de calidad
de crédito, y también reduce la cantidad de
hipotecas de alto riesgo en nuestros libros.
La mayor parte de la cartera restante de
PFH, la cual totaliza aproximadamente
$1,500 millones al igual que $287 millones
en certificados de bonos asociados con las
titulizaciones en el estado de situación se
presentarán al valor del mercado en base a
FAS 159 (Fair Value Option for Financial
Assets and Financial Liabilities). La adop-
ción de FAS 159, que se implementará el
reducción de $85.1 millones en el justo
valor de intereses residuales reconocidos por
PFH en titulizaciones previas, (iv) $16.6
millones en costos por reestructuración en
PFH y (v) $231.9 millones en cargos por
reestructuración y menoscabo de algunos
activos en E-LOAN. Estas variaciones nega-
tivas fueron compensadas en parte por una
ganancia antes de contribución sobre ingre-
sos de $118.7 millones proveniente de la
venta en marzo del 2007 de las acciones
comunes de Telecomunicaciones de Puerto
Rico, Inc. (TELPRI) que tenía la Corporación.
El precio de nuestra acción bajó en un
41% durante el 2007 a $10.60 al cierre del
año. Estamos extremadamente decepciona-
dos con nuestros resultados financieros, así
como con el rendimiento de nuestra acción.
Reconocemos que estos resultados son
inaceptables, y hemos comenzado un
proceso dirigido a realinear nuestras opera-
ciones en los Estados Unidos, con el fin de
llevarlas a niveles aceptables de rentabilidad.
Estados Unidos
En Popular Financial Holdings (PFH),
nuestra operación de préstamos de alto
riesgo en los Estados Unidos, reducimos el
tamaño del negocio y tomamos medidas
para aminorar nuestro riesgo en el mercado
de hipotecas de alto riesgo. En E-LOAN,
adaptamos el modelo de negocio y ajusta-
mos nuestra infraestructura al tamaño
adecuado para reflejar la realidad de un
Popular, Inc.
2007
Informe Anual
11
Enfocaremos nuestros
esfuerzos en realzar el
valor de nuestra franquicia
de banca individual.
como la reducción de liquidez en los
mercados secundarios, nos instaron a rees-
tructurar E-LOAN. En noviembre del 2007,
adoptamos un plan de reestructuración que
redujo sustancialmente los gastos de merca-
deo y personal, a la vez que enfocó a
E-LOAN en la originación de préstamos de
primeras hipotecas que cumplen con las
pautas de las agencias federales. Este plan
se tradujo en cargos de $20.1 millones por
concepto de reestructuración durante el
cuarto trimestre del 2007, y se espera que
reduzca los gastos de operaciones en $77
millones en el 2008.
En vista de los cambios realizados al
modelo de negocios y del ambiente de
desafíos que encara la industria hipotecaria
en los Estados Unidos, realizamos una
valoración de la plusvalía y del poder de la
marca E-LOAN. La valoración demostró un
deterioro de plusvalía. Esta transacción se
realizó sin que mediara efectivo, y por tanto
no impactó la liquidez de Popular ni las
métricas de capital requeridas por las agen-
cias reguladoras.
E-LOAN sigue siendo un elemento
importante para Popular, dada su plata-
forma tecnológica, el amplio alcance
geográfico de sus productos, su capacidad
de aumentar el nivel de depósitos de la
Corporación, así como el valor de su marca,
que es ampliamente reconocida y respetada.
1ro de enero, se traducirá en un ajuste
negativo de entre aproximadamente $280
y $300 millones antes de contribuciones
sobre ingresos y no tendrá impacto en el
estado de ingresos y gastos, puesto que se
deducirá del balance de las ganancias
acumuladas.
Al momento de la reestructuración de
enero del 2007, decidimos continuar las
operaciones de Equity One y sus subsidia-
rias, las cuales se dedican a originar y dar
servicio a préstamos de consumo a través
de una red de más de 130 oficinas. No
obstante, en vista del aumento en los costos
de fondos debido a cambios en los merca-
dos capitales que comenzaron en el verano
del 2007, nos convencimos de que sería
progresivamente más difícil generar un
rendimiento adecuado sobre el capital
invertido en Equity One. En enero del
2008, anunciamos la firma de un acuerdo
para vender ciertos activos de Equity One
a American General Financial, miembro
de American International Group (AIG).
Como parte del acuerdo, American General
adquirió una parte significativa de la cartera
de préstamos hipotecarios y de consumo
de aproximadamente $1,400 millones,
así como 24 sucursales de Equity One.
Cerraremos las sucursales restantes. Esta
transacción cerró en marzo primero del
2008, y resultó en cargos por concepto de
reestructuración de $19.5 millones, la
mayor parte de los cuales se registrarán en
el primer trimestre, y generaron una ganan-
cia antes de contribuciones sobre ingresos
de aproximadamente $50 millones.
El efecto combinado de las iniciativas
mencionadas anteriormente es una reduc-
ción en la cartera de préstamos de PFH,
de $6,900 millones al comienzo del 2007,
a aproximadamente $1,300 millones a
diciembre del 2007, de los cuales $1,000
millones son préstamos de alto riesgo,
comparado con $4,600 millones a diciem-
bre del 2006. Estas iniciativas nos permiten
presentar un cuadro más claro de nuestro
riesgo en este negocio.
Banco Popular North America
Banco Popular North America (BPNA), que
incluye E-LOAN como subsidiaria, registró
una pérdida neta de $195.4 millones
en el 2007. Esta pérdida fue impulsada
por una pérdida neta de $245.7 millones
en E-LOAN.
Las operaciones bancarias de BPNA
generaron un ingreso neto de $50.5 millones,
lo cual aunque positivo, fue un 50% más
bajo que en el 2006. Los resultados de
BPNA se vieron afectados adversamente por
el aumento en los costos de crédito e ingre-
sos por concepto de interés más bajos. La
provisión para pérdida de préstamos de
BPNA alcanzó un total de $77.8 millones,
la cual es 106% más alta que en el 2006,
debido a una cantidad mayor de activos no
acumulativos en las carteras de préstamos
hipotecarios y de construcción. El ingreso
neto por intereses fue de $14.5 millones,
menos que el del 2006, debido a márgenes
más estrechos.
En vista de los retos a los cuales nos
enfrentamos, tomamos acción para enfocar
y priorizar nuestros recursos. En octubre
del 2007 anunciamos la venta de seis de
nuestras sucursales en Houston, Texas a
Prosperity Bank. Prosperity Bank pagó
una prima de 10.10% para obtener aproxi-
madamente $125 millones en depósitos y
también adquirió ciertos préstamos y activos
atribuibles a las sucursales. Enfocaremos
nuestros esfuerzos en mejorar la ejecutoria
de la red de sucursales que hemos formado
en los Estados Unidos para aumentar el
valor de nuestra franquicia de banca
individual.
E-LOAN incurrió en una pérdida neta
de $245.7 millones en el 2007, que incluye
los cargos de $20.1 millones por reestructu-
ración, al igual que cargos por deterioro de
plusvalía y del poder de la marca ascendien-
tes a $211.8 millones.
El negocio de E-LOAN continuó reci-
biendo el impacto severo de las condiciones
del mercado en el 2007. Una disminución
general en el volumen de originación de
hipotecas, aumentos significativos en los
niveles de morosidad y ejecuciones, así
12
Carta a los Accionistas, continuación
Puerto Rico
Nuestras operaciones de servicios financie-
ros en Puerto Rico, compuestas por Banco
Popular de Puerto Rico y otras subsidiarias
especializadas, se desempeñaron muy bien
en el 2007, a pesar del escenario de rece-
sión, el deterioro de la calidad de crédito, y
la competencia tan reñida. Estos resultados
confirman nuestra capacidad de no sola-
mente resistir estas fuerzas negativas, sino
también de fortalecer nuestra posición aun
en las épocas marcadas por los más formi-
dables retos.
El ingreso neto en el círculo de Puerto
Rico alcanzó un total de $327.3 millones,
$28.6 millones menos que en el 2006. Los
resultados financieros recibieron el impacto
del deterioro en la calidad de crédito, que
resultó en una provisión para pérdidas en
préstamos de $243.7 millones, la cual es
73% más alta que en el año anterior. Las
pérdidas netas en préstamos aumentaron
en un 69%, alcanzando la cifra de $191
millones, mayormente en las carteras de
préstamos comerciales, personales y de
tarjetas de crédito. A través del año nos
enfocamos en manejar proactivamente la
calidad de crédito, siendo más estrictos con
los estándares de suscripción, anticipando
posibles pérdidas, aumentando los márgenes
y mejorando los esfuerzos de cobro.
A pesar de nuestro enfoque cauteloso
en el área de crédito, pudimos defender y
aumentar nuestra participación general de
mercado. El obtener mayor participación
de mercado resulta más difícil cada año,
considerando que somos el jugador princi-
pal en siete de nueve categorías de producto
claves que seguimos de cerca. Durante el
2007 mejoramos nuestra posición en ocho
de nueve categorías, abarcando el 23% del
total de préstamos y el 35% del total de
depósitos en el mercado. Continuaremos
haciendo hincapié en la expansión rentable
del mercado, para solidificar más nuestra
posición de liderazgo en Puerto Rico.
Además de ampliar nuestro negocio exis-
tente, fortalecimos nuestra franquicia con la
adquisición del negocio de banca individual
a nivel local de Citibank y las operaciones
locales de corretaje de Smith Barney. La
adquisición del negocio de banca individual
incluyó 17 sucursales (de las cuales siete
fueron consolidadas), aproximadamente
$1,000 millones en depósitos, mayormente
depósitos básicos, y más de $220 millones
en préstamos. Al incluir estos depósitos, la
participación de mercado de Popular
aumentó a aproximadamente un 38%. Le
dimos la bienvenida a más de 200 nuevos
compañeros, así como a una sólida base de
clientes que representa un gran potencial
para la venta cruzada de productos adicio-
nales de Popular. El negocio local de valores
se encuentra sumamente concentrado, con
el 60% de los activos bajo manejo (AUM)
controlado por las dos entidades principales
del mercado. La transacción de Smith
Barney fortalece nuestra fuerza de ventas y
provee volumen adicional de negocios
($1,200 millones en AUM), lo cual cierra
significativamente la brecha existente entre
Popular Securities y la segunda entidad que
compite en el mismo mercado.
El mejoramiento de la rentabilidad
continuó siendo una de las prioridades de
Banco Popular en el 2007. Los gastos fueron
4.7% más altos que en el 2006, en gran
parte debido a los costos relacionados con
la conversión de las operaciones de banca
individual y de corretaje de Citibank. Sin
embargo, aun cuando estos costos no
estaban contemplados en el presupuesto
original, los gastos totales del año estuvieron
por debajo del presupuesto debido a la
disciplina ejercida en los gastos de otras
áreas. Como resultado de nuestros esfuerzos
realizados a través de los pasados tres años,
hemos mejorado nuestra métrica de eficien-
cia de un 55.8% en el 2005 a un 52.9%
en el 2007.
Anticipamos que el difícil escenario
económico actual persistirá hasta bien
entrado el 2008. No obstante, tal y como
lo probamos en el 2007, la disciplina, el
enfoque en la ejecución, y la solidez de
nuestra franquicia, pueden no solamente
Tal y como lo probamos
en el 2007, la disciplina
y el enfoque en la
ejecución pueden
fortalecernos aún más.
hacernos sobrellevar los tiempos más
difíciles, sino que pueden hacernos surgir
aún mas fuertes que antes.
EVERTEC
EVERTEC, nuestra unidad de procesa-
miento con operaciones en Puerto Rico,
el Caribe y Latinoamérica, aumentó sus
ingresos, su ingreso neto y su volumen
de transacciones en el 2007, a pesar de la
recesión económica en Puerto Rico, que
es su mercado principal, y de la creciente
competencia de otras compañías de procesa-
miento más grandes establecidas a través de
todas las regiones.
En ingreso neto de EVERTEC en el 2007
alcanzó $31.3 millones, lo que representa
un aumento de un 20% sobre el 2006.
Estos resultados fueron impulsados por un
crecimiento bueno en los ingresos prove-
niente principalmente de clientes fuera de
las compañías Popular, combinado con un
manejo más estricto de los gastos.
Además de sus sólidos resultados finan-
cieros, EVERTEC realizó un importante
progreso en varias de sus áreas estratégicas
claves, tales como aumentar la competitivi-
dad de la Red ATH®. Por más de 20 años,
ATH® ha sido el método de pago preferido,
así como el más seguro y menos costoso
para los puertorriqueños. Durante el 2007,
la red ATH® procesó más de 535 millones
de transacciones a través de 4,944 cajeros
automáticos y 100,500 terminales de punto
de venta. En años recientes, ATH® ha expe-
rimentado niveles de competencia en
aumento por parte de Visa y MasterCard
Popular, Inc.
2007
Informe Anual
13
Valores Institucionales
Compromiso Social
Estamos comprometidos a traba-
jar activamente para promover el
bienestar social y económico de
las comunidades que servimos.
Cliente
Logramos la satisfacción y lealtad
de nuestros clientes añadiéndole
valor a cada interacción. La
relación con nuestro cliente está
por encima de una transacción
particular.
Integridad
Nos desempeñamos bajo las
normas más estrictas de ética,
integridad y moral. La confianza
que nuestros clientes nos depositan
es lo más importante.
Excelencia
Creemos que sólo hay una forma
de hacer las cosas: bien hechas.
Innovación
Fomentamos la búsqueda
incesante de nuevas soluciones
como estrategia para realzar
nuestra ventaja competitiva.
Nuestra Gente
Nos esforzamos por atraer,
desarrollar, recompensar y
retener al mejor talento dentro
de un ambiente de trabajo que
se caracteriza por el cariño y la
disciplina.
Rendimiento
Nuestra meta es obtener
resultados financieros altos y
consistentes para nuestros
accionistas fundamentados en
una visión a largo plazo.
debido al alza de tarjetas de débito con
firma. Como respuesta a este cambio, la Red
ATH® en Puerto Rico actualizó su estructura
de precios para brindar mayores incentivos
financieros a sus miembros bancarios, a la
vez que se mantiene como la alternativa de
más bajo costo para los comerciantes. Estos
cambios solidificarán y protegerán el poder
de la marca ATH® y fomentarán el creci-
miento del negocio a largo plazo.
En Puerto Rico, añadimos varias institu-
ciones financieras a nuestra lista de clientes
y ampliamos los servicios que se ofrecen a
los clientes existentes. EVERTEC ahora
procesa aproximadamente el 75% de todos
los cheques e intercambios electrónicos en
Puerto Rico. Expandimos nuestro negocio
de manejo de fuerza laboral con la adquisi-
ción de SENSE, una compañía de desarrollo
de software que brinda soluciones a las
áreas de recursos humanos, procesamiento
de nómina, horario y asistencia. El negocio
de sistemas de salud adquirió una cartera de
proveedores médicos y aumentó el número
de transacciones procesadas en aproximada-
mente un 20%. EVERTEC Latinoamérica
tuvo un año excelente, aumentando nota-
blemente los ingresos y añadiendo clientes
importantes en la región, a pesar de la
entrada de compañías internacionales de
procesamiento, como consecuencia de la
adquisición de bancos locales por parte de
grandes entidades internacionales.
Los resultados y logros estratégicos de
EVERTEC durante el 2007 corroboran la
estrategia que establecimos hace cuatro años
apalancando nuestra infraestructura para
generar ingresos adicionales y diversificar
más nuestras fuentes de ingreso.
Hacia adelante
La guía y el apoyo de nuestra Junta de
Directores durante este año, caracterizado
por tantos retos, ha sido muy significativa y
absolutamente apreciada. Quisiera expresar
un reconocimiento especial a José B.
Carrión (Pepe) por su servicio en las Juntas
de Banco Popular y Popular, Inc. Durante
siete años esta organización se benefició
enormemente de su asesoría e intelecto.
Pepe se retiró en el 2007 al llegar a la edad
de jubilación obligatoria. A la misma vez,
nos sentimos extremadamente complacidos
de darle la bienvenida a nuestra Junta de
Directores a Michael Masin. Sé que la vasta
experiencia de Michael como parte de la
gerencia y de las Juntas de algunas de las
principales corporaciones en los Estados
Unidos, será de gran valor a Popular.
Igualmente, luego de servir a Popular
por espacio de 30 años, Tere Loubriel,
nuestra Vicepresidenta Ejecutiva a cargo de
Gente, Comunicaciones y Planificación, se
retirará en Marzo. Tere ocupó una amplia
variedad de cargos a través de los años,
todos ellos con el mismo nivel de dedica-
ción y compromiso con la excelencia.
La vamos a echar muchísimo de menos y
le deseamos lo mejor. Eduardo Negrón,
nuestro Principal Oficial Legal Auxiliar
durante siete años, va a dirigir y llevar
hacia adelante las áreas de Gente y
Comunicaciones.
En retrospectiva, el 2007 fue definitiva-
mente uno de los años de más desafíos a
los cuales nuestra Corporación se ha
enfrentado hasta la fecha. Las condiciones
sin precedentes y la turbulencia en la
industria de servicios financieros han
puesto a prueba nuestra organización.
Nuestra gente respondió como siempre
lo ha hecho, enfocando su atención y
energías en definir y llevar a cabo lo que
era necesario hacer para afrontar los retos.
Ahora más que en cualquier otro momento,
nos sentimos seguros de nuestra capacidad
de ir hacia adelante y volver a colocar a
Popular en los niveles de crecimiento y
rentabilidad que han caracterizado la
historia de esta organización.
Richard L. Carrión
Presidente de la Junta de Directores
Presidente, Principal Oficial Ejecutivo
14
Resumen Financiero Histórico – 25 Años
(Dólares en millones, excepto información por acción)
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Información Financiera Seleccionada
Ingreso Neto por Intereses
Ingreso Operacional
Gastos Operacionales
Ingreso Neto
Activos
Préstamos Netos
Depósitos
Capital de Accionistas
Valor Agregado en el Mercado
Rendimiento de Activos (ROA)
Rendimiento de Capital (ROE)
Por Acción Común1
Ingreso Neto – Básico
Ingreso Neto – Diluido
Dividendos (Declarados)
Valor en los Libros
Precio en el Mercado
Activos por Área Geográfica
Puerto Rico
Estados Unidos
Caribe y Latinoamérica
Total
Sistema de Distribución Tradicional
Sucursales Bancarias
Puerto Rico
Islas Vírgenes
Estados Unidos
Subtotal
Oficinas No Bancarias
Popular Financial Holdings
Popular Cash Express
Popular Finance
Popular Auto
Popular Leasing, U.S.A.
Popular Mortgage
Popular Securities
Popular Insurance
Popular Insurance Agency U.S.A.
Popular Insurance, V.I.
EVERTEC
Subtotal
Total
Sistema de Distribución Electrónico
Cajeros Automáticos2
Propios y Administrados
Puerto Rico
Caribe
Estados Unidos
Subtotal
Administrados
Puerto Rico
Caribe
Subtotal
Total
Transacciones (en millones)
Transacciones Electrónicas3
Efectos Procesados
Empleados (equivalente a tiempo completo)
$
$
$
$
$
144.9
19.6
127.3
26.8
2,974.1
1,075.7
2,347.5
182.2
119.3
0.95%
15.86%
0.19
0.19
0.06
1.24
0.83
94%
5%
1%
100%
112
3
6
121
$
$
$
$
$
156.8
19.0
137.2
29.8
3,526.7
1,373.9
2,870.7
203.5
159.8
0.94%
15.83%
0.21
0.21
0.06
1.38
1.11
91%
8%
1%
100%
113
3
9
125
$
$
$
$
$
174.9
26.8
156.0
32.9
4,141.7
1,715.7
3,365.3
226.4
216.0
0.89%
15.59%
0.23
0.23
0.07
1.54
1.50
92%
7%
1%
100%
115
3
9
127
$
$
$
$
$
184.2
41.4
168.4
38.3
4,531.8
2,271.0
3,820.2
283.1
304.0
0.88%
15.12%
0.25
0.25
0.08
1.73
2.00
92%
7%
1%
100%
124
3
9
136
121
125
127
136
113
113
51
51
164
30
30
30
0.6
102.1
3,832
78
78
6
6
84
4.4
110.3
4,110
94
94
36
36
130
7.0
123.8
4,314
$
$
$
$
$
207.7
41.0
185.7
38.3
5,389.6
2,768.5
4,491.6
308.2
260.0
0.76%
13.09%
0.24
0.24
0.09
1.89
1.67
94%
5%
1%
100%
$
$
$
$
$
232.5
54.9
195.6
47.4
5,706.5
3,096.3
4,715.8
341.9
355.0
0.85%
14.87%
0.30
0.30
0.09
2.10
2.22
93%
6%
1%
100%
$
$
$
$
$
260.9
63.3
212.4
56.3
5,972.7
3,320.6
4,926.3
383.0
430.1
0.99%
15.87%
0.35
0.35
0.10
2.35
2.69
92%
6%
2%
100%
$
$
$
$
$
284.2
70.9
229.6
63.4
8,983.6
5,373.3
7,422.7
588.9
479.1
1.09%
15.55%
0.40
0.40
0.10
2.46
2.00
89%
9%
2%
100%
$
$
$
$
$
407.8
131.8
345.7
64.6
8,780.3
5,195.6
7,207.1
631.8
579.0
0.72%
10.57%
0.27
0.27
0.10
2.63
2.41
87%
11%
2%
100%
$
$
$
$
$
440.2
124.5
366.9
85.1
10,002.3
5,252.1
8,038.7
752.1
987.8
0.89%
12.72%
0.35
0.35
0.10
2.88
3.78
87%
10%
3%
100%
$
$
$
$
$
492.1
125.2
412.3
109.4
11,513.4
6,346.9
8,522.7
834.2
1,014.7
1.02%
13.80%
0.42
0.42
0.12
3.19
3.88
79%
16%
5%
100%
126
3
9
138
14
14
152
136
3
139
55
55
194
126
3
10
139
17
17
156
153
3
156
68
68
224
128
3
10
141
18
4
22
163
151
3
154
65
65
219
173
3
24
200
26
9
35
235
211
3
214
54
54
268
161
3
24
188
27
26
9
62
250
206
3
209
73
73
282
162
3
30
195
41
26
9
76
271
211
3
6
220
81
81
301
165
8
32
205
58
26
8
92
297
234
8
11
253
86
86
339
8.3
134.0
4,400
12.7
139.1
4,699
14.9
159.8
5,131
16.1
161.9
5,213
18.0
164.0
7,023
23.9
166.1
7,006
28.6
170.4
7,024
33.2
171.8
7,533
1 Datos ajustados por las divisiones en acciones.
2 No incluyen cajeros automáticos que están conectados a la Red ATH® (2,186 en el 2007) pero que son administrados por otras instituciones financieras.
3 Desde el 1981 al 2003, transacciones electrónicas incluyen transacciones ACH, Pago Directo, TelePago, Banca por Internet y transacciones por la Red ATH® en Puerto Rico. Desde 2004, estos números incluyen el total de
transacciones por la Red ATH® en República Dominicana, Costa Rica, El Salvador y Estados Unidos, transacciones de facturación médica, transferencias cablegráficas y otros pagos electrónicos además de lo previamente señalado.
Popular, Inc.
2007
Informe Anual
15
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
$
$
$
$
$
$
$
$
$
$
535.5
141.3
447.8
124.7
12,778.4
7,781.3
9,012.4
1,002.4
923.7
1.02%
13.80%
0.46
0.46
0.13
3.44
3.52
76%
20%
4%
100%
$
584.2
173.3
486.8
146.4
15,675.5
8,677.5
9,876.7
1,141.7
$ 1,276.8
$
681.3
205.5
541.9
185.2
16,764.1
9,779.0
10,763.3
1,262.5
$ 2,230.5
$
784.0
247.6
636.9
209.6
19,300.5
11,376.6
11,749.6
1,503.1
$ 3,350.3
1.04%
14.22%
1.14%
16.17%
1.14%
15.83%
$
$
$
0.53
0.53
0.15
3.96
4.85
75%
21%
4%
100%
$
$
$
0.67
0.67
0.18
4.40
8.44
$
$
$
0.75
0.75
0.20
5.19
12.38
74%
22%
4%
100%
74%
23%
3%
100%
166
8
34
208
73
28
10
111
319
262
8
26
296
88
88
384
166
8
40
214
91
31
9
3
134
348
281
8
38
327
120
120
447
178
8
44
230
102
39
8
3
1
153
383
327
9
53
389
162
97
259
648
201
8
63
272
117
44
10
7
3
2
183
455
391
17
71
479
170
192
362
841
43.0
174.5
7,606
56.6
175.0
7,815
78.0
173.7
7,996
111.2
171.9
8,854
$
$
$
$
$
873.0
291.2
720.4
232.3
23,160.4
13,078.8
13,672.2
1,709.1
4,611.7
$
953.7
372.9
837.5
257.6
25,460.5
14,907.8
14,173.7
1,661.0
$ 3,790.2
1.14%
15.41%
1.08%
15.45%
0.83
0.83
0.25
5.93
17.00
71%
25%
4%
100%
198
8
89
295
128
51
48
10
8
11
2
258
553
421
59
94
574
187
265
452
1,026
130.5
170.9
10,549
$
$
$
0.92
0.92
0.30
5.76
13.97
71%
25%
4%
100%
199
8
91
298
137
102
47
12
10
13
2
4
327
625
442
68
99
609
102
851
953
1,562
159.4
171.0
11,501
982.8
464.1
876.4
276.1
28,057.1
16,057.1
14,804.9
1,993.6
3,578.1
$ 1,056.8
491.8
926.2
304.5
30,744.7
18,168.6
16,370.0
2,272.8
$ 3,965.4
$
1,160.2
543.8
1,029.0
351.9
33,660.4
19,582.1
17,614.7
2,410.9
$ 4,476.4
$ 1,284.7
626.0
1,113.1
470.9
36,434.7
22,602.2
18,097.8
2,754.4
$ 5,960.2
$
1,375.5
608.8
1,171.0
489.9
44,401.6
28,742.3
20,593.2
3,104.6
$ 7,685.6
$ 1,424.2
785.3
1,328.2
540.7
48,623.7
31,710.2
22,638.0
3,449.2
$ 5,836.5
$
1,427.9
809.5
1,485.1
357.7
47,404.0
32,736.9
24,438.3
3,620.3
$ 5,003.4
$
$
1,449.4
694.3
1,704.6
-64.5
44,411.4
29,911.0
28,334.4
3,581.9
2,968.3
1.04%
15.00%
1.09%
14.84%
1.11%
16.29%
1.36%
19.30%
1.23%
17.60%
1.17%
17.12%
0.74%
9.73%
-0.14%
-2.08%
0.99
0.99
0.32
6.96
13.16
72%
26%
2%
100%
199
8
95
302
136
132
61
12
11
21
3
2
4
382
684
478
37
109
624
118
920
1,038
1,662
199.5
160.2
10,651
$
$
$
1.09
1.09
0.38
7.97
14.54
$
$
$
1.31
1.31
0.40
9.10
16.90
$
$
$
1.74
1.74
0.51
9.66
22.43
$
$
$
1.79
1.79
0.62
10.95
28.83
$
$
$
1.98
1.97
0.64
11.82
21.15
$
$
$
1.24
1.24
0.64
12.32
17.95
-$
-$
$
0.27
0.27
0.64
12.12
10.60
68%
30%
2%
100%
66%
32%
2%
100%
62%
36%
2%
100%
55%
43%
2%
100%
53%
45%
2%
100%
52%
45%
3%
100%
196
8
96
300
149
154
55
20
13
25
4
2
1
4
427
727
524
39
118
681
155
823
978
1,659
206.0
149.9
11,334
195
8
96
299
153
195
36
18
13
29
7
2
1
1
5
460
759
539
53
131
723
174
926
1,100
1,823
236.6
145.3
11,037
193
8
97
298
181
129
43
18
11
32
8
2
1
1
5
431
729
557
57
129
743
176
1,110
1,286
2,029
255.7
138.5
11,474
192
8
128
328
183
114
43
18
15
30
9
2
1
1
7
423
751
568
59
163
790
167
1,216
1,383
2,173
568.5
133.9
12,139
194
8
136
338
213
4
49
17
14
33
12
2
1
1
8
354
692
583
61
181
825
212
1,726
1,938
2,763
625.9
140.3
13,210
191
8
142
341
159
52
15
11
32
12
2
1
1
12
297
638
605
65
192
862
226
1,360
1,586
2,448
690.2
150.0
12,508
59%
38%
3%
100%
196
8
147
351
135
51
12
24
32
13
2
1
1
11
282
633
615
69
187
871
433
1,454
1,887
2,758
772.7
175.2
12,303
16
Junta de Directores
Richard L. Carrión
Presidente de la Junta de Directores
Presidente, Principal Oficial Ejecutivo, Popular, Inc.
Juan J. Bermúdez
Socio, Bermúdez & Longo, S.E.
María Luisa Ferré
Presidenta, Grupo Ferré Rangel
Michael Masin
Senior Partner, O’Melvany & Myers
Manuel Morales, Jr.
Presidente, Parkview Realty, Inc.
Francisco M. Rexach, Jr.
Presidente, Capital Assets, Inc.
Frederic V. Salerno
Inversionista
William J. Teuber, Jr.
Vicepresidente de la Junta de Directores, EMC Corporation
José R. Vizcarrondo
Presidente y Principal Oficial Ejecutivo, Desarrollos
Metropolitanos, S.E.
Lcdo. Samuel T. Céspedes
Secretario de la Junta de Directores, Popular, Inc.
Círculo de Liderato Corporativo
Richard L. Carrión
Presidente de la Junta de Directores
Presidente, Principal Oficial Ejecutivo, Popular, Inc.
David H. Chafey, Jr.
Primer Vicepresidente Ejecutivo, Popular, Inc.
Presidente, Banco Popular de Puerto Rico
Roberto R. Herencia
Vicepresidente Ejecutivo, Popular, Inc.
Presidente, Banco Popular North America
Lcdo. Amílcar Jordán
Vicepresidente Ejecutivo, Manejo de Riesgo, Popular, Inc.
Jorge A. Junquera
Primer Vicepresidente Ejecutivo,
Principal Oficial Financiero, Popular, Inc.
Tere Loubriel
Vicepresidenta Ejecutiva,
Gente, Comunicaciones y Planificación, Popular, Inc.
Lcda. Brunilda Santos de Álvarez
Vicepresidenta Ejecutiva,
Principal Oficial Legal, Popular, Inc.
Félix M. Villamil
Vicepresidente Ejecutivo, Popular, Inc.
Presidente, EVERTEC, Inc.
Nuestro Credo
El Banco Popular es una institución genuinamente nativa
dedicada exclusivamente a trabajar por el bienestar social
y económico de Puerto Rico e inspirada en los principios
más sanos y fundamentales de una buena práctica bancaria.
El Popular tiene empeñados sus esfuerzos y voluntad
al desarrollo de un servicio bancario para Puerto Rico
dentro de normas estrictamente comerciales tan eficiente
como pueda requerir la comunidad más progresista
del mundo.
Estas palabras, escritas en 1928 por don Rafael Carrión
Pacheco, Vicepresidente Ejecutivo y Presidente (1927-1956),
representan el pensamiento que rige a Popular, Inc. en todos
sus mercados.
Nuestra Gente
Los hombres y mujeres que laboran para nuestra institución,
desde los más altos ejecutivos hasta los empleados que
llevan a cabo las tareas más rutinarias, sienten un orgullo
especial al servir a nuestra clientela con esmero y dedica-
ción. Todos sienten la íntima satisfacción de pertenecer a
la Gran “Familia del Banco Popular”, en la que se fomenta
el cariño y la comprensión entre todos sus miembros, y en
la que a la vez se cumple firmemente con las más estrictas
reglas de conducta y de moral.
Estas palabras fueron escritas en 1988 por don Rafael Carrión,
Jr., Presidente y Presidente de la Junta de Directores, (1956-
1991), con motivo del 95 aniversario del Banco Popular de
Puerto Rico y son muestra de nuestro compromiso con nuestros
recursos humanos.
Información Corporativo
Firma Registrada de Contabilidad Pública Independiente
PricewaterhouseCoopers LLP
Reunión Anual
La reunión anual de accionistas del 2007 de Popular, Inc.
se celebrará el viernes, 25 de abril, a las 9:00 a.m. en el
Edificio Centro Europa en San Juan, Puerto Rico.
Información Adicional
El Informe Anual en la Forma 10-K radicado con la Comisión
de Valores e Intercambio e información financiera adicional
están disponibles visitando nuestra página de Internet:
www.popular.com
Financial Review and
Supplementary Information
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Statistical Summaries
Financial Statements
Management’s Report to Stockholders
Report of Independent Registered
Public Accounting Firm
Consolidated Statements of Condition
as of December 31, 2007 and 2006
Consolidated Statements of Operations
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
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Comprehensive
Income for the years ended December 31,
2007, 2006 and 2005
Notes to Consolidated Financial Statements
3
68
73
74
76
77
78
79
80
81
2
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
Overview
Significant U.S. Strategic Events
Events Subsequent to Year-End 2007
Critical Accounting Policies / Estimates
Statement of Operations Analysis
Net Interest Income
Provision for Loan Losses
Non-Interest Income
Operating Expenses
Income Tax Expense
Fourth Quarter Results
Reportable Segment Results
Statement of Condition Analysis
Assets
Deposits, Borrowings and
Other Liabilities
Stockholders’ Equity
Off-Balance Sheet Financing Entities
Risk Management
Market Risk
Liquidity Risk
Credit Risk Management and
Loan Quality
Operational Risk Management
Loss Mitigation for Securitized Mortgage Loans
Recently Issued Accounting Pronouncements
and Interpretations
Glossary of Selected Financial Terms
Statistical Summaries
Statements of Condition
Statements of Operations
Average Balance Sheet and
Summary of Net Interest Income
Quarterly Financial Data
3
3
8
10
11
19
21
21
26
28
28
29
32
34
35
36
36
36
43
50
60
60
62
65
68
69
70
72
2007 Annual Report 3
2007
2007
Popular, Inc. 2007
2007
Management’’’’’s Discussion and Analysis of Financial
Condition and Results of Operations
The following management’s discussion and analysis (“MD&A”)
provides you with information management believes necessary
for understanding the financial performance of Popular, Inc. and
its subsidiaries (the “Corporation” or “Popular”). All
accompanying tables, consolidated financial statements and
corresponding notes included in this “Financial Review and
Supplementary Information - 2007 Annual Report” (“the report”)
should be considered an integral part of this MD&A.
FFFFF O R W A R D
L O O K I N G S S S S S T A T E M E N T S
O R W A R D----- L O O K I N G
T A T E M E N T S
T A T E M E N T S
L O O K I N G
L O O K I N G
O R W A R D
O R W A R D
T A T E M E N T S
T A T E M E N T S
L O O K I N G
O R W A R D
The information included in this report may contain certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These include
descriptions of products or services, plans or objectives for future
operations, and forecast of revenues, earnings, cash flows, or
other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate
strictly to historical or current facts.
Forward-looking statements are not guarantees of future
performance and, by their nature, involve certain risks,
uncertainties, estimates and assumptions by management that
are difficult to predict. Various factors, some of which are beyond
the Corporation’s control, could cause actual results to differ
materially from those expressed in, or implied by, such forward-
looking statements. Factors that might cause such a difference
include, but are not limited to, the rate of growth in the economy,
as well as general business and economic conditions; changes in
interest rates, as well as the magnitude of such changes; the fiscal
and monetary policies of the federal government and its agencies;
the relative strength or weakness of the consumer and commercial
credit sectors and of the real estate markets; the performance of
the stock and bond markets; competition in the financial services
industry; possible legislative, tax or regulatory changes; and
difficulties in combining the operations of acquired entities.
All forward-looking statements are based upon information
available to the Corporation as of the date of this report.
Management assumes no obligation to update or revise any such
forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
OOOOO V E R V I E W
V E R V I E W
V E R V I E W
V E R V I E W
V E R V I E W
The Corporation is a financial holding company, which is subject
to the supervision and regulation of the Board of Governors of the
Federal Reserve System. Since its foundation more than a century
ago, Popular has evolved from a commercial bank based in Puerto
Rico to a diverse financial services company with operations in
Puerto Rico, the United States, the Caribbean and Latin America.
The Corporation ranked 30th among the top 50 bank holding
companies based on total assets as per information gathered and
disclosed by the Federal Reserve System as of December 31, 2007.
The Corporation operates four principal businesses or
operating segments: Banco Popular de Puerto Rico, Banco Popular
North America, Popular Financial Holdings and EVERTEC. As
the leading financial institution in Puerto Rico, the Corporation
offers retail and commercial banking services through its principal
banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as
well as auto and equipment leasing and financing, mortgage loans,
consumer lending, investment banking, broker-dealer and
insurance services through specialized subsidiaries. In the United
States, the Corporation operates Banco Popular North America
(“BPNA”), including its wholly-owned subsidiary E-LOAN, and
Popular Financial Holdings (“PFH”). BPNA is a community bank
providing a broad range of financial services and products to the
communities it serves. BPNA operates branches in New York,
California, Illinois, New Jersey, Florida and Texas. E-LOAN offers
online consumer direct lending and provides an online platform
to raise deposits for BPNA. PFH, after certain restructuring events
discussed later in this MD&A, is currently exiting the loan
origination business, but still carries a maturing loan portfolio
that approximated $3.3 billion at December 31, 2007, of which a
carrying amount of $1.4 billion was classified as held-for-sale.
Also, PFH continues to service for others over $9.4 billion in
mortgage loans. The Corporation, through its transaction
processing company, EVERTEC, continues to use its expertise
in technology as a competitive advantage in its expansion
throughout the United States, the Caribbean and Latin America,
as well as internally servicing many of the Corporation's
subsidiaries’ system infrastructures and transactional processing
businesses. Note 32 to the consolidated financial statements, as
well as the Reportable Segments section in this MD&A, present
further information about the Corporation’s business segments.
Popular, Inc.’s financial performance for the year ended
December 31, 2007 reflected a net loss of $64.5 million, compared
with net income of $357.7 million for 2006. The reduction in the
Corporation’s results of operations continued to reflect the impact
of unprecedented adverse market conditions, particularly on
Popular’s U.S. mainland operations.
Net losses in the Corporation’s U.S. operations, which include
the reportable segments of Banco Popular North America and PFH,
amounted to $467.8 million for the year ended December 31,
2007, compared to net income of $5.0 million in 2006. The year
2007 was marked by very important decisions with respect to
Popular’s U.S. operations, which had a significant impact in the
financial results for the year, including:
• the implementation of various restructuring plans, resulting
in the recognition of significant associated costs, which
approximated $36.7 million, and of non-cash impairment
losses related to E-LOAN’s goodwill and trademark
approximating $211.8 million, and
4
Table A
Table A
Table A
Table A
Table A
Components of Net (Loss) Income as a Percentage of Average Total Assets
Net interest income
Provision for loan losses
Sales and valuation adjustments of investment securities
(Loss) gain on sale of loans and valuation adjustments
on loans held-for-sale
Trading (losses) gains
Other non-interest income
Operating expenses
Net (loss) income before tax and cumulative effect
of accounting change
Income tax
Cumulative effect of accounting change, net of tax
Net (loss) income
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
3 . 0 8 %
3 . 0 8 %
3 . 0 8 %
3 . 0 8 %
3 . 0 8 %
( 1 . 1 9 )
( 1 . 1 9 )
( 1 . 1 9 )
( 1 . 1 9 )
( 1 . 1 9 )
0 . 1 2
0 . 1 2
0 . 1 2
0 . 1 2
0 . 1 2
( 0 . 0 8 )
( 0 . 0 8 )
( 0 . 0 8 )
( 0 . 0 8 )
( 0 . 0 8 )
( 0 . 0 1 )
( 0 . 0 1 )
( 0 . 0 1 )
( 0 . 0 1 )
( 0 . 0 1 )
1 . 4 4
1 . 4 4
1 . 4 4
1 . 4 4
1 . 4 4
3 . 3 6
3 . 3 6
3 . 3 6
3 . 3 6
3 . 3 6
( 3 . 6 2 )
( 3 . 6 2 )
( 3 . 6 2 )
( 3 . 6 2 )
( 3 . 6 2 )
( 0 . 2 6 )
( 0 . 2 6 )
( 0 . 2 6 )
( 0 . 2 6 )
( 0 . 2 6 )
0 . 1 2
0 . 1 2
0 . 1 2
0 . 1 2
0 . 1 2
-
( 0 . 1 4 % )
( 0 . 1 4 % )
( 0 . 1 4 % )
( 0 . 1 4 % )
( 0 . 1 4 % )
For the Year
2006
2.96%
(0.60)
0.01
0.24
0.07
1.36
4.04
(3.08)
0.96
(0.22)
-
0.74%
2005
3.07%
(0.42)
0.11
0.18
0.06
1.34
4.34
(2.86)
1.48
(0.32)
0.01
1.17%
2004
3.45%
(0.45)
0.04
0.11
-
1.38
4.53
(2.94)
2003
3.71%
(0.57)
0.21
0.15
(0.03)
1.48
4.95
(3.21)
1.59
(0.36)
-
1.23%
1.74
(0.38)
-
1.36%
• the loan recharacterization transaction of the majority of
the on-balance sheet securitizations at PFH which resulted
in a net pre-tax loss of approximately $90.1 million.
These U.S. strategic events are explained in detail in the
Significant U.S. Strategic Events section of this MD&A and are
integral to the understanding of the 2007 financial results.
The Corporation’s operations in Puerto Rico continued to
perform well despite a difficult economic environment, which
presents credit challenges and has led to a recessionary cycle.
Solidifying Popular’s presence in the Puerto Rico market and
sustaining the Corporation’s confidence in this market, in 2007,
the Corporation completed the acquisition of Citibank’s retail
banking operations in Puerto Rico, which added 17 branches to
BPPR’s retail branch network prior to branch closing due to
synergies, and contributed approximately $1 billion in deposits
and $220 million in loans. Also, Popular Securities, a subsidiary
within the Banco Popular de Puerto Rico reportable segment,
strengthened its brokerage sales force and increased its assets
under its management by acquiring Smith Barney’s retail
brokerage operations in Puerto Rico. Both of these acquisitions
took place in the latter part of the fourth quarter of 2007. The
Corporation recorded $147 million in goodwill and other
intangibles related to these two acquisitions.
Information on the analysis of financial results for the Puerto
Rico, including EVERTEC, and U.S. operations is provided in
the Reportable Segments section of this MD&A.
Table A presents a five-year summary of the components of net
(loss) income as a percentage of average total assets. Table B
presents the changes in net (loss) income applicable to common
stock and (losses) earnings per common share for the last three
years. In addition, Table C provides selected financial data for the
past 10 years. A glossary of selected financial terms has been
included at the end of this MD&A.
Financial results for the year ended December 31, 2007 were
principally impacted by the following items (on a pre-tax basis),
compared to the year 2006:
• A $274.9 million increase in the provision for loan losses,
which was mostly influenced by a slowdown in the housing
sector, principally in the U.S. mainland, and weak economic
conditions in Puerto Rico and the U.S. mainland that
impacted the commercial and consumer sectors and has
resulted in higher delinquencies. Refer to the Credit Risk
Management and Loan Quality section of this MD&A for a
more detailed analysis of the allowance for loan losses, net
charge-offs, non-performing assets and credit quality
statistics.
• A decrease of $115.2 million in non-interest income, mostly
driven by loss on sale of loans that includes the impact of
the PFH loan recharacterization transaction described in
detail in the Significant U.S. Strategic Events section in
this MD&A and unfavorable valuation adjustments on loans
held-for-sale due to illiquidity in certain markets and higher
credit loss expectations which impacted price margins.
Also, the decrease in non-interest income was the result of
reductions in value in the residual interests of PFH. These
unfavorable variances were partially offset by higher gains
on sale of equity securities by the Corporation’s holding
company and higher service fees.
2007 Annual Report 5
2007
2007
Popular, Inc. 2007
2007
Table B
Table B
Table B
Table B
Table B
Changes in Net (Loss) Income Applicable to Common Stock and (Losses) Earnings per Common Share
(In thousands, except per common share amounts)
D o l l a r s
D o l l a r s
D o l l a r s
D o l l a r s
D o l l a r s
Per share
Per share
Per share
Per share
Per share
Dollars
Per share
Dollars
Per share
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
$ 3 4 5 , 7 6 3
$ 3 4 5 , 7 6 3
$ 3 4 5 , 7 6 3
$ 3 4 5 , 7 6 3
$ 3 4 5 , 7 6 3
$ 1 . 2 4
$ 1 . 2 4
$ 1 . 2 4
$ 1 . 2 4
$ 1 . 2 4
$528,789
$1.98
$477,995
$1.79
Net income applicable to common stock
for prior year
Increase (decrease) from changes in:
Net interest income
Provision for loan losses
Sales and valuation adjustments of investment
securities
Trading account
Sales of loans and valuation adjustments on
loans held-for-sale
Other non-interest income
Impairment losses on long-lived assets*
Goodwill and trademark impairment losses*
Amortization of intangibles
All other operating expenses
Income tax
Cumulative effect of accounting change
2 1 , 4 8 0
2 1 , 4 8 0
2 1 , 4 8 0
2 1 , 4 8 0
2 1 , 4 8 0
( 2 7 4 , 8 9 0 )
( 2 7 4 , 8 9 0 )
( 2 7 4 , 8 9 0 )
( 2 7 4 , 8 9 0 )
( 2 7 4 , 8 9 0 )
0 . 0 8
0 . 0 8
0 . 0 8
0 . 0 8
0 . 0 8
( 0 . 9 9 )
( 0 . 9 9 )
( 0 . 9 9 )
( 0 . 9 9 )
( 0 . 9 9 )
3,703
(92,488)
5 0 , 8 0 0
5 0 , 8 0 0
5 0 , 8 0 0
5 0 , 8 0 0
5 0 , 8 0 0
( 3 7 , 7 5 2 )
( 3 7 , 7 5 2 )
( 3 7 , 7 5 2 )
( 3 7 , 7 5 2 )
( 3 7 , 7 5 2 )
0 . 1 8
0 . 1 8
0 . 1 8
0 . 1 8
0 . 1 8
( 0 . 1 4 )
( 0 . 1 4 )
( 0 . 1 4 )
( 0 . 1 4 )
( 0 . 1 4 )
(47,754)
5,237
( 1 5 6 , 3 9 1 )
( 1 5 6 , 3 9 1 )
( 1 5 6 , 3 9 1 )
( 1 5 6 , 3 9 1 )
( 1 5 6 , 3 9 1 )
2 8 , 1 7 4
2 8 , 1 7 4
2 8 , 1 7 4
2 8 , 1 7 4
2 8 , 1 7 4
( 5 , 1 1 2 )
( 5 , 1 1 2 )
( 5 , 1 1 2 )
( 5 , 1 1 2 )
( 5 , 1 1 2 )
( 1 9 7 , 5 1 2 )
( 1 9 7 , 5 1 2 )
( 1 9 7 , 5 1 2 )
( 1 9 7 , 5 1 2 )
( 1 9 7 , 5 1 2 )
1 , 9 3 3
1 , 9 3 3
1 , 9 3 3
1 , 9 3 3
1 , 9 3 3
( 1 8 , 7 8 7 )
( 1 8 , 7 8 7 )
( 1 8 , 7 8 7 )
( 1 8 , 7 8 7 )
( 1 8 , 7 8 7 )
1 6 5 , 8 8 8
1 6 5 , 8 8 8
1 6 5 , 8 8 8
1 6 5 , 8 8 8
1 6 5 , 8 8 8
-----
( 0 . 5 6 )
( 0 . 5 6 )
( 0 . 5 6 )
( 0 . 5 6 )
( 0 . 5 6 )
0 . 1 0
0 . 1 0
0 . 1 0
0 . 1 0
0 . 1 0
( 0 . 0 2 )
( 0 . 0 2 )
( 0 . 0 2 )
( 0 . 0 2 )
( 0 . 0 2 )
( 0 . 7 1 )
( 0 . 7 1 )
( 0 . 7 1 )
( 0 . 7 1 )
( 0 . 7 1 )
0 . 0 1
0 . 0 1
0 . 0 1
0 . 0 1
0 . 0 1
( 0 . 0 6 )
( 0 . 0 6 )
( 0 . 0 6 )
( 0 . 0 6 )
( 0 . 0 6 )
0 . 6 0
0 . 6 0
0 . 6 0
0 . 6 0
0 . 6 0
-----
34,124
32,603
(7,232)
(14,239)
(2,798)
(132,604)
42,029
(3,607)
0.01
(0.35)
(0.18)
0.02
0.13
0.12
(0.03)
(0.05)
(0.01)
(0.50)
0.16
(0.01)
1.29
(0.05)
48,696
(16,615)
0.18
(0.06)
36,859
30,210
39,129
70,306
-
-
(1,735)
(155,453)
(4,210)
3,607
528,789
-
0.14
0.11
0.15
0.27
-
-
(0.01)
(0.58)
(0.01)
0.01
1.99
(0.01)
Net (loss) income before preferred stock dividends
and change in average common shares
Change in average common shares**
( 7 6 , 4 0 6 )
( 7 6 , 4 0 6 )
( 7 6 , 4 0 6 )
( 7 6 , 4 0 6 )
( 7 6 , 4 0 6 )
-----
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
-----
345,763
-
Net (loss) income applicable to common stock
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
$345,763
$1.24
$528,789
$1.98
*Associated with the PFH Restructuring Plan, PFH Branch Network Restructuring Plan, and E-LOAN Restructuring Plan.
**Reflects the effect of the shares repurchased, plus the shares issued through the Dividend Reinvestment Plan and the subscription rights offering, and the effect of stock
options exercised in the years presented.
• Higher operating expenses by $219.5 million, which
includes restructuring charges that are detailed in the
Significant U.S. Strategic Events section in this MD&A.
The above unfavorable variances were partially offset by:
• Higher net interest income by $21.5 million. For further
information refer to the Net Interest Income and Market
Risk sections of this MD&A.
• Income tax benefit of $59.0 million in 2007, compared to
income tax expense of $106.9 million in 2006. Refer to the
Income Tax section of this MD&A for additional
information.
Total assets at December 31, 2007 amounted to $44.4 billion,
or $3.0 billion lower than total assets at the same date in the
previous year. Total earning assets at December 31, 2007
decreased by $2.8 billion, or 6%, compared with December 31,
2006. As of December 31, 2007, loans, the primary interest-
earning asset category for the Corporation, totaled $29.9 billion,
reflecting a decline of $2.8 billion, or 9%, from December 31,
2006. As explained in the Significant U.S. Strategic Events section
of this MD&A, the loan recharacterization transaction and the
PFH Restructuring Plan contributed substantially to the reduction
in total loans. For more detailed information on lending activities,
refer to the Statement of Condition Analysis and Credit Risk
Management and Loan Quality sections of this MD&A. Investment
and trading securities, the second largest component of interest-
earning assets, accounted for $0.6 billion of the decline in total
assets from December 31, 2006.
Assets at December 31, 2007 were funded principally through
deposits, primarily time deposits. Deposits supported
approximately 64% of the asset base, while borrowings, other
liabilities and stockholders’ equity accounted for approximately
36%. As of December 31, 2006, 52% of total assets were funded
through deposits, while borrowings, other liabilities and
stockhoders' equity accounted for 48%. In the third quarter of
2007, the Corporation increased its reliance on brokered
certificates of deposit, as a result of expected reduced availability
of non-deposit funding. Beginning in the third quarter of 2007,
6
T a b l e C
T a b l e C
T a b l e C
T a b l e C
T a b l e C
Selected Financial Data
(Dollars in thousands, except per share data)
CONDENSED INCOME STATEMENTS
Interest income
Interest expense
Net interest income
Provision for loan losses
Net gain (loss) on sale and valuation adjustment of investment securities
Trading account (loss) profit
(Loss) gain on sale of loans and valuation adjustments on
loans held-for-sale
Other non-interest income
Operating expenses
Income tax (benefit) expense
Net (gain) loss of minority interest
Cumulative effect of accounting change, net of tax
Net (loss) income
Net (loss) income applicable to common stock
PER COMMON SHARE DATA*
Net (loss) income:
Basic before cumulative effect of accounting change
Diluted before cumulative effect of accounting change
Basic after cumulative effect of accounting change
Diluted after cumulative effect of accounting change
Dividends declared
Book value
Market price
Outstanding shares:
Average - basic
Average - diluted
End of period
AVERAGE BALANCES
Net loans**
Earning assets
Total assets
Deposits
Borrowings
Total stockholders’ equity
PERIOD END BALANCES
Net loans**
Allowance for loan losses
Earning assets
Total assets
Deposits
Borrowings
Total stockholders’ equity
SELECTED RATIOS
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
$ 3 , 1 2 8 , 1 7 1
$ 3 , 1 2 8 , 1 7 1
$ 3 , 1 2 8 , 1 7 1
$ 3 , 1 2 8 , 1 7 1
$ 3 , 1 2 8 , 1 7 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
6 8 0 , 5 9 1
6 8 0 , 5 9 1
6 8 0 , 5 9 1
6 8 0 , 5 9 1
6 8 0 , 5 9 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
-
-
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
( 0 . 2 7 )
0 . 6 4
0 . 6 4
0 . 6 4
0 . 6 4
0 . 6 4
1 2 . 1 2
1 2 . 1 2
1 2 . 1 2
1 2 . 1 2
1 2 . 1 2
1 0 . 6 0
1 0 . 6 0
1 0 . 6 0
1 0 . 6 0
1 0 . 6 0
$3,064,441
1,636,531
1,427,910
287,760
4,359
35,288
117,421
652,417
1,485,073
106,886
-
-
$357,676
$345,763
$1.24
1.24
1.24
1.24
0.64
12.32
17.95
$2,665,859
1,241,652
1,424,207
195,272
52,113
30,051
83,297
619,814
1,328,200
148,915
-
3,607
$540,702
$528,789
$1.97
1.96
1.98
1.97
0.64
11.82
21.15
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 7 9 , 4 9 4 , 1 5 0
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
278,468,552
278,703,924
278,741,547
267,334,606
267,839,018
275,955,391
$ 3 2 , 7 4 9 , 9 9 3
$ 3 2 , 7 4 9 , 9 9 3
$ 3 2 , 7 4 9 , 9 9 3
$ 3 2 , 7 4 9 , 9 9 3
$ 3 2 , 7 4 9 , 9 9 3
4 3 , 7 8 9 , 6 9 3
4 3 , 7 8 9 , 6 9 3
4 3 , 7 8 9 , 6 9 3
4 3 , 7 8 9 , 6 9 3
4 3 , 7 8 9 , 6 9 3
4 7 , 1 0 4 , 9 3 5
4 7 , 1 0 4 , 9 3 5
4 7 , 1 0 4 , 9 3 5
4 7 , 1 0 4 , 9 3 5
4 7 , 1 0 4 , 9 3 5
2 5 , 5 6 9 , 1 0 0
2 5 , 5 6 9 , 1 0 0
2 5 , 5 6 9 , 1 0 0
2 5 , 5 6 9 , 1 0 0
2 5 , 5 6 9 , 1 0 0
1 6 , 8 6 6 , 7 5 4
1 6 , 8 6 6 , 7 5 4
1 6 , 8 6 6 , 7 5 4
1 6 , 8 6 6 , 7 5 4
1 6 , 8 6 6 , 7 5 4
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
5 4 8 , 8 3 2
5 4 8 , 8 3 2
5 4 8 , 8 3 2
5 4 8 , 8 3 2
5 4 8 , 8 3 2
4 0 , 9 0 1 , 8 5 4
4 0 , 9 0 1 , 8 5 4
4 0 , 9 0 1 , 8 5 4
4 0 , 9 0 1 , 8 5 4
4 0 , 9 0 1 , 8 5 4
4 4 , 4 1 1 , 4 3 7
4 4 , 4 1 1 , 4 3 7
4 4 , 4 1 1 , 4 3 7
4 4 , 4 1 1 , 4 3 7
4 4 , 4 1 1 , 4 3 7
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
1 1 , 5 6 0 , 5 9 6
1 1 , 5 6 0 , 5 9 6
1 1 , 5 6 0 , 5 9 6
1 1 , 5 6 0 , 5 9 6
1 1 , 5 6 0 , 5 9 6
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
$32,078,716
44,930,391
48,294,566
23,264,132
20,545,546
3,741,273
$32,736,939
522,232
43,660,568
47,403,987
24,438,331
18,533,816
3,620,306
$29,730,913
43,245,684
46,362,329
22,253,069
20,091,520
3,274,808
$31,710,207
461,707
45,167,761
48,623,668
22,638,005
21,296,299
3,449,247
Net interest yield (taxable equivalent basis)
Return on average total assets
Return on average common stockholders’ equity
Dividend payout ratio to common stockholders
Efficiency ratio
Overhead ratio
Tier I capital to risk-adjusted assets
Total capital to risk-adjusted assets
3.59%
1.17
17.12
32.31
62.30
38.12
11.17
12.44
* Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information
3 . 5 2 %
3 . 5 2 %
3 . 5 2 %
3 . 5 2 %
3 . 5 2 %
( 0 . 1 4 )
( 0 . 1 4 )
( 0 . 1 4 )
( 0 . 1 4 )
( 0 . 1 4 )
( 2 . 0 8 )
( 2 . 0 8 )
( 2 . 0 8 )
( 2 . 0 8 )
( 2 . 0 8 )
( 2 3 3 . 8 9 )
( 2 3 3 . 8 9 )
( 2 3 3 . 8 9 )
( 2 3 3 . 8 9 )
( 2 3 3 . 8 9 )
8 1 . 9 9
8 1 . 9 9
8 1 . 9 9
8 1 . 9 9
8 1 . 9 9
6 9 . 7 0
6 9 . 7 0
6 9 . 7 0
6 9 . 7 0
6 9 . 7 0
1 0 . 1 2
1 0 . 1 2
1 0 . 1 2
1 0 . 1 2
1 0 . 1 2
1 1 . 3 8
1 1 . 3 8
1 1 . 3 8
1 1 . 3 8
1 1 . 3 8
3.44%
0.74
9.73
51.02
67.16
47.31
10.61
11.86
at the end of the periods. All per share data have been adjusted to reflect two stock splits effected in the form of dividends on July 8, 2004 and July 1, 1998.
** Includes loans held-for-sale.
2007 Annual Report 7
2007
2007
Popular, Inc. 2007
2007
2004
2003
2002
Year ended December 31,
2001
2000
1999
1998
$2,216,265
840,754
1,375,511
178,657
15,254
(159)
44,168
549,508
1,171,012
144,705
-
-
$489,908
$477,995
$1.79
1.79
1.79
1.79
0.62
10.95
28.83
$2,034,238
749,550
1,284,688
195,939
71,094
(10,214)
53,572
511,558
1,113,083
130,326
(435)
-
$470,915
$460,996
$1.74
1.74
1.74
1.74
0.51
9.66
22.43
$2,023,797
863,553
1,160,244
205,570
(3,342)
(804)
52,077
495,832
1,029,002
117,255
(248)
-
$351,932
$349,422
$1.31
1.31
1.31
1.31
0.40
9.10
16.90
$2,095,862
1,039,105
1,056,757
213,250
27
(1,781)
45,633
447,937
926,209
105,280
18
686
$304,538
$296,188
$1.09
1.09
1.09
1.09
0.38
7.97
14.54
$2,150,157
1,167,396
982,761
194,640
11,201
1,991
39,673
411,195
876,433
100,797
1,152
-
$276,103
$267,753
$0.99
0.99
0.99
0.99
0.32
6.96
13.16
$1,851,670
897,932
953,738
148,948
638
(1,582)
34,890
338,970
837,482
85,120
2,454
-
$257,558
$249,208
$0.92
0.92
0.92
0.92
0.30
5.76
13.97
$1,651,703
778,691
873,012
137,213
8,933
3,653
23,036
255,624
720,354
74,671
328
-
$232,348
$223,998
$0.83
0.83
0.83
0.83
0.25
5.93
17.00
266,302,105
266,674,856
266,582,103
265,481,840
265,595,832
265,783,892
267,830,164
267,830,550
264,878,094
272,476,576
272,476,938
272,724,728
271,814,952
271,814,952
271,997,234
271,171,268
271,171,268
271,308,584
271,064,172
271,064,172
271,274,654
$25,143,559
37,621,648
39,898,775
19,409,055
16,954,909
2,903,137
$28,742,261
437,081
41,812,475
44,401,576
20,593,160
19,882,202
3,104,621
$20,730,041
32,781,355
34,674,761
17,757,968
13,835,437
2,545,113
$22,602,192
408,542
34,451,748
36,434,715
18,097,828
14,949,236
2,754,417
$18,729,220
30,194,914
31,822,390
16,984,646
12,190,076
2,150,386
$19,582,119
372,797
31,899,765
33,660,352
17,614,740
12,955,966
2,410,879
$17,045,257
26,414,204
27,957,107
15,575,791
9,805,000
2,096,534
$18,168,551
336,632
29,139,288
30,744,676
16,370,042
11,588,221
2,272,818
$15,801,887
24,893,366
26,569,755
14,508,482
9,674,547
1,884,525
$16,057,085
290,653
26,339,431
28,057,051
14,804,907
10,785,239
1,993,644
$13,901,290
22,244,959
23,806,372
13,791,338
7,825,855
1,712,792
$14,907,754
292,010
23,754,620
25,460,539
14,173,715
9,154,468
1,660,986
$11,930,621
19,261,949
20,432,382
12,270,101
6,268,921
1,553,258
$13,078,795
267,249
21,591,950
23,160,357
13,672,214
7,297,742
1,709,113
3.95%
1.23
17.60
32.85
59.86
40.88
11.82
13.21
4.28%
1.36
19.30
27.05
60.51
37.91
12.43
13.93
4.19%
1.11
16.29
30.76
60.42
41.82
9.85
11.52
4.33%
1.09
14.84
33.10
59.81
41.11
9.96
11.74
4.23%
1.04
15.00
32.47
61.45
41.96
10.44
12.37
4.65%
1.08
15.45
31.56
63.16
48.71
10.17
12.29
4.91%
1.14
15.41
28.42
62.35
49.15
10.82
13.14
8
the U.S. credit markets were marked by unprecedented instability
and disruption, making even routine asset sale and funding
activities much more challenging for financial institutions. Credit
spreads widened significantly and rapidly as many investors
allocated their funds to only the highest-quality financial assets
such as U.S. government securities. The result of these actions by
market participants made it more difficult for corporate borrowers
to raise financing in the capital markets. In light of this scenario,
the Corporation determined at that time to substitute overnight
borrowings with longer term funding. Furthermore, the increase
in deposits was the result of the acquisition of the Citibank retail
branches in Puerto Rico in the fourth quarter of 2007, which
contributed with approximately $1 billion in deposits, principally
in time deposits and savings accounts. For additional data on
funding sources refer to the Statement of Condition Analysis and
Liquidity Risk sections of this MD&A.
Stockholders’ equity at December 31, 2007 showed a reduction
of $38 million, compared to December 31, 2006. The impact of
the net loss for the year 2007 and the dividend payouts was partially
offset by the net impact of unrealized gains in the valuation of
available-for-sale securities at year-end 2007 of $21 million,
compared to unrealized losses of $155 million in year-end 2006.
The Corporation’s common stock declined 41% in market
value in 2007 closing at $10.60. The Corporation’s market
capitalization at December 31, 2007 was $3.0 billion, compared
with $5.0 billion at December 31, 2006. The shares of the
Corporation’s common and preferred stock are traded on the
National Association of Securities Dealers Automated Quotations
(“NASDAQ”) system under the symbols BPOP and BPOPO,
respectively. Table J shows the Corporation’s common stock
performance on a quarterly basis during the last five years,
including market prices and cash dividends declared.
The Corporation, like other financial institutions, is subject
to a number of risks, many of which are outside of management’s
control, though efforts are made to manage those risks while
optimizing returns. Among the risks assumed 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.
These four risks are covered in greater detail throughout this
MD&A. In addition, the Corporation is subject to legal,
compliance and reputational risks, among others.
As a financial services company, the Corporation’s earnings
are significantly affected by general business and economic
conditions. Lending and deposit activities and fee income
generation are influenced by the level of business spending and
investment, consumer income, spending and savings, capital
market activities, competition, customer preferences, interest
rate conditions and prevailing market rates on competing
products. The Corporation continuously monitors general
business and economic conditions, industry-related indicators
and trends, competition, interest rate volatility, credit quality
indicators, loan and deposit demand, operational and systems
efficiencies, revenue enhancements and changes in the regulation
of financial services companies. The Corporation operates in a
highly regulated environment and may be adversely affected by
changes in federal and local laws and regulations. Also, competition
with other financial institutions could adversely affect its
profitability.
The description of the Corporation’s business and risk factors
contained in Item 1 and 1A of its Form 10-K for the year ended
December 31, 2007, while not all inclusive, discusses additional
information about the business of the Corporation and the material
risk factors that, in addition to the other information in this
report, readers should consider.
Further discussion of operating results, financial condition
and business risks is presented in the narrative and tables included
herein.
Significant U.S. Strategic Events
Significant U.S. Strategic Events
Significant U.S. Strategic Events
Significant U.S. Strategic Events
Significant U.S. Strategic Events
The following significant U.S. initiatives were adopted to improve
the Corporation’s balance sheet, profitability and liquidity. Certain
of these events occurred in 2007, while others are expected to be
effected in early 2008.
PFH Restructuring Plan
In January 2007, the Corporation adopted a Restructuring and
Integration Plan at PFH, the holding company of Equity One (the
“PFH Restructuring Plan”). The PFH Restructuring Plan called
for PFH to exit the wholesale subprime mortgage loan origination
business during early first quarter of 2007 and to shut-down the
wholesale broker, retail and call center business divisions. Also,
the plan included consolidating PFH support functions with its
sister U.S. banking entity, Banco Popular North America, creating
a single integrated North American financial services unit. At
that time, Popular decided to continue the operations of Equity
One and its subsidiaries (“Equity One”), with over 130 consumer
services branches, principally dedicated to direct subprime loan
origination, consumer finance and mortgage servicing.
The PFH Restructuring Plan resulted in restructuring costs
amounting to approximately $14.7 million in 2007, primarily in
severance and lease termination charges. In 2006, the Corporation
recognized $7.2 million in impairment of long-lived assets and
$14.2 million in the impairment of PFH’s goodwill as a result of
2007 Annual Report 9
2007
2007
Popular, Inc. 2007
2007
the PFH Restructuring Plan. Refer to the Operating Expenses
section in this MD&A for a breakdown of these costs by major
categories. Exiting these origination channels also impacted
financial results by reducing new loan volumes and, thus, had an
impact on revenues generated by the sale of loans.
Refer to the Events Subsequent to Year-End 2007 section of
this MD&A for additional steps taken by management with respect
to PFH’s operations in 2008, which resulted in a second
restructuring plan, namely the PFH Branch Network Restructuring
Plan.
E-LOAN Restructuring Plan
In November 2007, the Board of Directors of Popular adopted a
restructuring plan for its Internet financial services subsidiary E-
LOAN (the “E-LOAN Restructuring Plan”). Considering
E-LOAN’s operating losses in light of current market conditions
and other factors, the Board of Directors approved a substantial
reduction of marketing and personnel costs at E-LOAN and
changes in E-LOAN’s business model to align it with revenue
expectations. The changes include concentrating marketing
investment toward the Internet and the origination of first mortgage
loans that qualify for sale to government sponsored entities
(“GSEs”). Also, as a result of escalating credit costs in the current
economic environment and lower liquidity in the secondary
markets for mortgage related products, in December 2007, the
Corporation determined to hold back the origination by E-LOAN
of home equity lines of credit, closed-end second lien mortgage
loans and auto loans. The E-LOAN Restructuring Plan continues
to promote the Internet deposit gathering initiative with BPNA.
As part of the E-LOAN Restructuring Plan, the Corporation
evaluated the value of E-LOAN’s recorded goodwill and trademark
by considering the changes in E-LOAN’s business model and the
unprecedented conditions in the mortgage loan business. The E-
LOAN Restructuring Plan resulted in charges recorded in the
fourth quarter of 2007 amounting to $231.9 million, which
included $211.8 million in non-cash impairment losses related to
its goodwill and trademark intangible assets. Refer to the
Operating Expenses section in this MD&A for a breakdown of
these costs by major categories.
The cost-control plan initiative and changes in loan
origination strategies incorporated as part of the plan will result
in the elimination of over 400 positions between the fourth quarter
of 2007 and first quarter of 2008. As a result of the E-LOAN
Restructuring Plan, operating expenses are expected to be reduced
by approximately $77 million for 2008. E-LOAN’s estimated net
losses for the year ended December 31, 2008 are expected to
decline by $15 million, resulting principally from the reduction
in operating expenses, partially offset by the related tax impact
and by lower volume of loan originations in certain business
channels that are impacted by this plan.
Recharacterization of Certain On-Balance Sheet Securitizations
as Sales under FASB Statement No. 140
From 2001 through 2006, the Corporation conducted 21 mortgage
loan securitizations that were sales for legal purposes but did not
qualify for sale accounting treatment at the time of inception
because the securitization trusts did not meet the criteria for
qualifying special purpose entities (“QSPEs”) contained in SFAS
No. 140 “Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities”. As a result, the transfers
of the mortgage loans pursuant to these securitizations were
initially accounted for as secured borrowings with the mortgage
loans continuing to be reflected as assets on the Corporation’s
consolidated statement of financial condition with appropriate
footnote disclosure indicating that the mortgage loans were, for
legal purposes, sold to the securitization trusts.
As part of the Corporation’s strategy of exiting the subprime
business at PFH, on December 19, 2007, PFH and the trustee for
each of the related securitization trusts amended the provisions of
the related pooling and servicing agreements to delete the
discretionary provisions that prevented the transactions from
qualifying for sale treatment. These changes in the primary
discretionary provisions included:
• deleting the provision that grants the servicer “sole
discretion” to have the right to purchase for its own account
or for resale from the trust fund any loan which is 91 days or
more delinquent;
• deleting the provision that grants the servicer (PFH) “sole
discretion” to sell loans with respect to which it believes
default is imminent;
• deleting the provision that grants the servicer “sole
discretion” to determine whether an immediate sale of a
real estate owned (“REO”) property or continued
management of such REO property is in the best interest of
the certificateholders; and
• deleting the provision that grants the residual holder (PFH)
to direct the trustee to acquire derivatives post closing.
The Corporation obtained a legal opinion, which among other
considerations, indicated that each amendment (a) is authorized
or permitted under the pooling and servicing agreement related
to such amendment, and (b) will not adversely affect in any material
respect the interests of any certificateholders covered by the related
pooling and servicing agreement.
The amendments to the pooling and servicing agreement
allowed the Corporation to recognize 16 out of the 21 transactions
as sales under SFAS No. 140. When accounting for the transfers
as sales, the Corporation (i) reclassified the loans as held-for-sale
with the corresponding lower of cost or market adjustment as of
the date of the transfer, (ii) removed from the Corporation’s books
10
approximately $3.2 billion in mortgage loans and $3.1 billion in
related liabilities representing secured borrowings, (iii)
recognized assets referred to as residual interests, which represent
the fair value of residual interest certificates that were issued by
the securitization trusts and retained by PFH, and (iv) recognized
mortgage servicing rights, which represent the fair value of PFH’s
right to continue to service the mortgage loans transferred to the
securitization trusts. As part of the recharacterization, the
Corporation recognized residual interests of $38 million and
MSRs of $18 million. The Corporation had previously recorded
MSRs in several of these securitization transactions, which
amounted to $18 million at December 31, 2007. The net impact
of the recharacterization transaction was a pre-tax loss of $90.1
million, which is included in the caption “(Loss) gain on sale of
loans and valuation adjustments on loans held-for-sale” in the
consolidated statement of operations.
Because the loans in these trusts continued to be reflected as
assets on the Corporation’s consolidated financial statements prior
to effecting the loan recharacterization transaction, the
Corporation was required to record charge-offs and make provision
for inherent loan losses relating to such loans in accordance with
FASB Statement No. 5, “Accounting for Contingencies.”
This loan recharacterization transaction as sale on the
Corporation’s financial statements reflects management’s current
strategy of exiting the subprime mortgage origination business
of PFH. It also provides investors a better portrayal of the legal
rights and obligations related to these transactions and will allow
them to better assess their economic impact on the Corporation’s
financial condition. The removal of the mortgage assets from
Popular’s books had a favorable impact on its capital ratios and
reduced the amount of subprime mortgages in the Corporation’s
books. The loan recharacterization transaction contributed with
a reduction in non-performing mortgage loans of approximately
$316 million, when compared to December 31, 2006.
Events Subsequent To Year-End 2007
Events Subsequent To Year-End 2007
Events Subsequent To Year-End 2007
Events Subsequent To Year-End 2007
Events Subsequent To Year-End 2007
Sale of BPNA’s Retail Bank Branches in Houston
On January 10, 2008, the Corporation completed the sale of six
branches of BPNA in Houston, Texas to Prosperity Bank.
Prosperity Bank paid a premium of 10.10% for approximately
$126 million in deposits, as well as purchased certain loans and
other assets attributable to the branches. Prosperity retained all
branch-based employees. BPNA continues to operate its mortgage
business based in Houston as well as its franchise and small
business lending activities in Texas. BPNA will also continue to
maintain a retail branch in Arlington, Texas.
PFH Branch Network Restructuring Plan
Given the unprecedented disruption in the capital markets since
the summer of 2007 and its impact on funding, Popular’s
management concluded that it would be difficult to generate an
adequate return on the capital invested at Equity One’s consumer
service branches.
In January 2008, the Corporation signed an Asset Purchase
Agreement (the “Agreement”) to sell certain assets of Equity One,
the U.S. mainland consumer finance operations of Popular Financial
Holdings, to American General Finance, Inc., a member of
American International Group. The closing of the Agreement with
effective date of March 1, 2008 resulted in the sale of a significant
portion of Equity One’s mortgage loan and consumer loan portfolio
approximating $1.4 billion. This portfolio was reclassified by
the Corporation from loans held-in-portfolio to loans held-for-sale
in December 2007. American General Finance, Inc. will hire certain
Equity One’s consumer services employees and will retain certain
branch locations. Equity One will close all remaining consumer
branches. Workforce reductions at Equity One will result in the
loss of employment for those employees at the consumer services
branches not hired by American General Finance, Inc., as well as
for other related support functions.
This strategic initiative resulted in the adoption of an additional
restructuring plan at PFH (the “PFH Branch Network Restructuring
Plan”) during the first quarter of 2008. It is anticipated that this
restructuring plan (the “PFH Branch Network Restructuring Plan”)
will result in estimated combined charges for the Corporation of
approximately $19.5 million, of which $1.9 million in impairment
charges related to long-lived assets, primarily leasehold
improvements, furniture and equipment, were recognized on
December 31, 2007, and the remainder is expected to be
substantially incurred in the first quarter of 2008.
Adoption of Statement of Financial Accounting Standards No.
159 “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”)
The Corporation adopted the provisions of SFAS No. 159 in
January 2008. Management elected the fair value option for
approximately $287 million of loans and $287 million of bond
certificates associated to PFH’s on-balance sheet securitizations
that were outstanding at December 31, 2007 (transactions
excluded from the recharacterization transaction described in
Note 23 to the consolidated financial statements). These loans
serve as collateral for the bond certificates. Due to accounting
constraints, the Corporation is unable to recharacterize these
loan securitizations as sales. Additionally, the Corporation elected
the fair value option for approximately $1.2 billion of whole loans
held-in-portfolio by PFH. These whole loans consist principally
of mortgage loans, including second-liens, that were originated
through the exited business of PFH and home equity lines of
credit that had been originated by E-LOAN prior to the 2007 U.S.
reorganization. Due to their subprime characteristics and current
market disruptions, these loans are being held-in-portfolio as
2007 Annual Report 11
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Popular, Inc. 2007
2007
potential buyers have withdrawn from the market given heightened
concerns over credit quality of borrowers and continued
deterioration in the housing markets. Management understands
that accounting for these loans at fair value provides a more relevant
and transparent measurement of the realizable value of the assets
and differentiates the PFH portfolio from that loan portfolio that
the Corporation will continue to originate through other channels
outside PFH. The measurement of the bond certificates at fair
value reflects the actual liability of the Corporation after
considering the credit risk to be borne by the certificateholders
on the on-balance sheet securitization. Management understands
that the adoption of the fair value option for the financial assets
and liabilities selected better reflects the inherent risks of these
instruments and reflects the intention of the Corporation to
discontinue most of the businesses previously conducted at PFH.
As a result of the adoption of SFAS No. 159, the Corporation
expects to recognize a negative pre-tax adjustment that could
range between $280 million and $300 million ($158 million and
$169 million after-tax) due to the transitional adjustment for
electing the fair value option on existing instruments at adoption.
That amount represents the difference between the fair value and
the carrying value of the loans at date of adoption. This negative
adjustment would not impact earnings but instead be reflected as
a reduction of beginning retained earnings as of January 1, 2008.
Subsequent increases or decreases in the fair value of the assets
and liabilities accounted under SFAS No. 159 provisions will be
recorded as valuation adjustments through earnings in the
consolidated statement of operations. The fair value adjustments
disclosed here are only estimates as management is in the process
of validating the methodologies used to value the assets and
liabilities and the results of such valuations. Also, management
continues to evaluate the impact that SFAS No. 159 will have on
the consolidated financial statements, including disclosures.
CCCCCRITICAL
OLICIES / E / E / E / E / E STIMATES
CCOUNTING P P P P P OLICIES
RITICAL A A A A ACCOUNTING
STIMATES
STIMATES
OLICIES
OLICIES
CCOUNTING
CCOUNTING
RITICAL
RITICAL
STIMATES
STIMATES
OLICIES
CCOUNTING
RITICAL
The accounting and reporting policies followed by the
Corporation and its subsidiaries conform with generally accepted
accounting principles ( “GAAP”) in the United States of America
and general practices within the financial services industry. The
Corporation’s significant accounting policies are described in
detail in Note 1 to the consolidated financial statements and should
be read in conjunction with this section.
Critical accounting policies require management to make
estimates and assumptions, which involve significant judgment
about the effect of matters that are inherently uncertain and that
involve a high degree of subjectivity. These estimates are made
under facts and circumstances at a point in time and changes in
those facts and circumstances could produce actual results that
differ from those estimates. The following MD&A section is a
summary of what management considers the Corporation’s critical
accounting policies / estimates.
Securities’ Classification and Related Values
Securities’ Classification and Related Values
Securities’ Classification and Related Values
Securities’ Classification and Related Values
Securities’ Classification and Related Values
Management determines the appropriate classification of debt and
equity securities at the time of purchase. Debt securities are
classified as held-to-maturity ( “HTM”) when the Corporation has
the intent and ability to hold the securities to maturity. HTM
securities are reported on the Corporation’s financial statements
at amortized cost. Debt and equity securities classified as trading
securities are reported at fair value, with unrealized gains and
losses included in earnings. Debt and equity securities not
classified as HTM or trading, except for equity or other securities
which do not have readily available fair values, are classified as
available-for-sale ( “AFS”). Securities AFS are reported at fair value,
with unrealized gains and losses excluded from earnings and
reported net of taxes in accumulated other comprehensive income
(a component of stockholders’ equity). At December 31, 2007,
unrealized net gains on the AFS securities, net of taxes, amounted
to $21 million. Investments in equity or other securities that do
not have publicly and readily determinable fair values are classified
as other investment securities in the statement of condition and
carried at the lower of cost or realizable value.
The assessment of fair value applies to certain of the
Corporation’s assets and liabilities, including the trading and
investment portfolios. Fair values are volatile and are affected by
factors such as market interest rates, technical factors affecting
supply and demand, prepayment speeds and discount rates.
Fair values for most of the Corporation’s trading and investment
securities, including publicly-traded equity securities, are based
on quoted market prices. If quoted market prices are not readily
available, fair values are based on quoted prices of similar
instruments. For information on the determination of the fair value
of interest-only strips derived from securitization transactions,
refer to the critical accounting policy described under the section
Retained Interests on Transfers of Financial Assets - Subprime
Mortgage Loan Securitizations, in this MD&A. Significant
changes in factors such as interest and prepayment rates could
affect the value of the trading, AFS and HTM securities and cause
the Corporation to recognize other-than-temporary impairments,
thereby adversely affecting results of operations. Management
assesses the fair value of its portfolio at least on a quarterly basis.
Factors considered include for example, the nature of the
investment, severity and duration of possible impairments,
industry reports, sector credit ratings, economic environment,
creditworthiness of the issuers and any guarantees, and the ability
to hold the security until maturity or recovery. Any impairment
that is considered other-than-temporary is recorded directly in
the statement of operations.
12
Notwithstanding the judgment required in determining the
fair value of the Corporation’s assets and liabilities, management
believes that its estimates of fair value are reasonable given the
process of obtaining external prices, periodic reviews of internal
models and the consistent application of methodologies from period
to period.
Loans and Allowance for Loan Losses
Loans and Allowance for Loan Losses
Loans and Allowance for Loan Losses
Loans and Allowance for Loan Losses
Loans and Allowance for Loan Losses
Interest on loans is accrued and recorded as interest income based
upon the principal amount outstanding.
Recognition of interest income on commercial and
construction loans, lease financing, conventional mortgage loans
and closed-end consumer loans is discontinued when loans are 90
days or more in arrears on payments of principal or interest, or
when other factors indicate that the collection of principal and
interest is doubtful. Income is generally recognized on open-end
(revolving credit) consumer loans until the loans are charged-off.
Closed-end consumer loans and leases are charged-off when
payments are 120 days in arrears. In the case of the Corporation’s
non-bank consumer and mortgage lending subsidiaries, however,
closed-end consumer loans, including second mortgages, are
charged-off when payments are 180 days delinquent. Open-end
(revolving credit) consumer loans are charged-off when payments
are 180 days in arrears.
One of the most critical and complex accounting estimates is
associated with the determination of the allowance for loan losses.
The provision for loan losses charged to current operations is
based on this determination. The methodology used to establish
the allowance for loan losses is based on SFAS No. 114 “Accounting
by Creditors for Impairment of a Loan” (as amended by SFAS No.
118) and SFAS No. 5 “Accounting for Contingencies.” Under
SFAS No. 114, the Corporation has defined as impaired loans
those commercial loans that amount to $250,000 or more and
with interest and /or principal 90 days or more past due. Also,
specific commercial loans over $500,000 are deemed impaired
when, based on current information and events, management
considers that it is probable that the debtor will be unable to pay
all amounts due according to the contractual terms of the loan
agreement. An allowance for loan impairment is recognized to the
extent that the carrying value of an impaired commercial loan
exceeds the present value of the expected future cash flows
discounted at the loan’s effective rate, the observable market price
of the loan, if available, or the fair value of the collateral if the loan
is collateral dependent. The allowance for impaired commercial
loans is part of the Corporation’s overall allowance for loan losses.
SFAS No. 5 provides for the recognition of a loss allowance for
groups of homogeneous loans. To determine the allowance for
loan losses under SFAS No. 5, the Corporation applies a historic
loss and volatility factor to specific loan balances segregated by
loan type and legal entity. For subprime mortgage loans, the
allowance for loan losses is established to cover at least one year of
projected losses which are inherent in these portfolios.
The Corporation’s management evaluates the adequacy of the
allowance for loan losses on a monthly basis following a systematic
methodology in order to provide for known and inherent risks in
the loan portfolio. In developing its assessment of the adequacy of
the allowance for loan losses, the Corporation must rely on
estimates and exercise judgment regarding matters where the
ultimate outcome is unknown, such as economic developments
affecting specific customers, industries or markets. Other factors
that can affect management’s estimates are the years of historical
data to include when estimating losses, the level of volatility of
losses in a specific portfolio, changes in underwriting standards,
financial accounting standards and loan impairment measurement,
among others. Changes in the financial condition of individual
borrowers, in economic conditions, in historical loss experience
and in the condition of the various markets in which collateral
may be sold, may all affect the required level of the allowance for
loan losses. Consequently, the business, financial condition,
liquidity, capital and results of operations could also be affected.
A discussion about the process used to estimate the allowance
for loan losses is presented in the Credit Risk Management and
Loan Quality section of this MD&A.
Retained Interests on Transfers of Financial Assets
Retained Interests on Transfers of Financial Assets
Retained Interests on Transfers of Financial Assets
Retained Interests on Transfers of Financial Assets
Retained Interests on Transfers of Financial Assets
- Subprime Mortgage Loan Securitizations
- Subprime Mortgage Loan Securitizations
- Subprime Mortgage Loan Securitizations
- Subprime Mortgage Loan Securitizations
- Subprime Mortgage Loan Securitizations
In subprime mortgage loan securitizations, the Corporation
combines the subprime mortgage loans that are originated or
purchased in pools to serve as collateral for asset-backed securities
that are issued and sold to the public. In connection with PFH’s
securitization transactions, the Corporation is party to pooling
and servicing agreements in which the Corporation transfers (on
a servicing retained basis) certain of the Corporation’s loans to a
special purpose entity, which in turn transfers the loans to a
securitization trust vehicle.
In order to determine the proper accounting treatment for each
securitization transaction, management evaluates whether or not
the Corporation retained or surrendered control over the transferred
assets by reference to the conditions set forth in SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - a replacement of FASB Statement
No. 125.” All terms of these transactions are evaluated against the
conditions set forth in this statement, including among the
principal factors the isolation of transferred assets from the
transferor, transferee’s right to pledge or exchange the transferred
assets, and entitlement and obligation to repurchase or redeem
the assets.
When the transfer of subprime mortgage loans is executed in
a manner such that the Corporation surrenders control over the
collateral and meets all required sale criteria of SFAS No. 140, the
transfer is accounted for as a sale to the extent that consideration
other than beneficial interests is received in exchange (“off-balance
sheet securitizations”). 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. In a loan securitization accounted
for as a sale of assets, the Corporation normally retains the right
to service the underlying mortgage loans and also retains the
residual interest certificates. The estimated fair value of the
securitization components is considered a critical accounting
estimate as the valuation assumptions used regarding economic
conditions and the make-up of the collateral, including interest
rates, principal payments, prepayments and loan defaults, are
highly uncertain and require a high degree of judgment.
During 2007, the Corporation conducted one off-balance sheet
asset securitization that involved the transfer of mortgage loans
to a qualifying special purpose entity (“QSPE”), which in turn
transferred these assets and their titles to different trusts.
Approximately $461 million in adjustable (“ARM”) and fixed-rate
loans were securitized and sold by PFH during 2007 as part of this
off-balance sheet asset securitization and PFH realized a gain on
sale of approximately $13.5 million. As part of this transaction,
the Corporation initially recognized MSRs of $8 million and
residual interests of $5 million. Also, in December 2007, the
Corporation completed the recharacterization of certain on-balance
sheet securitizations that allowed the Corporation to recognize
t h e t r a n s a c t i o n s a s s a l e s u n d e r S F A S N o . 1 4 0 . T h i s
recharacterization was described in the Significant U.S. Strategic
Events section of this MD&A.
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. In
these cases, the assets remain on the Corporation’s financial
statements and a liability is recorded for the related asset-backed
securities (“on-balance sheet securitizations”). The loans
transferred to the trusts are included on the consolidated statement
of condition as pledged loans held-in-portfolio. During 2007,
PFH did not execute any on-balance sheet securitization.
The recorded residual interests and MSRs resulting from the
subprime mortgage loan securitizations are subject to the valuation
techniques described below since quoted market prices for these
types of assets are not readily available because these assets are
not actively traded.
2007 Annual Report 13
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Popular, Inc. 2007
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R e s i d u a l i n t e r e s t s
R e s i d u a l i n t e r e s t s
R e s i d u a l i n t e r e s t s
R e s i d u a l i n t e r e s t s
R e s i d u a l i n t e r e s t s
Under SFAS No. 140, residual interests retained in securitizations
or other financial assets that can contractually be prepaid or
otherwise settled in such a way that the holder would not recover
substantially all of its investment shall be subsequently measured
like investments in debt securities classified as available-for-sale
or trading under SFAS No. 115.
Residual interests retained as part of off-balance sheet
securitizations of subprime mortgage loans prior to 2006 have
been classified as investment securities available-for-sale and are
presented at fair value in the consolidated statements of condition.
PFH’s residual interests classified as available-for-sale as of
December 31, 2007 amounted to $5 million.
Commencing in January 2006 and as permitted by accounting
guidance, the residual interests derived from newly-issued PFH’s
off-balance sheet securitizations and from the recharacterization
were accounted for as trading securities. Trading securities are
marked-to-market with changes in value reflected in current period
earnings (favorable and unfavorable value changes) as opposed to
available-for-sale securities in which the changes in value are
recorded as unrealized gains (losses) through equity, unless
unfavorable changes are considered other-than temporary. Residual
interests from PFH’s securitizations and recharacterization
accounted for as trading securities amounted to $40 million at
December 31, 2007.
Management’s determination to prospectively classify the
residual interests as trading securities was driven by accounting
considerations and not by intent to actively trade these assets.
Illiquidity in the subprime markets had a direct impact on the
value and liquidity of the Corporation’s residual interests as will
be described below. Given market conditions, management does
not anticipate selling these residual interests in the near term
unless an opportunity arises as part of strategic initiatives.
The cash flows the Corporation receives on residual interests
are dependent on the interest rate environment, default and
prepayment experience of the borrowers of the underlying
mortgage loan collateral and the interest spread between the
coupon on the underlying loans and the cost of financing,
considering overcollateralization, which is designed to protect
the primary security holder from credit loss on the underlying
loans. As payments are received, they are applied to the cost
basis of the residual interest. Each period, the accretable yield
for each residual interest is evaluated and, to the extent there has
been a change in the estimated cash flows, it is adjusted and
applied prospectively. The accretable yield is recorded as interest
income with a corresponding increase to the cost basis of the
residual interest.
The Corporation reviews the residual interests for potential
impairment on a quarterly basis and records impairment in
accordance with SFAS No. 115 and EITF 99-20 “Recognition of
14
Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets” ("EITF 99-
20"). Management’s basis in determining when these securities
must be written down to fair value due to other-than-temporary
impairment is based on EITF 99-20. Whenever the current fair
value of the residual interests classified as available-for-sale is
lower than its current amortized cost, management evaluates if an
impairment charge for the deficiency is required to be taken
through earnings. If there has been an adverse change in estimated
cash flows (considering both the timing and amount of flows),
then the residual interest security is written-down to fair value,
which becomes the new amortized cost basis. The Corporation
recognized other-than-temporary impairment losses on these
residual interests of $45.4 million for the year ended December
31, 2007 that are classified as part of net gain (loss) on sale and
valuation adjustment of investment securities in the consolidated
statements of operations. During 2007, all declines in fair value in
residual interests classified as available-for-sale were considered
other-than-temporary.
The fair value determinations for residual interests classified
as trading securities are also performed on a quarterly basis. Any
valuation adjustment related to these particular residual interests
is reflected in earnings as it occurs and is recorded as part of
trading account (loss) profit in the consolidated statements of
operations. The Corporation recognized trading losses on these
residual interests of $39.7 million for the year ended December
31, 2007.
The fair value of the residual interests for each securitization
is determined by using a third-party cash flow valuation model to
calculate the present value of projected future cash flows. However,
all economic assumptions are internally developed and provided
to the third-party (the internal-based valuation). The assumptions,
which are highly uncertain and require a high degree of judgment,
include primarily market discount rates, anticipated prepayment
speeds, delinquency and loss rates. The assumptions used are
drawn from a combination of internal and external data sources.
The principal assumptions and their sources are summarized
below:
• Prepayment rates on loan collateral are estimated by product
types (adjustable and fixed rate mortgages) by analyzing
internal loan collateral prepayment performance and
prepayment data obtained from research reports and
publications provided by industry participants.
• Discount rates are determined based on the inherent risk
associated with the specific cash flow stream and rates of
return observed in the capital markets for instruments with
similar cash flow characteristics.
• Future interest rates are projected from a forward yield curve
obtained from nationally recognized market data service
providers, such as Bloomberg.
• Credit losses are estimated by utilizing an industry standard
predictive credit performance model and allocated over the
expected life of the collateral by utilizing a default curve
developed by a nationally recognized credit rating agency.
Credit losses are determined for the major product types
(adjustable and fixed rate mortgages) in the collateral pool
being securitized and are calibrated by analyzing actual
loss experience realized by the Corporation to that projected
by the model for the same type of collateral.
These assumptions are periodically refined as data is updated,
accumulated and analyzed, tools utilized for analysis become more
sophisticated and market conditions change. This is based on
the same framework utilized to determine the initial assumptions
used to calculate fair value. Any measurement of the fair value of
residual interests is limited by the existing conditions and the
assumptions utilized as of a particular point in time. Those same
assumptions may not be appropriate if applied at a different point
in time.
A third-party valuation of the residual interests, in which all
economic assumptions are determined by this third-party (the
external-based valuation), is obtained on a quarterly basis in
connection with the preparation of the financial statements, and
is used by management as a benchmark to evaluate the adequacy
of the cash flow model and the reasonableness of the assumptions
and fair value estimates developed internally for the internal-based
valuation. The external-based valuations are analyzed and
assumptions are evaluated and incorporated in the internal-based
valuation model when deemed necessary and agreed by
management.
The Corporation requires that internally determined
assumptions be documented and validated quarterly, and that
significant deviations in assumptions when compared with outside
sources be investigated and substantiated with factual data.
In 2007, the subprime mortgage market has continued to
experience (1) deteriorating credit performance trends, particularly
in loans originated in 2005, 2006 and 2007, (2) unprecedented
turmoil with subprime lenders due to increases in losses,
bankruptcies and liquidity problems, (3) lower levels of housing
activity and home price appreciation, and (4) a general tightening
of credit standards that may adversely affect subprime borrowers
when trying to refinance their mortgages. Furthermore, since the
third quarter of 2007, the U.S. credit markets have been affected
by unprecedented instability and disruption, making even routine
asset sales much more challenging. Credit spreads have widened
significantly and rapidly, as many investors have allocated their
funds to only the highest-quality financial assets such as U.S.
government securities.
2007 Annual Report 15
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Popular, Inc. 2007
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These factors led to an increase in cash flow uncertainty for
investors in subprime mortgage securities thereby causing risk
premiums to increase. Given the increase in risk premiums, along
with lower liquidity for subprime mortgage securities observed
in the market, in the first quarter of 2007, the Corporation changed
the discount rate utilized to discount projected residual cash
flows from 17% at the end of the fourth quarter in 2006 to 25% at
March 31, 2007. Market liquidity deteriorated further during the
third quarter of 2007, as evidenced by wider spreads on
subordinated interests in newly issued asset-backed security
transactions. As a result of the incremental market disruptions,
management increased again the discount rate utilized in the
valuation of the residual interests to 30% in the third quarter of
2007 and to 40% in the fourth quarter of 2007.
For the reasons described below, the prepayment assumption
for fixed-rate loans was changed to 20.7% HEP (“home equity
prepayment curve”) by December 31, 2007 from the 28% HEP
utilized at the same date in the previous year. The HEP model
assumes that prepayment speeds increase evenly over the seasoning
ramp of 12 months. The revised HEP reflects a decrease in the
long-term projected prepayment rates for the fixed-rate mortgage
collateral influenced by factors such as decreases in home prices,
slowdown in the purchases and sales of both new and existing
homes, and interest rates behavior, which impact refinance
activity.
With respect to credit losses, reduction in home prices,
declining demand for housing units leading to rising inventories,
housing affordability challenges and a general tightening of
underwriting standards are expected to lead to higher future
cumulative credit losses. Based on an analysis by management of
PFH’s historical collateral performance, risk model estimates and
rating agency loss coverage levels, the cumulative credit loss
assumptions were also changed, worsening throughout all quarters
of 2007. The cumulative credit loss estimates range between
3.35% and 11.03% as of December 31, 2007, compared to 1.28%
and 3.19% basis points at December 31, 2006. The increase reflects
current conditions in the housing and credit markets and higher
delinquencies in 2005 through 2007 vintages.
Refinements to assumptions, as well as model mechanics, are
typical in the on-going modeling process. As such, enhancements
to the estimation process are to be expected in the normal
assumption development process. Management believes that the
value of the Corporation’s residual interests as of December 31,
2007 is reasonable, but no assurance can be provided that future
changes in interest rates, prepayments and loss experience, or
changes in the market discount rate will not require additional
write-downs.
Refer to Note 23 to the consolidated financial statements for
information on the key economic assumptions used in measuring
the fair value of the residual interests at the dates of the
securitizations and as of the end of 2007. Also, such note provides
a sensitivity analysis based on immediate changes to the most
critical assumptions used in determining the fair value at December
31, 2007.
Mortgage Servicing Rights
Mortgage Servicing Rights
Mortgage Servicing Rights
Mortgage Servicing Rights
Mortgage Servicing Rights
The Corporation accounts for mortgage servicing rights (“MSRs”)
at fair value.
The fair value of servicing rights is estimated by using a cash
flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual
and expected loan prepayment rates, discount rates, servicing
costs, and other economic factors, which are determined based
on current market conditions.
Similar to the residual interests, the Corporation estimates
fair value of MSRs using a third-party valuation model that calculates
the present value of projected future cash flows in which all
economic assumptions are determined by the Corporation. The
valuation of MSRs requires the Corporation to make estimates of
numerous market assumptions, such as interest rates, prepayment
assumptions, servicing costs, discount rates, and the payment
performance of the underlying loans. These MSRs are valued using
a static interest rate simulation.
Economic assumptions are reviewed for reasonableness on a
quarterly basis and adjusted as necessary to reflect current and
anticipated market conditions. Thus, any measurement of the fair
value of MSRs is limited by the existing conditions and the
assumptions utilized as of a particular point in time. Those same
assumptions may not be appropriate if applied at a different point
in time.
Third-party valuations of the fair value of the subprime
mortgage loans’ MSRs, in which all economic assumptions are
determined by the third party, are obtained on a quarterly basis,
and are used by management only as a benchmark to evaluate the
reasonableness of the fair value estimates made internally. These
external-based valuations are analyzed and assumptions are
evaluated and incorporated in the internal-based valuation model
when validated and agreed upon by management. The Corporation
requires that internally determined assumptions be documented
and validated quarterly, and that significant deviations in
assumptions when compared with outside sources be investigated
and substantiated with factual data.
Refer to Note 22 to the consolidated financial statements for
information on the impact of the adoption of SFAS No. 156 and
other information on the Corporation’s MSRs. Refer to Note 23 to
the consolidated financial statements for information on the key
economic assumptions used in measuring the fair value of the
MRSs recorded by PFH and BPPR at the dates of the securitizations,
recharacterization or sales and as of December 31, 2007. Also,
Note 23 provides a sensitivity analysis based on immediate
16
changes to the most critical assumptions used in determining the
fair value at December 31, 2007.
Income Taxes
Income Taxes
Income Taxes
Income Taxes
Income Taxes
The calculation of our periodic income taxes is complex and
requires the use of estimates and judgments. The Corporation has
recorded two accruals for income taxes: (1) the net estimated
amount currently due or to be received from taxing jurisdictions,
including any reserve for potential examination issues, and (2) a
deferred income tax that represents the estimated impact of
temporary differences between how the Corporation recognizes
assets and liabilities under GAAP, and how such assets and
liabilities are recognized under the tax code. Differences in the
actual outcome of these future tax consequences could impact the
Corporation’s financial position or its results of operations. In
estimating taxes, management assesses the relative merits and
risks of the appropriate tax treatment of transactions taking into
consideration statutory, judicial and regulatory guidance.
Valuation allowances are established, when necessary, to reduce
the deferred tax assets to the amount expected to be realized. The
net deferred tax asset at December 31, 2007 amounted to $520
million of which $215 million was related to timing differences
in the recognition of the provision for loan losses under GAAP and
actual charge offs under the tax code, and $175 million was related
to net operating losses carryforward in the U.S. operations. The
realization of the deferred tax asset related to the net operating
loss carryforward of the Corporation’s U.S. operations is dependent
upon the existence of, or generation of, taxable income prior to
their expiration term of 20 years. Based on the information available
as of December 31, 2007, the Corporation expects to fully realize
the net deferred tax asset. Refer to Note 27 to the consolidated
financial statements for the Corporation’s net deferred tax assets
and valuation allowance requirements at December 31, 2007.
Changes in the Corporation’s estimates can occur due to
changes in tax rates, new business strategies, newly enacted
guidance, and resolution of issues with taxing authorities
regarding previously taken tax positions. Such changes could
affect the amount of accrued taxes. The current income tax payable
for 2007 has been paid during the year in accordance with estimate
tax payments rules. Any remaining payment will not have any
significant impact on liquidity and capital resources.
SFAS No. 109, “Accounting for Income Taxes,” requires the
recognition of income taxes on the unremitted earnings of
subsidiaries, unless these can be remitted on a tax-free basis or
are permanently invested. The Corporation’s U.S. subsidiaries
(which are considered foreign under Puerto Rico income tax law)
have never remitted retained earnings. The Corporation considers
the reinvestment of such earnings permanent. The Corporation’s
subsidiaries in the United States file a consolidated return. As of
December 31, 2007, the Corporation had no current or
accumulated earnings and profits on its combined U.S.
subsidiaries’ operations and, accordingly, the recognition of a
deferred tax liability was not considered necessary.
During the first quarter of 2007, the Corporation adopted
Financial Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement 109” (FIN
48), which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
Under the accounting guidance, a tax benefit from an uncertain
position may be recognized only if it is “more likely than not”
that the position is sustainable based on its technical merits. The
tax benefit of a qualifying position is the largest amount of tax
benefit that is greater than 50 percent likely of being realized
upon ultimate settlement with a taxing authority having full
knowledge of all relevant information. Based on management’s
assessment, there was no impact on retained earnings as of January
1, 2007 due to the initial application of the provisions of FIN 48
since the Corporation did not recognize any change in the liability
for unrecognized tax benefits. The amount of unrecognized tax
benefits, including accrued interest, as of December 31, 2007
amounted to $22.2 million. Refer to Note 27 to the consolidated
financial statements for further information on the impact of FIN
48. The amount of unrecognized tax benefits may increase or
decrease in the future for various reasons including adding amounts
for current tax year positions, expiration of open income tax
returns due to the statutes of limitation, changes in management’s
judgment about the level of uncertainty, status of examinations,
litigation and legislative activity and the addition or elimination
of uncertain tax positions. Although the outcome of tax audits is
uncertain, the Corporation believes that adequate amounts of tax,
interest and penalties have been provided for any adjustments that
are expected to result from open years. The Corporation does not
anticipate a significant change to the total amount of unrecognized
tax benefits within the next 12 months.
From time to time, the Corporation is audited by various
federal, state and local authorities regarding income tax matters.
The audits are in various stages of completion; however, no
outcome for a particular audit can be determined with certainty
prior to the conclusion of the audit, appeal and, in some cases,
litigation process. Although management believes its approach
to determining the appropriate tax treatment is supportable and
in accordance with Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes,” and FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes,” it is
possible that the final tax authority will take a tax position that is
different than that which is reflected in the Corporation’s income
tax provision and other tax reserves. As each audit is conducted,
adjustments, if any, are appropriately recorded in the consolidated
2007 Annual Report 17
2007
2007
Popular, Inc. 2007
2007
financial statement in the period determined. Such differences
could have an adverse effect on our income tax provision or benefit,
or other tax reserves, in the reporting period in which such
determination is made and, consequently, on our results of
operations, financial position and/or cash flows for such period.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
The Corporation’s goodwill and other identifiable intangible
assets having an indefinite useful life are tested for impairment
based on the requirements of SFAS No. 142, “Goodwill and Other
Intangible Assets.” Intangibles with indefinite lives are evaluated
for impairment at least annually and on a more frequent basis if
events or circumstances indicate impairment could have taken
place. Such events could include, among others, a significant
adverse change in the business climate, an adverse action by a
regulator, an unanticipated change in the competitive environment
and a decision to change the operations or dispose of a reporting
unit.
As of December 31, 2007, goodwill totaled $631 million, while
other intangibles with indefinite useful lives, mostly associated
with E-LOAN’s trademark, amounted to $17 million. Refer to
Notes 1 and 12 to the consolidated financial statements for further
information on goodwill and other intangible assets. Note 12 to
the consolidated financial statements provides an allocation of
goodwill by business segment.
During 2007, the Corporation performed the annual goodwill
impairment evaluation for the entire organization. The reporting
units utilized for this evaluation were those that are one level
below the business segments identified in Note 12 to the
consolidated financial statements. The impairment evaluation is
performed in two steps. The first step of the goodwill evaluation
process is to determine if potential impairment exists in any of
the Corporation’s reporting units, and is performed by comparing
the fair value of the reporting units with their carrying amount,
including goodwill. If required from the results of this step, a
second step measures the amount of any impairment loss. The
second step process estimates the fair value of the unit’s individual
assets and liabilities in the same manner as if a purchase of the
reporting unit was taking place. If the implied fair value of goodwill
calculated in step two is less than the carrying amount of goodwill
for the reporting unit, an impairment is indicated and the carrying
value of goodwill is written down to the calculated value.
In determining the fair value of a reporting unit, the
Corporation generally uses a combination of methods, including
market price multiples of comparable companies and the
discounted cash flow analysis.
The computations require management to make estimates and
assumptions. Critical assumptions that are used as part of these
evaluations include:
• selection of comparable publicly traded companies, based
on nature of business, location and size;
• selection of comparable acquisition transactions;
• the discount rate applied to future earnings, based on an
estimate of the cost of equity;
• the potential future earnings of the reporting unit;
• market growth and new business assumptions;
• the relative weight given to the valuations derived by the
different valuation methods.
For purposes of the market comparable approach, valuations
were determined by calculating average price multiples of relevant
revenue drivers from a group of companies that are comparable to
the reporting unit being analyzed and applying those price
multiples to the revenue drivers of the reporting unit. While the
market price multiple is not an assumption, a presumption that it
provides an indicator of the value of the reporting unit is inherent
in the valuation. The determination of the market comparables
also involves a degree of judgment.
For purposes of the discounted cash flows approach, the
valuation is based on estimated future cash flows. The Corporation
uses its internal Asset Liability Management Committee (ALCO)
forecasts to estimate future cash flows. The cost of equity used to
discount the cash flows was calculated using the Ibbotson Build-
Up Method and ranged from 10.88% to 18.62%.
As indicated in the Significant U.S. Strategic Events section
of this MD&A, management made a decision during the fourth
quarter of 2007 to restructure the operations of E-LOAN. As a
result, management updated the valuation test of E-LOAN’s
goodwill during the fourth quarter of 2007 to consider the new
business developments at that subsidiary. As a result of this
impairment analysis, the Corporation recorded goodwill
impairment losses of $164.4 million associated with the operations
of E-LOAN.
The annual goodwill impairment evaluation performed for the
other reporting units resulted in no impairment of goodwill or
other intangible assets with indefinite lives.
The goodwill impairment evaluation process requires the
Corporation to make estimates and assumptions with regard to
the fair value of the reporting units. Actual values may differ
significantly from these estimates. Such differences could result
in future impairment of goodwill that would, in turn, negatively
impact the Corporation’s results of operations and the reporting
units where the goodwill is recorded. However, had our estimated
fair value calculated for all units evaluated using the market
comparable approach been approximately 10% lower, there would
still be no indication of impairment for any of the Corporation’s
reporting units.
18
The valuation of the E-LOAN trademark was performed using
a valuation approach called the “relief-from-royalty” method. The
basis of the “relief-from-royalty” method is that, by virtue of having
ownership of the trademarks and trade names, Popular is relieved
from having to pay a royalty, usually expressed as a percentage of
revenue, for the use of trademarks and trade names. The main
estimates involved in the valuation of this intangible asset
included the determination of:
• an appropriate royalty rate;
• the revenue projections that benefit from the use of this
intangible;
• the after-tax royalty savings derived from the ownership of
the intangible; and
• the discount rate to apply to the projected benefits to arrive
at the present value of this intangible.
Since estimates are an integral part of this trademark
impairment analysis, changes in these estimates could have a
significant impact on the calculated fair value.
Based on the impairment evaluation test completed as of
December 31, 2007, the Corporation recorded impairment losses
of $47.4 million associated with E-LOAN’s trademark.
Pension and Postretirement Benefit Obligations
Pension and Postretirement Benefit Obligations
Pension and Postretirement Benefit Obligations
Pension and Postretirement Benefit Obligations
Pension and Postretirement Benefit Obligations
The Corporation provides pension and restoration benefit plans
for certain employees of various subsidiaries. The Corporation
also provides certain health care benefits for retired employees of
BPPR. The benefit costs and obligations of these plans are impacted
by the use of subjective assumptions, which can materially affect
recorded amounts, including expected returns on plan assets,
discount rates, rates of compensation increase and health care
trend rates. Management applies judgment in the determination of
these factors, which normally undergo evaluation against industry
assumptions and the actual experience of the Corporation. The
Corporation uses an independent actuarial firm for assistance in
the determination of the pension and postretirement benefit costs
and obligations. Detailed information on the plans and related
valuation assumptions are included in Note 24 to the consolidated
financial statements.
The Corporation periodically reviews its assumption for long-
term expected return on pension plan assets in the Banco Popular
de Puerto Rico Retirement Plan, which is the Corporation’s largest
pension plan with a market value of assets of $516.5 million at
December 31, 2007. The expected return on plan assets is
determined by considering a total fund return estimate based on a
weighted average of estimated returns for each asset class in the
plan. Asset class returns are estimated using current and projected
economic and market factors such as real rates of return, inflation,
credit spreads, equity risk premiums and excess return
expectations.
As part of the review, the Corporation’s independent consulting
actuaries performed an analysis of expected returns based on the
plan’s asset allocation at January 1, 2008. This analysis is
validated by the Corporation and used to develop expected rates
of return. This forecast reflects the actuarial firm’s view of expected
long-term rates of return for each significant asset class or
economic indicator; for example, 9.0% for large / mid-cap stocks,
5.3% for fixed income, and 2.7% inflation at January 1, 2008. A
range of expected investment returns is developed, and this range
relies both on forecasts and on broad-market historical benchmarks
for expected returns, correlations, and volatilities for each asset
class.
As a consequence of recent reviews, the Corporation left
unchanged its expected return on plan assets for year 2008 at
8.0%, similar to the expected rate assumed in 2006 and 2007.
Pension expense for the Banco Popular de Puerto Rico
Retirement Plan in 2007 amounted to $0.6 million. This included
a credit of $41.4 million reflecting the expected return on assets.
Pension expense is sensitive to changes in the expected return
on assets. For example, decreasing the expected rate of return for
2008 from 8.00% to 7.50% would increase the projected 2008
expense for the Banco Popular de Puerto Rico Retirement Plan by
approximately $2.5 million.
On December 31, 2006, the Corporation adopted SFAS No.
158 “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”, and commenced to account for the
underfunded status of the Corporation’s pension and postretirement
benefit plans as a liability, with an offset, net of tax, in accumulated
other comprehensive income. The determination of the fair value
of pension plan obligations involves judgment, and any changes
in those estimates could impact the Corporation’s consolidated
statement of financial condition. The valuation of pension plan
obligations is discussed above. Management believes that the fair
value estimates of the pension plan assets are reasonable given
that the plan assets are managed, in the most part, by the fiduciary
division of BPPR, which is subject to periodic audit verifications.
Also, the composition of the plan assets, as disclosed in Note 24
of the consolidated financial statements, is primarily in equity
and debt securities, which have readily determinable quoted
market prices.
The Corporation uses the Citigroup Yield Curve to discount
the expected program cash flows as a guide in the selection of the
discount rate, as well as the Citigroup Pension Liability Index.
The Corporation decided to use a discount rate of 6.40% to
determine the benefit obligation at December 31, 2007, compared
with 5.75% at December 31, 2006.
2007 Annual Report 19
2007
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Popular, Inc. 2007
2007
A 40 basis point decrease in the assumed discount rate of
6.40% as of the beginning of 2008 would increase the projected
2008 expense for the Banco Popular de Puerto Rico Retirement
Plan by approximately $2.0 million. The change would not affect
the minimum required contribution to the Plan.
The Corporation also provides a postretirement health care
benefit plan for certain employees of BPPR. This plan was unfunded
(no assets were held by the plan) at December 31, 2007. The
Corporation had an accrual for postretirement benefit costs of
$126 million at December 31, 2007. Assumed health care trend
rates may have significant effects on the amounts reported for the
health care plan. Note 24 to the consolidated financial statements
provides information on the assumed rates considered by the
Corporation and on the sensitivity that a one-percentage point
change in the assumed rate may have in the cost components and
postretirement benefit obligation of the Corporation.
SSSSS TATEMENT
PERATIONS A A A A A NALYSIS
TATEMENT OFOFOFOFOF O O O O O PERATIONS
NALYSIS
NALYSIS
PERATIONS
PERATIONS
TATEMENT
TATEMENT
NALYSIS
NALYSIS
PERATIONS
TATEMENT
Net Interest Income
Net Interest Income
Net Interest Income
Net Interest Income
Net Interest Income
Net interest income is the Corporation’s primary source of
earnings representing 68% of total revenues (defined as net interest
income plus non-interest income) for 2007, compared to 64% in
2006. It is defined as the difference between the revenue generated
on interest earning assets less the interest cost of funding those
assets. Various factors may cause the net interest income to
fluctuate from period to period, which may include interest rate
volatility, the shape of the yield curve, changes in volume and
mix of earning assets and interest bearing liabilities, repricing
characteristics of assets and liabilities, and derivative
transactions, among others.
Interest earning assets include investment securities and loans
that are exempt from income tax, principally in Puerto Rico. The
main sources of tax-exempt interest income are investments in
obligations of some U.S. Government agencies and sponsored
entities of the Puerto Rico Commonwealth and its agencies, and
assets held by the Corporation’s international banking entities,
which are tax-exempt under Puerto Rico laws. To facilitate the
comparison of all interest data related to these assets, the interest
income has been converted to a taxable equivalent basis, using
the applicable statutory income tax rates. The marginal tax rate
for the Puerto Rico subsidiaries in 2007 was 39%, compared to
43.5% for BPPR and 41.5% for the other Puerto Rico subsidiaries
in 2006. The marginal tax rate was 41.5% for all the Puerto Rico
subsidiaries in 2005. The decrease in the marginal tax rate was
responsible for the majority of the reduction in the taxable
equivalent benefit between 2006 and 2007, as shown in Table D.
The taxable equivalent computation considers the interest expense
disallowance required by the Puerto Rico tax law, also affected by
the mentioned decrease in tax rate.
Average outstanding securities balances are based on amortized
cost excluding any unrealized gains or losses on securities
available-for-sale. Non-accrual loans have been included in the
respective average loans and leases categories. Loan fees collected
and costs incurred in the origination of loans are deferred and
amortized over the term of the loan as an adjustment to interest
yield. Interest income for the year ended December 31, 2007
included an unfavorable impact of $8.4 million, consisting
principally of amortization of net loan origination costs (net of
origination fees) and amortization of net premiums on loans
purchased, partially offset by prepayment penalties and late payment
charges. These amounts approximated unfavorable impacts of
$18 million and $42 million, respectively, for the years ended
December 31, 2006 and 2005. The reduction in the unfavorable
impact for 2007, compared with 2006 and 2005, was mainly the
result of a lower balance of premium amortized related to mortgage
loans purchased by PFH, mainly in years prior to 2006, due to
reduced loan prepayments and to the direct impact of the maturity
run-off of the purchased mortgage loan portfolio.
In 2007, management continued its strategy to improve the
net interest margin by not reinvesting maturities of securities;
focusing on growing the commercial and consumer loan portfolio;
and reducing the level of residential mortgage loans (mainly
through a reduction of volume at PFH). These strategies assisted
in increasing the yield on earning assets and reduced the
Corporation’s dependence on wholesale funding, while the
purchase of the Citibank retail network in Puerto Rico provided a
more stable funding source.
However, even though the Corporation showed improvement
in its margin, the year 2007 presented various challenges: Internet-
based deposits carry a higher rate than deposits from branches
due to the competitive nature of this business channel, the liquidity
crisis that took place in the second half of 2007 lead the
Corporation to enter into certain financing agreements which
may delay the expected benefit of reduced market interest rates,
and competitive pressures that resulted in increases in the cost of
interest bearing deposits, and that affected the volume and spreads
of consumer and mortgage loans in the Puerto Rico subsidiaries.
During 2006, the Federal Reserve (“FED”) raised the federal
funds target rate 100 basis points, increasing this rate from 4.25%
on December 31, 2005 to 5.25% by June 30, 2006 and remaining
at that rate as of December 31, 2006. In 2007, the FED reduced
the federal funds rate 50 basis points in September 2007, 25 basis
points in October 2007 and 25 basis points in December 2007,
reaching 4.25% at December 31, 2007. As a result of financial
markets remaining under considerable stress, further credit
tightening throughout 2007 for some businesses and households,
the housing sector contracting and some labor markets softening,
among other considerations, the FED announced these interest
rate cuts in 2007.
20
The average key index rates for the years 2005 through 2007
were as follows:
Prime rate
Fed funds rate
3-month LIBOR
3-month Treasury Bill
10-year Treasury
FNMA 30-year
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
8 . 0 5 %
8 . 0 5 %
8 . 0 5 %
8 . 0 5 %
8 . 0 5 %
5 . 0 5
5 . 0 5
5 . 0 5
5 . 0 5
5 . 0 5
5 . 3 0
5 . 3 0
5 . 3 0
5 . 3 0
5 . 3 0
4 . 4 6
4 . 4 6
4 . 4 6
4 . 4 6
4 . 4 6
4 . 6 3
4 . 6 3
4 . 6 3
4 . 6 3
4 . 6 3
6 . 2 4
6 . 2 4
6 . 2 4
6 . 2 4
6 . 2 4
7.96%
4.96
5.20
4.84
4.79
6.32
6.19%
3.20
3.57
3.20
4.28
5.72
Table D presents the different components of the Corporation’s
net interest income, on a taxable equivalent basis, for the year
ended December 31, 2007, as compared with the same period in
2006, segregated by major categories of interest earning assets
and interest bearing liabilities.
The decrease in average earning assets for the year ended
December 31, 2007, compared with the previous year, was
principally due to the Corporation’s decision not to reinvest
maturities of securities, mainly U.S. Government agencies, as
well as selling low yielding mortgage loans in the second half of
2006. These strategies, in addition to the growth in the
commercial and consumer loan portfolios and the reduction
experienced in the Corporation’s U.S. subprime mortgage loan
originations, contributed to a change in the mix of earning assets
and funding sources. Refer to the Statement of Condition Analysis
section of this MD&A for additional information on factors that
contributed to the fluctuation in major earning assets categories.
The Corporation’s funding sources also experienced a change
in its mix, which contributed to the variance attributable to the
change in volume shown in Table D. The decline in low yielding
assets, an increase in the Corporation’s deposit base, and liquidity
measures taken in the second half of 2007 in response to market
disruptions, resulted in reduced levels of borrowed money. The
E-LOAN Internet deposit gathering initiative, launched in the
latter part of 2006, as well as increases in non-Internet certificates
of deposit, including brokered CDs and money market accounts,
coupled with the deposits derived from the acquisition of
Citibank’s retail branches in Puerto Rico, contributed also to the
reduction in borrowed money.
The increase in the net interest margin for the year ended
December 31, 2007, compared with the previous year, was partly
attributed to the following factors:
• The yield for commercial loans increased, when compared
to 2006, in part due to a high proportion of these loans with
floating rates. As of December 31, 2007, approximately
63% of the portfolio of commercial and construction loans
had floating or adjustable interest rates. For the majority of
2007, rates remained higher than 2006. In addition, due to
the timing of the rate resets, certain adjustable rate portfolios
have not had the complete impact of the decrease in market
rates that occurred in the last quarter of 2007.
• The yield of residential mortgage loans increased, when
compared to 2006, mainly as a result of a decrease in the
premium amortization for secured mortgage loans due to a
slowdown in the prepayment activity in the U.S. market, as
well as the direct impact of the maturity run-off of the
purchased mortgage portfolio.
• The yield of consumer loans increased, when compared to
2006, mainly as a result of higher rates for the Puerto Rico
consumer loan portfolio, and a higher volume and rate of
credit cards. The yield of the credit card portfolio increased
by 39 basis points.
Partially offsetting the above mentioned favorable variances
were the following negative impacts:
• Increased cost of interest bearing deposits as a result of a
higher proportion of Internet-based deposits raised through
the E-LOAN platform and higher rates for money markets
and time deposits. The overall increase in the Corporation’s
cost of deposits was also affected by the lagged impact of
the FED’s rate increase in 2006 and competitive pressures.
• Higher cost of short-term borrowings primarily as a result
of the tightening performed by the FED during 2006 and
higher funding costs in response to the market disruptions
in the second half of 2007.
• Increase in the cost of long-term debt, in part due to secured
debt with floating rates derived from on-balance sheet
mortgage loan securitizations that were outstanding for
most of the year prior the loan recharacterization transaction
that took effect in late December 2007.
• Unfavorable impact of mark-to-market adjustment related
to derivative instruments that were associated with
borrowed funds. The Corporation recognized $15.9 million
in derivative losses for the year ended December 31, 2007,
compared with derivative losses of $8.2 million in 2006,
which are included as funding costs on borrowed funds.
Most of these derivatives are economically hedging long-
term debt. The decline in the fair value of the derivative
instruments was influenced by disruptions in the financial
markets during the third quarter of 2007 and the reduction
in interest rates by the FED in the second half of 2007.
As part of its asset / liability management strategies, the
Corporation has entered into some activities with derivative
financial instruments to protect its exposure to market risk. Refer
to the Market Risk – Derivatives section of this MD&A and Note
30 to the audited consolidated financial statements for additional
information regarding the Corporation’s involvement in derivative
activities.
2007 Annual Report 21
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Popular, Inc. 2007
2007
As shown in Table D, the decrease in net interest income on a
taxable equivalent basis from 2005 to 2006 was mainly the result
of a lower taxable equivalent adjustment and lower net interest
margin, partially offset by an increase in average earning assets.
The decrease in the net interest margin for the year ended
December 31, 2006, compared with 2005, was partly attributed
to a higher average cost of interest bearing liabilities, principally
due to the tightening in monetary policy by the FED. During
2006, the FED raised the federal funds target rate from 4.25% on
December 31, 2005 to 5.25% by June 30, 2006 and remaining at
that rate as of December 31, 2006. Also, there was an increase in
the cost of long-term debt resulting primarily from secured debt
with floating rates derived from mortgage loan on-balance sheet
securitization transactions by PFH and higher cost of interest
bearing deposits. Partially offsetting these unfavorable variances
were higher yields in commercial, mortgage and consumer loans.
Contributors to the increase in loan yields for 2006 included the
favorable impact of rising rates in collateralized mortgage
obligations and commercial loans with floating rates, a decline in
premium amortization on mortgage loans purchased due to a
slowdown in the prepayment activity in the U.S. market, as well
as a decrease in the amount of mortgage loans purchased as part of
PFH’s operations. Also contributing to this variance were the
impact of sales of low yielding mortgage loans during the third
quarter of 2006 and maturities of low yielding securities during
2006, mainly agency securities.
The decrease in the taxable equivalent adjustment from 2005
to 2006, as shown in Table D, was mainly the result of a higher
cost of funds, partially offset by the increase in exempt interest
income and a greater benefit derived from a higher statutory rate
in 2006, when compared to 2005, as mentioned above. Puerto
Rico tax law requires that an interest expense be assigned to the
exempt interest income in order to calculate a net benefit. The
interest expense is determined by applying the ratio of exempt
assets to total assets to the Corporation’s total interest expense
in Puerto Rico. To the extent that the cost of funds increases at a
faster pace than the yield of earning assets, the net benefit will be
reduced. The cost of funds increased in part due to the FED's
tightening in monetary policy, which increased the federal funds
target rate by 100 basis points during 2006.
Average tax-exempt earning assets approximated $8.9 billion
in 2007, of which 83% represented tax-exempt investment
securities, compared with $9.7 billion and 87% in 2006, and
$10.0 billion and 88% in 2005.
Provision for Loan Losses
Provision for Loan Losses
Provision for Loan Losses
Provision for Loan Losses
Provision for Loan Losses
The Corporation’s provision for loan losses for the year ended
December 31, 2007 increased by $274.9 million, compared with
2006, and exceeded net charge-offs by $139.6 million. This
increase was mainly attributed to higher net charge-offs by $193.4
million, mainly in the mortgage, consumer, and commercial loan
portfolios, which reflect the continued credit problems in the
U.S. mainland subprime mortgage market, as well as higher
delinquencies in U.S. and Puerto Rico, due in part by the slowdown
in the economy. Also, the increase reflects probable losses inherent
in the loan portfolio, as a result of current economic conditions
and deteriorating market trends, primarily in the mortgage and
commercial loan sectors. The net charge-offs to average loans
held-in-portfolio ratio deteriorated, increasing to 1.31% in 2007,
from 0.74% in 2006 and 0.62% in 2005.
The provision for loan losses for the year ended December 31,
2006 increased by $92.5 million, or 47%, and exceeded net-
charge offs by $58 million compared with 2005. This increase
was mainly attributed to the growth in the loan portfolio and
higher net charge-offs, mainly in the consumer loan portfolio in
Puerto Rico. Also, the increase reflected probable losses inherent
in the loan portfolio as a result of economic conditions and
deteriorating market trends in 2006, primarily in the subprime
mortgage loan sectors and in the commercial portfolio, evidenced
by an increase in non-performing assets from 2005 to 2006.
Refer to the Credit Risk Management and Loan Quality section
for a detailed analysis of non-performing assets, allowance for
loan losses and selected loan losses statistics. Also, refer to Table
G and Note 9 to the consolidated financial statements for the
composition of the loan portfolio.
N o n - I n t e r e s t I n c o m e
N o n - I n t e r e s t I n c o m e
N o n - I n t e r e s t I n c o m e
N o n - I n t e r e s t I n c o m e
N o n - I n t e r e s t I n c o m e
Refer to Table E for a breakdown on non-interest income by major
categories for the past five years. Non-interest income accounted
for 32% of total revenues in 2007, while it represented 36% of
total revenues in the years 2006 and 2005.
Non-interest income for the year ended December 31, 2007,
compared with the previous year, was mostly impacted by:
• Higher other service fees, which are detailed by category
in Table E.
(cid:132) The favorable variance in credit card fees was due to
higher merchant fees resulting from higher volume of
purchases and late payment fees due to greater volume of
credit card accounts billed at a higher average rate
pursuant to a change in contract terms.
(cid:132) The increase in debit card fees was mostly due to the
change in the automatic teller machines’ interchange
fees from a fixed rate to a variable rate, as well as higher
transactional volume. Also, the increase is associated to
higher surcharge revenues from non-BPPR users of the
ATM terminals.
(cid:132) The increase in mortgage servicing fees was related to
higher servicing fees due to the growth in the portfolio
of loans serviced for others, which rose by approximately
22
T a b l e D
T a b l e D
T a b l e D
T a b l e D
T a b l e D
Net Interest Income - Taxable Equivalent Basis
(Dollars in millions)
Year ended December 31,
Average Volume
2006
Variance
2007
2007
2007
2007
2007
Average Yields / Costs
2007
2007
2007
2007
2007
2006
Variance
5 . 1 7 %
5 . 1 7 %
5 . 1 7 % 5.56%
5 . 1 7 %
5 . 1 7 %
(0.39%)
Money market investments
$514
$514
$514
$514
$514
9 , 8 5 4
9 , 8 5 4
9 , 8 5 4
9 , 8 5 4
9 , 8 5 4
6 7 26 7 26 7 26 7 26 7 2
$564
11,774
513
($50)
(1,920)
159
1 1 , 0 4 0
1 1 , 0 4 0
1 1 , 0 4 0
1 1 , 0 4 0
1 1 , 0 4 0
12,851
(1,811)
1 5 , 0 8 2
1 5 , 0 8 2
1 5 , 0 8 2
1 5 , 0 8 2
1 5 , 0 8 2
1 , 1 7 8
1 , 1 7 8
1 , 1 7 8
1 , 1 7 8
1 , 1 7 8
1 0 , 9 5 4
1 0 , 9 5 4
1 0 , 9 5 4
1 0 , 9 5 4
1 0 , 9 5 4
5 , 5 3 6
5 , 5 3 6
5 , 5 3 6
5 , 5 3 6
5 , 5 3 6
3 2 , 7 5 0
3 2 , 7 5 0
3 2 , 7 5 0
3 2 , 7 5 0
3 2 , 7 5 0
13,613
1,283
12,113
5,070
32,079
1,469
(105)
(1,159)
466
671
5 . 1 9
5 . 1 9
5 . 1 9
5 . 1 9
5 . 1 9
6 . 4 4
6 . 4 4
6 . 4 4
6 . 4 4
6 . 4 4
5 . 2 6
5 . 2 6
5 . 2 6
5 . 2 6
5 . 2 6
7 . 7 2
7 . 7 2
7 . 7 2
7 . 7 2
7 . 7 2
7 . 8 9
7 . 8 9
7 . 8 9
7 . 8 9
7 . 8 9
7 . 1 2
7 . 1 2
7 . 1 2
7 . 1 2
7 . 1 2
1 0 . 8 2
1 0 . 8 2
1 0 . 8 2
1 0 . 8 2
1 0 . 8 2
8 . 0 5
8 . 0 5
8 . 0 5
8 . 0 5
8 . 0 5
5.14
6.63
5.22
7.63
7.57
6.93
10.53
7.82
0.05
(0.19)
0.04
0.09
0.32
0.19
0.29
0.23
Investment securities
Trading securities
Loans:
(In thousands)
Interest
Variance
Attributable to
2007
2007
2007
2007
2007
2006
Variance
Rate
Volume
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
5 1 1 , 2 0 8
5 1 1 , 2 0 8
5 1 1 , 2 0 8
5 1 1 , 2 0 8
5 1 1 , 2 0 8
4 3 , 3 0 6
4 3 , 3 0 6
4 3 , 3 0 6
4 3 , 3 0 6
4 3 , 3 0 6
$31,382
605,588
34,004
($4,817)
($1,824)
($2,993)
(94,380)
5,061
(99,441)
9,302
(992)
10,294
5 8 1 , 0 7 9
5 8 1 , 0 7 9
5 8 1 , 0 7 9
5 8 1 , 0 7 9
5 8 1 , 0 7 9
670,974
(89,895)
2,245
(92,140)
1 , 1 6 4 , 9 1 8
1 , 1 6 4 , 9 1 8
1 , 1 6 4 , 9 1 8
Commercial and construction 1 , 1 6 4 , 9 1 8
1 , 1 6 4 , 9 1 8
1,038,497
126,421
11,693
114,728
Leasing
Mortgage
Consumer
9 2 , 9 4 0
9 2 , 9 4 0
9 2 , 9 4 0
9 2 , 9 4 0
9 2 , 9 4 0
7 8 0 , 0 1 2
7 8 0 , 0 1 2
7 8 0 , 0 1 2
7 8 0 , 0 1 2
7 8 0 , 0 1 2
5 9 9 , 0 8 5
5 9 9 , 0 8 5
5 9 9 , 0 8 5
5 9 9 , 0 8 5
5 9 9 , 0 8 5
97,166
839,515
533,692
(4,226)
3,950
(8,176)
(59,503)
22,472
(81,975)
65,393
9,047
47,162
56,346
80,923
2 , 6 3 6 , 9 5 5
2 , 6 3 6 , 9 5 5
2 , 6 3 6 , 9 5 5
2 , 6 3 6 , 9 5 5
2 , 6 3 6 , 9 5 5
2,508,870
128,085
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$44,930
($1,140)
7 . 3 5 %
7 . 3 5 %
7 . 3 5 % 7.08%
7 . 3 5 %
7 . 3 5 %
0.27%
Total earning assets
Interest bearing deposits:
$ 3 , 2 1 8 , 0 3 4
$ 3 , 2 1 8 , 0 3 4
$ 3 , 2 1 8 , 0 3 4 $3,179,844
$ 3 , 2 1 8 , 0 3 4
$ 3 , 2 1 8 , 0 3 4
$38,190
$49,407
($11,217)
$ 4 , 4 2 9
$ 4 , 4 2 9
$ 4 , 4 2 9
$ 4 , 4 2 9
$ 4 , 4 2 9
5 , 6 9 8
5 , 6 9 8
5 , 6 9 8
5 , 6 9 8
5 , 6 9 8
1 1 , 3 9 9
1 1 , 3 9 9
1 1 , 3 9 9
1 1 , 3 9 9
1 1 , 3 9 9
2 1 , 5 2 6
2 1 , 5 2 6
2 1 , 5 2 6
2 1 , 5 2 6
2 1 , 5 2 6
8 , 6 8 5
8 , 6 8 5
8 , 6 8 5
8 , 6 8 5
8 , 6 8 5
8 , 1 8 1
8 , 1 8 1
8 , 1 8 1
8 , 1 8 1
8 , 1 8 1
$3,878
5,440
9,977
19,295
10,677
9,868
$551
258
1,422
2,231
(1,992)
(1,687)
2 . 6 0 %
2 . 6 0 %
2 . 6 0 % 2.06%
2 . 6 0 %
2 . 6 0 %
0.54%
NOW and money market*
$ 1 1 5 , 0 4 7
$ 1 1 5 , 0 4 7
$ 1 1 5 , 0 4 7
$ 1 1 5 , 0 4 7
$ 1 1 5 , 0 4 7
$79,820
$35,227
$17,963
$17,264
1 . 9 6
1 . 9 6
1 . 9 6
1 . 9 6
1 . 9 6
4 . 7 3
4 . 7 3
4 . 7 3
4 . 7 3
4 . 7 3
3 . 5 6
3 . 5 6
3 . 5 6
3 . 5 6
3 . 5 6
5 . 1 6
5 . 1 6
5 . 1 6
5 . 1 6
5 . 1 6
5 . 6 8
5 . 6 8
5 . 6 8
5 . 6 8
5 . 6 8
1.43
4.24
3.01
4.86
5.45
0.53
0.49
0.55
0.30
0.23
Savings
Time deposits
Short-term borrowings
Medium and long-term debt
Total interest bearing
1 1 1 , 8 7 7
1 1 1 , 8 7 7
1 1 1 , 8 7 7
1 1 1 , 8 7 7
1 1 1 , 8 7 7
77,611
34,266
5 3 8 , 8 6 9
5 3 8 , 8 6 9
5 3 8 , 8 6 9
5 3 8 , 8 6 9
5 3 8 , 8 6 9
422,663
116,206
7 6 5 , 7 9 3
7 6 5 , 7 9 3
7 6 5 , 7 9 3
7 6 5 , 7 9 3
7 6 5 , 7 9 3
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
580,094
518,960
537,477
185,699
(70,788)
(72,661)
4,513
46,221
68,697
30,623
19,458
29,753
69,985
117,002
(101,411)
(92,119)
3 8 , 3 9 2
3 8 , 3 9 2
3 8 , 3 9 2
3 8 , 3 9 2
3 8 , 3 9 2
39,840
(1,448)
4 . 3 7
4 . 3 7
4 . 3 7
4 . 3 7
4 . 3 7
4.11
0.26
liabilities
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1,636,531
42,250
118,778
(76,528)
4 , 0 4 3
4 , 0 4 3
4 , 0 4 3
4 , 0 4 3
4 , 0 4 3
1 , 3 5 5
1 , 3 5 5
1 , 3 5 5
1 , 3 5 5
1 , 3 5 5
3,970
1,120
73
235
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$ 4 3 , 7 9 0
$44,930
($1,140)
3 . 8 3 %
3 . 8 3 %
3 . 8 3 % 3.64%
3 . 8 3 %
3 . 8 3 %
3 . 5 2 %
3 . 5 2 %
3 . 5 2 % 3.44%
3 . 5 2 %
3 . 5 2 %
0.19%
0.08%
Non-interest bearing
demand deposits
Other sources of funds
Net interest margin
Net interest income on
2 . 9 8 %
2 . 9 8 %
2 . 9 8 % 2.97%
2 . 9 8 %
2 . 9 8 %
0.01%
Net interest spread
a taxable equivalent basis
1 , 5 3 9 , 2 5 3
1 , 5 3 9 , 2 5 3
1 , 5 3 9 , 2 5 3
1 , 5 3 9 , 2 5 3
1 , 5 3 9 , 2 5 3
1,543,313
(4,060)
($69,371)
$65,311
Taxable equivalent
adjustment
8 9 , 8 6 3
8 9 , 8 6 3
8 9 , 8 6 3
8 9 , 8 6 3
8 9 , 8 6 3
115,403
(25,540)
Net interest income
$ 1 , 4 4 9 , 3 9 0
$ 1 , 4 4 9 , 3 9 0
$ 1 , 4 4 9 , 3 9 0 $1,427,910
$ 1 , 4 4 9 , 3 9 0
$ 1 , 4 4 9 , 3 9 0
$21,480
Notes: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.
*Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.
$7.2 billion from December 31, 2006 to December 31,
2007 as well as, higher late payment fees derived from
the serviced portfolio as a result of increased
delinquencies primarily associated with the U.S.
mainland. Also, the positive variance was impacted by
the adoption of SFAS No. 156, in which the Corporation
elected fair value measurement and, as a result, the
residential mortgage servicing rights are no longer
amortized in proportion to and over the period of
estimated net servicing income. Refer to Note 22 to the
consolidated financial statements for detailed information
on the adoption of SFAS No. 156. Any fair value
adjustment of MSRs is recorded in “other service fees” in
the consolidated statements of operations together with
2007 Annual Report 23
2007
2007
Popular, Inc. 2007
2007
(In thousands)
Interest
Variance
Attributable to
2006
2005
Variance
Rate
Volume
$31,382
605,588
34,004
$33,319
($1,937)
$8,592
($10,529)
591,089
14,499
38,049
(23,550)
32,427
1,577
(123)
1,700
670,974
656,835
14,139
46,518
(32,379)
Average Volume
2005
Variance
Average Yields / Costs
2005
2006
Variance
(Dollars in millions)
2006
$564
11,774
513
12,851
13,613
1,283
12,113
5,070
32,079
$797
12,230
488
13,515
11,815
1,303
12,238
4,375
29,731
$44,930
$43,246
$3,878
5,440
9,977
19,295
10,677
9,868
$3,732
5,677
8,776
18,185
10,327
9,764
($233)
(456)
25
(664)
1,798
(20)
(125)
695
2,348
$1,684
$146
(237)
1,201
1,110
350
104
5.56%
4.18%
1.38%
Money market investments
5.14
6.63
5.22
7.63
7.57
6.93
10.53
7.82
4.83
6.65
4.86
6.73
7.57
6.53
10.12
7.18
0.31
(0.02)
0.36
0.90
-
0.40
0.41
0.64
Investment securities
Trading securities
Loans:
Leasing
Mortgage
Consumer
7.08%
6.46%
0.62%
Total earning assets
Interest bearing deposits:
Commercial and construction 1,038,497
794,899
243,598
113,981
129,617
97,166
839,515
533,692
98,618
(1,452)
799,332
442,662
40,183
91,030
60
48,421
16,012
(1,512)
(8,238)
75,018
2,508,870
2,135,511
373,359
178,474
194,885
$3,179,844
$2,792,346
$387,498
$224,992
$162,506
2.06%
1.49%
0.57%
NOW and money market*
$79,820
$55,645
$24,175
$20,257
$3,918
1.43
4.24
3.01
4.86
5.45
1.23
3.48
2.37
3.38
4.73
0.20
0.76
0.64
1.48
0.72
Savings
Time deposits
Short-term borrowings
Medium and long-term debt
Total interest bearing
77,611
422,663
580,094
518,960
537,477
69,940
7,671
305,228
117,435
430,813
349,203
149,281
169,757
9,953
72,341
102,551
162,016
461,636
75,841
73,812
(2,282)
45,094
46,730
7,741
2,029
39,840
38,276
1,564
4.11
3.24
0.87
liabilities
1,636,531
1,241,652
394,879
338,379
56,500
3,970
1,120
4,069
901
(99)
219
$44,930
$43,246
$1,684
3.64%
3.44%
2.87%
3.59%
0.77%
(0.15%)
Non-interest bearing
demand deposits
Other sources of funds
Net interest margin
Net interest income on
2.97%
3.22%
(0.25%)
Net interest spread
a taxable equivalent basis
1,543,313
1,550,694
(7,381)
($113,387)
$106,006
Taxable equivalent
adjustment
115,403
126,487
(11,084)
Net interest income
$1,427,910
$1,424,207
$3,703
the loan servicing fees charged to third-parties on the
serviced portfolio. These favorable variances were
partially offset by lower prepayment fees on loans
serviced due to a slowdown in prepayments.
(cid:132) Other fees decreased mainly as a result of lower brokered
loan fees on services provided to mortgage brokers on
the origination of loans for their portfolio. This
reduction in servicing fees was a result of the
discontinuation of PFH’s broker-origination channel as
part of the PFH Restructuring Plan.
• Favorable variance in the net gain on sale and valuation
adjustments of investment securities, which consisted of:
24
(In thousands)
Net gain on sale of
investment securities
Valuation adjustments of
investment securities
Total
Year ended December 31,
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006 $ Variance
$ 1 2 0 , 3 2 8
$ 1 2 0 , 3 2 8
$ 1 2 0 , 3 2 8
$ 1 2 0 , 3 2 8
$ 1 2 0 , 3 2 8
$22,233
$98,095
• Unfavorable variance in gain on sales of loans and negative
adjustments in the valuation of loans held-for-sale,
particularly mortgage loans, were as follows:
( 6 5 , 1 6 9 )
( 6 5 , 1 6 9 )
( 6 5 , 1 6 9 )
( 6 5 , 1 6 9 )
( 6 5 , 1 6 9 )
$ 5 5 , 1 5 9
$ 5 5 , 1 5 9
$ 5 5 , 1 5 9
$ 5 5 , 1 5 9
$ 5 5 , 1 5 9
(17,874)
$4,359
(47,295)
$50,800
(In thousands)
Year ended December 31,
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006 $ Variance
The favorable variance in the net gain on sale of investment
securities for the year ended December 31, 2007, compared with
the same period in 2006, was mainly due to $118.7 million in
gains from the sale of the Corporation ’s interest in
Telecomunicaciones de Puerto Rico, Inc. (“TELPRI”) during the
first quarter of 2007. The gain on sale of investment securities in
2006 included gains of $13.6 million from the sale of marketable
equity securities and FNMA securities.
The unfavorable variance in valuation adjustments of
investment securities, considered other-than-temporary, included
a negative valuation adjustment of $45.4 million in PFH’s residual
interests classified as available-for-sale and $19.5 million in
certain equity securities for 2007. During 2006, the negative
valuation adjustments were mostly associated to $17.8 million of
PFH’s residual interests. For information on the conditions that
impacted PFH’s residual interests during 2007 and 2006, refer to
the Critical Accounting Policies / Estimates section of this
MD&A.
• Unfavorable variance in trading account (loss) profit, which
consisted of:
(In thousands)
Mark-to-market of PFH'S
residual interests
Other trading account
profit
Total
Year ended December 31,
2006
$ Variance
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
( $ 3 9 , 6 6 1 )
( $ 3 9 , 6 6 1 )
( $ 3 9 , 6 6 1 )
( $ 3 9 , 6 6 1 )
( $ 3 9 , 6 6 1 )
($971) ($38,690)
3 7 , 1 9 7
3 7 , 1 9 7
3 7 , 1 9 7
3 7 , 1 9 7
3 7 , 1 9 7
( $ 2 , 4 6 4 )
( $ 2 , 4 6 4 )
( $ 2 , 4 6 4 )
( $ 2 , 4 6 4 )
( $ 2 , 4 6 4 )
938
36,259
$35,288 ($37,752)
PFH’s residual interests classified as trading securities were
also unfavorably impacted by credit and market events in the U.S.
subprime market during 2007 as described previously in this
MD&A.
Loss on sale of loans related
to loan recharacterization by
PFH
( $ 9 0 , 1 4 4 )
( $ 9 0 , 1 4 4 )
( $ 9 0 , 1 4 4 )
( $ 9 0 , 1 4 4 )
( $ 9 0 , 1 4 4 )
-
($90,144)
Gain on sales of loans,
excluding loan
recharacterization
Lower of cost or market
valuation adjustment on
loans held-for-sale
Total
7 6 , 5 6 4
7 6 , 5 6 4
7 6 , 5 6 4
7 6 , 5 6 4
7 6 , 5 6 4
$117,421
(40,857)
( 2 5 , 3 9 0 )
( 2 5 , 3 9 0 )
( 2 5 , 3 9 0 )
( 2 5 , 3 9 0 )
( 2 5 , 3 9 0 )
( $ 3 8 , 9 7 0 )
( $ 3 8 , 9 7 0 )
( $ 3 8 , 9 7 0 )
( $ 3 8 , 9 7 0 )
( $ 3 8 , 9 7 0 )
-
(25,390)
$117,421 ($156,391)
The negative variance associated to the loss on the loan
recharacterization transaction by PFH was explained in the
Significant U.S. Strategic Events section of this MD&A.
Excluding the PFH loan recharacterization transaction, the
decrease in gain on sales of loans for 2007, compared to 2006, was
principally due to lower volume of loans originated at PFH due to
exiting the wholesale subprime mortgage business, coupled with
lower origination volume at E-LOAN due to market conditions
and the lack of liquidity in the private secondary markets. There
were also lower gains on sale of SBA loans by the Corporation’s
U.S. banking subsidiary. The decrease was partially offset by the
fact that during 2006, BPPR realized a $20.1 million loss on the
bulk sale of mortgage loans, and there were no similar losses
during 2007.
The unfavorable lower of cost or market valuation adjustment
on loans held-for-sale resulted principally from the deterioration
in the U.S. subprime mortgage market and lack of liquidity in the
private secondary markets experienced during the second half of
2007, which negatively impacted price margins, coupled with
credit deterioration.
For the year ended December 31, 2006, non-interest income
increased $24.2 million, or 3%, compared with 2005. There were
higher gains on sale of loans by $34.1 million mainly due to E-
LOAN’s production, as this subsidiary was acquired in the fourth
quarter of 2005, partially offset by losses in the Puerto Rico
operations that resulted from the bulk sale of approximately $0.6
billion of mortgage loans to a U.S. financial institution during
2006 and lower sales volumes and price margins due to the
slowdown in the housing market. Other operating income rose by
$34.9 million during 2006, when compared to the previous year,
due to higher revenues from E-LOAN related in part to mortgage
loan closing services and business referral fees, higher dividend
income derived from the Corporation’s investment in TELPRI,
higher income derived from securitization related invested funds,
2007 Annual Report 25
2007
2007
Popular, Inc. 2007
2007
T a b l e E
T a b l e E
T a b l e E
T a b l e E
T a b l e E
Non-Interest Income
(Dollars in thousands)
2007
2007
2007
2007
2007
2006
2005
2004
2003
Five-Year
C.G.R.*
Service charges on deposit accounts
$ 1 9 6 , 0 7 2
$ 1 9 6 , 0 7 2
$ 1 9 6 , 0 7 2
$ 1 9 6 , 0 7 2
$ 1 9 6 , 0 7 2
$190,079
$181,749
$165,241
$161,839
4.45%
Year ended December 31,
Other service fees:
Credit card fees and discounts
Debit card fees
Insurance fees
Processing fees
Sale and administration of
1 0 2 , 1 7 6
1 0 2 , 1 7 6
1 0 2 , 1 7 6
1 0 2 , 1 7 6
1 0 2 , 1 7 6
7 6 , 5 7 3
7 6 , 5 7 3
7 6 , 5 7 3
7 6 , 5 7 3
7 6 , 5 7 3
5 5 , 8 2 4
5 5 , 8 2 4
5 5 , 8 2 4
5 5 , 8 2 4
5 5 , 8 2 4
4 7 , 4 7 6
4 7 , 4 7 6
4 7 , 4 7 6
4 7 , 4 7 6
4 7 , 4 7 6
89,827
61,643
53,889
44,050
82,062
52,675
50,734
42,773
69,702
51,256
38,924
40,169
60,432
45,811
29,855
40,003
11.53
12.52
18.02
5.37
investment products
3 0 , 4 5 3
3 0 , 4 5 3
3 0 , 4 5 3
3 0 , 4 5 3
3 0 , 4 5 3
27,873
28,419
22,386
21,174
7.12
Mortgage servicing fees, net of
amortization and fair value
adjustments
Trust fees
Check cashing fees
Other fees
1 1 , 7 0 8
1 1 , 7 0 8
1 1 , 7 0 8
1 1 , 7 0 8
1 1 , 7 0 8
1 1 , 1 5 7
1 1 , 1 5 7
1 1 , 1 5 7
1 1 , 1 5 7
1 1 , 1 5 7
3 8 73 8 73 8 73 8 73 8 7
2 7 , 5 0 3
2 7 , 5 0 3
2 7 , 5 0 3
2 7 , 5 0 3
2 7 , 5 0 3
(2,750)
9,316
737
36,290
6,226
8,290
17,122
43,200
7,412
8,872
21,680
35,150
6,853
7,830
24,420
48,014
Total other service fees
3 6 3 , 2 5 7
3 6 3 , 2 5 7
3 6 3 , 2 5 7
3 6 3 , 2 5 7
3 6 3 , 2 5 7
320,875
331,501
295,551
284,392
(0.36)
4.23
(55.07)
(6.99)
6.45
Net gain on sale and valuation
adjustments of investment securities
Trading account (loss) profit
(Loss) gain on sale of loans and
valuation adjustments on loans
held-for-sale
Other operating income
Total non-interest income
* C.G.R. refers to compound growth rate.
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
4,359
35,288
52,113
30,051
15,254
(159)
71,094
(10,214)
-
25.11
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
1 2 1 , 2 6 2
1 2 1 , 2 6 2
1 2 1 , 2 6 2
1 2 1 , 2 6 2
1 2 1 , 2 6 2
117,421
141,463
83,297
106,564
44,168
88,716
53,572
65,327
-
10.89
$ 6 9 4 , 3 1 6
$ 6 9 4 , 3 1 6
$ 6 9 4 , 3 1 6
$ 6 9 4 , 3 1 6
$ 6 9 4 , 3 1 6
$809,485
$785,275
$608,771
$626,010
5.01%
and higher revenues from services on the structuring of bond
issues, among others. These favorable variances were partially
offset by a decrease of $47.8 million in net gains on sale and
unfavorable valuation adjustments of other-than-temporary
impairments of investment securities available-for-sale,
principally residual interests of PFH. Additionally, there were
lower check cashing fees and other fees as a result of the lack of
revenue originally produced by the Corporation’s check cashing
operations in the U.S., which were sold during the fourth quarter
of 2005.
26
Operating Expenses
Operating Expenses
Operating Expenses
Operating Expenses
Operating Expenses
Refer to Table F for the detail of operating expenses by major
categories along with various related ratios for the last five years.
Operating expenses totaled $1.7 billion for the year ended
December 31, 2007, an increase of $219.5 million, or 15%,
compared with the same period in 2006. Included in operating
expenses for 2007 are approximately $248.5 million in impairment
charges and costs associated to the PFH Restructuring Plan, E-
LOAN Restructuring Plan and PFH Branch Network Restructuring
Plan described previously in this MD&A. In 2006, there were
$21.4 million in impairment charges associated with the PFH
Restructuring Plan. The table below segregates these 2007 costs
by categories within operating expenses.
PFH
E-LOAN
PFH Branch
Restructuring Restructuring Network Restructuring
(in millions)
Plan
Plan
Plan
Total
-
-
-
-
-
$4.6
$7.8
$14.7
$12.4
4.5
0.3
1.8
0.3
4.2
0.4
0.4
-
8.7
0.7
2.2
0.3
Personnel costs (1)
Net occupancy
expenses (2)
Equipment expenses
Professional fees (3)
Other operating expenses
Total restructuring
expenses
Impairment of long-lived
assets (4)
Impairment of trademark
and goodwill (5)
Total restructuring and
impairment charges
(1) Severance, stay bonuses, related taxes and other employee benefits
(2) Lease terminations
(3) Outplacement services and professional services contract termination
(4) Impairment of leasehold improvements, equipment and intangible assets with
definitive lives
(5) Goodwill impairment of $164.4 million and trademark impairment of $47.4 million
$248.5
$231.9
$24.3
211.8
211.8
$14.7
12.4
10.5
$9.6
$1.9
1.9
-
-
-
-
Isolating the impact of the different charges associated to the
restructuring plans named above, operating expenses increased
(decreased) from 2006 to 2007 as follows:
(in millions)
2007
Charges
2007, excluding
related to charges related to excluding
restructuring
impairment
plans
restructuring
plans
2006,
charges Variance
$12.4
8.7
0.7
-
2.2
-
-
-
$655.8
114.9
126.8
50.1
147.7
66.9
115.4
17.4
$668.7
116.7
135.9
44.5
141.5
68.3
130.0
17.7
$668.2
123.6
127.5
50.1
149.9
66.9
115.4
17.4
($12.9)
(1.8)
(9.1)
5.6
6.2
(1.4)
(14.6)
(0.3)
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Impairment losses on
long-lived assets (1)
Other operating expenses
Impact of change in
fiscal period
Goodwill and trademark
-
impairment losses (1)
(2.0)
Amortization of intangibles
Total
($7.4)
(1) For comparative purposes, this table excludes $7.2 million in impairment of long-lived
assets and $14.2 million in goodwill impairment losses taken in 2006 that were associated
to the PFH Restructuring Plan.
-
12.4
$1,463.5
211.8
10.4
$1,704.6
-
10.4
$1,456.1
211.8
-
$248.5
(0.1)
150.8
12.3
151.1
-
118.1
(0.1)
32.7
12.4
0.3
(9.7)
9.7
-
-
-
Excluding the severance costs associated with the
restructuring plans, the decrease in personnel costs for 2007,
compared to 2006, was principally the result of lower headcount
resulting from the PFH Restructuring Plan which took effect in
early 2007. The PFH reportable segment’s personnel expenses,
excluding $7.8 million related to the PFH Restructuring Plan,
decreased by $37.1 million during 2007, compared to the previous
year. PFH was impacted by a reduction in headcount as described
below. The reduction in the PFH reportable segment’s personnel
costs was partly offset by increases in the Corporation’s other
reportable segments, including the Puerto Rico and U.S. mainland
operations. These increases were mostly associated to the impact
of merit increases across the Corporation’s subsidiaries, increased
headcount, higher commissions on certain businesses, medical
insurance costs and savings plan expenses, among other factors,
coupled with lower cost deferrals due to a lower volume of loan
originations. At December 31, 2007, the Corporation’s full-time
equivalent employees (“FTEs”) were 12,303, compared with
12,508 at December 31, 2006.
Other operating expenses categories reflecting greater
variances in 2007 compared to 2006, excluding the impact of the
restructuring plans, are described below.
• Equipment expenses declined mostly as a result of lower
electronic equipment depreciation, maintenance and repair
2007 Annual Report 27
2007
2007
Popular, Inc. 2007
2007
T a b l e F
T a b l e F
T a b l e F
T a b l e F
T a b l e F
Operating Expenses
(Dollars in thousands)
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
2004
2003
Salaries
$ 5 1 9 , 5 2 3
$ 5 1 9 , 5 2 3
$ 5 1 9 , 5 2 3
$ 5 1 9 , 5 2 3
$ 5 1 9 , 5 2 3
Pension, profit sharing and other benefits 1 4 8 , 6 6 6
1 4 8 , 6 6 6
1 4 8 , 6 6 6
1 4 8 , 6 6 6
1 4 8 , 6 6 6
$517,178
151,493
$474,636
148,053
$427,870
143,148
$388,527
137,917
Year ended December 31,
Total personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Impairment losses on long-lived assets
Other operating expenses:
Credit card processing, volume
and interchange expenses
Transportation and travel
All other*
Goodwill and trademark
impairment losses
Amortization of intangibles
Subtotal
Total
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 7 , 4 7 2
1 2 7 , 4 7 2
1 2 7 , 4 7 2
1 2 7 , 4 7 2
1 2 7 , 4 7 2
5 0 , 1 1 1
5 0 , 1 1 1
5 0 , 1 1 1
5 0 , 1 1 1
5 0 , 1 1 1
1 4 9 , 8 5 4
1 4 9 , 8 5 4
1 4 9 , 8 5 4
1 4 9 , 8 5 4
1 4 9 , 8 5 4
6 6 , 8 7 7
6 6 , 8 7 7
6 6 , 8 7 7
6 6 , 8 7 7
6 6 , 8 7 7
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 7 , 4 3 8
1 7 , 4 3 8
1 7 , 4 3 8
1 7 , 4 3 8
1 7 , 4 3 8
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
4 1 , 6 9 5
4 1 , 6 9 5
4 1 , 6 9 5
4 1 , 6 9 5
4 1 , 6 9 5
1 6 , 1 4 2
1 6 , 1 4 2
1 6 , 1 4 2
1 6 , 1 4 2
1 6 , 1 4 2
9 3 , 2 2 5
9 3 , 2 2 5
9 3 , 2 2 5
9 3 , 2 2 5
9 3 , 2 2 5
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
668,671
116,742
135,877
44,543
141,534
68,283
129,965
17,741
7,232
30,707
18,064
79,098
14,239
12,377
816,402
622,689
108,386
124,276
39,197
119,281
63,395
100,434
18,378
-
29,700
19,426
73,459
-
9,579
571,018
89,821
108,823
40,260
95,084
60,965
75,708
17,938
-
26,965
14,968
61,618
-
7,844
526,444
83,630
104,821
37,904
82,325
58,038
73,277
19,111
-
23,869
13,811
82,009
-
7,844
705,511
599,994
586,639
Five-Year
C.G.R.
7.50%
3.24
6.45
9.51
5.16
6.17
12.10
4.41
13.43
(2.63)
-
18.25
3.04
7.62
-
2.79
13.92
$ 1 , 7 0 4 , 5 5 1
$ 1 , 7 0 4 , 5 5 1
$ 1 , 7 0 4 , 5 5 1
$ 1 , 7 0 4 , 5 5 1
$ 1 , 7 0 4 , 5 5 1
$1,485,073
$1,328,200
$1,171,012
$1,113,083
10.62%
Efficiency ratio**
Personnel costs to average assets
Operating expenses to average assets
Employees (full-time equivalent)
Assets per employee (in millions)
8 1 . 9 9 %
8 1 . 9 9 %
8 1 . 9 9 %
8 1 . 9 9 %
8 1 . 9 9 %
1 . 4 2
1 . 4 2
1 . 4 2
1 . 4 2
1 . 4 2
3 . 6 2
3 . 6 2
3 . 6 2
3 . 6 2
3 . 6 2
1 2 , 3 0 3
1 2 , 3 0 3
1 2 , 3 0 3
1 2 , 3 0 3
1 2 , 3 0 3
$ 3 . 6 1
$ 3 . 6 1
$ 3 . 6 1
$ 3 . 6 1
$ 3 . 6 1
67.16%
1.38
3.08
12,508
$3.79
62.30%
1.34
2.86
13,210
$3.68
59.86%
1.43
2.94
12,139
$3.66
60.51%
1.52
3.21
11,474
$3.18
* Includes insurance, sundry losses, FDIC assessment and other real estate expenses, among others.
** Non-interest expense divided by net interest income plus recurring non-interest income.
expenses, and software package amortization, as well as
lower equipment requirements due to the streamlining of
PFH’s operations.
• Other taxes increased mainly associated to higher
municipal license taxes, personal property taxes,
examination banking fees and the new sales tax implemented
in Puerto Rico in the later part of 2006.
• Professional fees also increased principally due to higher
business strategy consulting, computer service fees, credit
collection, imaging services and programming services,
among others.
• Business promotion expenses experienced a reduction
mainly as a result of cost control measures on marketing
expenditures on the U.S. mainland operations, primarily at
E-LOAN, and lower expenditures at PFH due to the
streamlining of operations in 2007. These reductions were
partially offset by higher costs related to the loyalty reward
program in the Puerto Rico operations.
• Other operating expenses rose primarily as a result of higher
other real estate expenses associated with the increased
administrative and foreclosure costs resulting from a higher
number of repossessed units and additional write downs in
the collateral value of repossessed real estate properties in
the U.S. mainland. The increase in other operating expenses
is also due to higher credit card processing and interchange
expenses, primarily due to higher volume of transactions
at a higher average rate.
28
• Impact of change in fiscal period of certain subsidiaries
represents a net loss for the month of December 2005 in
those subsidiaries that changed their fiscal year in 2006,
as described in the Corporation’s 2006 Annual Report.
The efficiency ratio measures how much of a company’s revenue
is used to pay operating expenses. As stated in the Glossary of
Selected Financial Terms included in this 2007 Annual Report, in
determining the efficiency ratio, the Corporation includes
recurring non-interest income items, thus isolating income items
that may be considered volatile in nature. Management believes
that the exclusion of those items would permit greater
comparability for analytical purposes. Amounts within non-interest
income not considered recurring in nature by the Corporation
amounted to $64.6 million during the year ended December 31,
2007, compared with $26.0 million in the same period of the
previous year. Non-recurring gains during 2007 corresponded
principally to net gains on sale and valuation adjustments of
investment securities available-for-sale, whereas 2006 was mainly
impacted by gains on the sale of real estate properties. The
efficiency ratio was mainly unfavorably impacted by the
impairment losses that resulted from the evaluation of the goodwill
and trademark of E-LOAN and the restructuring charges related
to the three restructuring plans previously discussed.
For the year 2006, total operating expenses increased $156.9
million, or 12%, from 2005, mainly resulting from E-LOAN’s
operations, which had only impacted 2005 results since its
acquisition in November 2005. E-LOAN’s share of the increase
in operating expenses for 2006, compared to 2005, was
approximately $133 million. Popular Cash Express ("PCE"), sold
in late 2005, contributed with a reduction of $28 million in
operating expenses for 2006, which represented the subsidiary’s
costs for the year 2005. Isolating the above impact in operating
expenses from E-LOAN and PCE, the Corporation’s operating
expenses for the year ended December 31, 2006 increased $52
million, or 4%, compared with the previous year.
For the year ended December 31, 2006, personnel costs
increased by $46.0 million, or 7%, compared with 2005. E-LOAN
contributed with $46.4 million of this increase, while PCE
contributed with a reduction of $10.1 million. The increase was
mainly attributed to higher salaries and related taxes, bonuses,
health insurance costs and savings plan expenses, partially offset
by lower incentive compensation, training costs and profit
sharing. All other operating expenses for the year 2006, excluding
personnel costs, increased by $110.9 million, or 16%, compared
with 2005. E-LOAN contributed with approximately $86.1 million
of this increase, mostly in business promotion and professional
fees. PCE represented a reduction of approximately $17.6 million,
principally in net occupancy expenses. Excluding the impact of
E-LOAN and PCE, the most significant variances were goodwill
impairment losses during 2006 of $14.2 million at PFH, higher
net occupancy expenses by $11.1 million resulting from business
expansion in the U.S. mainland, the impact of a change in this
fiscal year of certain of the Corporation’s subsidiaries amounting
to a pre-tax loss of $9.7 million, and higher equipment expenses
by $8.8 million driven by software maintenance and systems
technology investments to support business processes. These
variances were partially offset by a reduction of $14.9 million in
business promotion expenses, excluding E-LOAN and PCE
operations, resulting from lower expenses related to the loyalty
rewards program as a result of a lower cost structure and changes
in the redemption requirements, and by cost control measures.
Income Tax Expense
Income Tax Expense
Income Tax Expense
Income Tax Expense
Income Tax Expense
Income tax benefit for the year ended December 31, 2007 was
$59.0 million, compared with an income tax expense of $106.9
million for 2006. This variance was primarily due to the pre-tax
losses for 2007, in the Corporation’s U.S. operations, and to higher
income subject to a preferential tax rate on capital gains in Puerto
Rico when compared to 2006. In addition, income tax expense in
the Puerto Rico operations decreased due to the expiration of the
transitory provision that increased the statutory tax rate for Puerto
Rico corporations in 2006, as described earlier in the Net Interest
Income section of this MD&A. The impact of these changes was
partially offset by lower net tax-exempt interest income and by
the reversal of several tax positions during 2006 upon the
completion of various federal and Puerto Rico tax audits.
Income tax expense for the year ended December 31, 2006 was
$106.9 million, compared with $148.9 million in 2005, a decrease
of $42.0 million, or 28%. This decline was primarily due to lower
pre-tax earnings, partially offset by a decrease in net tax-exempt
interest income and by lower income subject to a preferential tax
rate on capital gains in Puerto Rico. In addition, income tax
expense reflected a change in the statutory tax rate from 41.5% to
43.5% in BPPR effective in 2006 and there was lower reversal of
certain tax positions during 2006 as compared to 2005.
Refer to Note 27 to the consolidated financial statements for
additional information on income taxes.
Fourth Quarter Results
Fourth Quarter Results
Fourth Quarter Results
Fourth Quarter Results
Fourth Quarter Results
Refer to the Statistical Summary 2006-2007 Quarterly Financial
Data presented in this MD&A.
Net interest margin, on a taxable equivalent basis, was 3.53%
for the fourth quarter of 2007, compared to 3.52% in the same
period of 2006. Net interest income, on a taxable equivalent basis,
declined by $3.1 million, or less than 1%, compared with the
fourth quarter of 2006. The reduction was principally due to a
lower taxable equivalent adjustment, as a result of the lower
marginal tax rate in 2007 of 39%, which was discussed in the Net
2007 Annual Report 29
2007
2007
Popular, Inc. 2007
2007
Interest Income section of this MD&A. The average volume of
earning assets declined by $0.4 billion, primarily due to a $0.9
billion net reduction in money markets and securities, offset in
part by an increase in average loans of $0.5 billion, mainly
commercial and consumer loans, reduced in part by a lower average
volume of mortgage loans. Earning assets were funded principally
through interest bearing deposits, which on average rose by $3.0
billion, and non-interest bearing sources of funds, which rose on
average by $0.3 billion. Borrowed funds decreased $3.7 billion.
Refer to the Statement of Condition and Liquidity sections of this
MD&A for explanations on changes in the mix of earning assets
and funding sources.
The provision for loan losses for the fourth quarter of 2007
increased by $94.8 million, compared with the same quarter in
2006, principally due to higher net charge-offs and to higher
delinquencies, a trend exhibited throughout the year due to weak
economic conditions. The net charge-offs to average loans held-
in-portfolio ratio deteriorated, increasing to 1.75% in the fourth
quarter of 2007, from 0.93% for the same quarter in 2006. Net
charge-offs for the quarter ended December 31, 2007 were $141.5
million, compared with $73.4 million in the same quarter of the
previous year. The increase was experienced in mortgage loans
by $37.2 million, consumer loans by $16.7 million and commercial
loans by $16.1 million. The increase in net charge-offs on
mortgage loans primarily reflects the continued credit problems
in the U.S. mainland subprime mortgage market. Increases in net
charge-offs in the commercial loan and consumer loan portfolios
are principally due to higher delinquencies in Puerto Rico
resulting from the slowdown in the economy. The commercial
loan sector in the Corporation’s U.S. mainland operations also
experienced higher charge-offs.
Non-interest income amounted to $71.8 million for the quarter
ended December 31, 2007, compared with $205.3 million for the
same quarter in 2006. This decline was mostly the result of the
$90.1 million pre-t ax l oss re sul ti ng f ro m t he lo an
recharacterization transaction by PFH, and to higher losses on
the valuation of PFH’s residual interest by $15.0 million for the
fourth quarter of 2007, compared to the same period in 2006.
Also, there were lower gains on the sale of real estate property in
the fourth quarter of 2007 by approximately $10.5 million,
compared to the same quarter in the previous year. These
unfavorable variances were partially offset by higher other service
fees that included debit and credit card fees, offset in part by an
unfavorable change in the fair value of mortgage servicing rights
during the fourth quarter of 2007 due to market conditions,
including changes in delinquency curves and increased servicing
costs.
Operating expenses for the fourth quarter of 2007 totaled $621.2
million, representing an increase of $242.3 million, compared
with the same quarter in 2006. This increase was principally
driven by $211.8 million in impairment losses related to E-
LOAN’s goodwill and trademark, and to $20.1 million in other
charges taken in the fourth quarter of 2007 associated to the E-
LOAN Restructuring Plan. The fourth quarter of 2006 included
$21.4 million in impairment charges related to goodwill and long-
lived assets on the PFH Restructuring Plan. Other factors
impacting the increase in other operating expenses for the fourth
quarter of 2007, when compared to the same quarter in 2006,
included higher salaries in part due to merit increases, additional
headcount from the Puerto Rico acquisitions, lower expense
deferrals due to lower loan origination volumes, higher other real
estate expenses and credit collection expenses, partially offset by
lower equipment and business promotion expenses, among other
factors.
Income tax benefit amounted to $95.5 million in the fourth
quarter of 2007, compared to income tax expense of $18.8 million
in the same quarter of 2006. The main factors impacting this
variance were the operating losses recorded in the U.S. operations
primarily as a result of the loan recharacterization and the
restructuring plans.
RRRRR E P O R T A B L E
E G M E N T R R R R R E S U L T S
E P O R T A B L E S S S S S E G M E N T
E S U L T S
E S U L T S
E G M E N T
E G M E N T
E P O R T A B L E
E P O R T A B L E
E S U L T S
E S U L T S
E G M E N T
E P O R T A B L E
The Corporation’s reportable segments for managerial reporting
purposes consist of Banco Popular de Puerto Rico, EVERTEC,
Banco Popular North America, and PFH. Also, a Corporate group
supports the reportable segments. For managerial reporting
purposes, the costs incurred by the Corporate group are not
allocated to the four reportable segments.
Prior to the fourth quarter of 2007, all U.S. operations were in
a single segment referred to as Popular North America. Given the
events and strategic moves commenced by management in the
fourth quarter of 2007 with respect to selling or discontinuing
PFH’s loan origination branch operations, including the
prospective sale of a significant portion of its branch portfolio
during the first quarter of 2008 and the sale or closure of its
consumer branch network, management determined that the
Popular North America (U.S. operations) would no longer be
evaluated as a single reportable segment. As a result, commencing
in the fourth quarter of 2007, the Corporation’s Popular North
America reportable segment was segregated in two segments:
Banco Popular North America, which includes the operations of
E-LOAN; and PFH.
As a result of further disruptions in the subprime market,
liquidity constraints with respect to financing the operations of
PFH and further loan credit deterioration, the Corporation
determined to exit this business and allow the existing loan
portfolio that cannot be sold due to lack of market or to legal
constraints (i.e. for the on-balance sheet securitization not
recharacterized) to mature. As indicated in the Events Subsequent
to Year-End 2007 section of this MD&A, management opted to
30
account for a substantial portion of PFH’s maturing loans held-
in-portfolio at fair value commencing on January 1, 2008. PFH
will continue to operate its loan servicing unit.
For a more complete description of the Corporation’s reportable
segments, including additional financial information and the
underlying management accounting process, refer to Note 32 to
the consolidated financial statements.
The Corporate group had a net income of $44.2 million in
2007, compared with a net loss of $28.8 million in 2006 and a net
income of $9.0 million in 2005. In 2007, the Corporation’s
holding companies within the Corporate group realized net gains
on the sale and valuation adjustment of investment securities,
mainly marketable equity securities, approximating $95.5
million, mainly due to a gain on the sale of TELPRI shares in the
first quarter of 2007, while in 2006 these gains amounted to $13.9
million.
Highlights on the earnings results for the reportable segments
are discussed below.
Banco Popular de Puerto Rico
Banco Popular de Puerto Rico
Banco Popular de Puerto Rico
Banco Popular de Puerto Rico
Banco Popular de Puerto Rico
The Corporation’s core operations in Puerto Rico continued to
perform well during 2007 despite a difficult economic environment
which presented credit challenges, aggressive competition and
an economy experiencing a greater slowdown than in the previous
year. As indicated earlier, Banco Popular de Puerto Rico grew its
retail banking business by acquiring Citibank’s retail banking
operations, which added 17 branches prior to branch closings
due to synergies. Also, Popular Securities, a subsidiary within
the Banco Popular de Puerto Rico reportable segment, strengthened
its brokerage sales force and assets under management by
acquiring Smith Barney’s retail brokerage operations in Puerto
Rico. Both of these acquisitions took place in the latter part of the
fourth quarter of 2007.
Banco Popular de Puerto Rico reportable segment reported net
income of $327.3 million in 2007, a decrease of $28.6 million, or
8%, when compared with the previous year. Net income amounted
to $355.9 million for 2006 and $398.7 million for 2005. The
main factors that contributed to the variance 2007 compared to
2006 included:
• Higher net interest income by $42.9 million, or 5%,
primarily related to the commercial banking business;
• Higher provision for loan losses by $102.6 million, or 73%,
primarily associated with higher net charge-offs mainly in
the consumer and commercial loan portfolios due to higher
delinquencies resulting from the slowdown in the economy.
The provision for loan losses represented 127% of net
charge-offs for 2007, compared with 124% in 2006. The
net charge-offs to average loans held-in-portfolio for the
Banco Popular de Puerto Rico operations was 1.22% for the
year ended December 31, 2007, compared with 0.77% in
the previous year. The ratio of allowance for loan losses to
loans held-in-portfolio for the Banco Popular de Puerto Rico
reportable segment was 2.31% at December 31, 2007,
compared with 2.09% at December 31, 2006;
• Higher non-interest income by $53.6 million, or 12%,
mainly due to higher other service fees by $42.0 million,
primarily in debit and credit card fees and mortgage
servicing fees. Also, there was a favorable variance in the
caption of gains on sale of loans by $16.4 million because
of a $20.1 million loss on the bulk sale of mortgage loans in
the third quarter of 2006;
• Higher operating expenses by $34.1 million, or 5%,
primarily associated with higher professional fees,
personnel costs, business promotion, other operating taxes
and other operating expenses, which include credit card
processing and interchange expenses. Despite the 5%
increase in operating costs, this reportable segment
managed costs through disciplined spending during 2007;
• Lower income tax expense by $11.7 million, or 9%,
primarily due to lower taxable income in 2007 than in the
previous year.
E V E R T E C
E V E R T E C
E V E R T E C
E V E R T E C
E V E R T E C
EVERTEC is the Corporation’s reportable segment dedicated to
processing and technology outsourcing services, servicing
customers in Puerto Rico, the Caribbean, Central America and
the U.S. mainland. EVERTEC provides support internally to the
Corporation’s subsidiaries, as well as to third parties. EVERTEC
increased transaction volume, revenues and net income during
2007 in spite of a recession in its main market, Puerto Rico, and
in spite of increased competition from larger competitors across
all regions it serves. During 2007, EVERTEC focused on
leveraging its existing product offering to achieve strong revenue
growth, enhancing competitiveness of the automated teller
machine network, continuously improving quality levels, and
continuing to develop its technology infrastructure.
For the year ended December 31, 2007, net income for the
reportable segment of EVERTEC totaled $31.3 million, an
increase of $5.3 million, or 20%, compared with $26.0 million
for 2006. Net income amounted to $24.7 million for 2005. Factors
that contributed to the variance in results for 2007 when compared
to 2006 included:
• Lower net interest loss by $1.1 million, or 57%, primarily
due to increased revenues from funds invested in securities;
• Higher non-interest income by $12.4 million, or 5%,
mostly as a result of higher electronic transactions
processing fees related to point of sale and the automated
teller machine network, other item processing fees
associated with cash depot services and payment
2007 Annual Report 31
2007
2007
Popular, Inc. 2007
2007
processing, and an increase in IT consulting services,
among others;
• Higher operating expenses by $5.7 million, or 3%,
primarily due to higher personnel costs, including impact
of merit increases, higher headcount, commissions and
medical costs, among other factors, and professional
services primarily in programming services. These
variances were partially offset by lower equipment expenses
due to lower software package expenses and lower
depreciation of electronic equipment.
• Higher income tax expense by $2.5 million, or 17%,
primarily due to higher taxable income in 2007 compared
to the previous year.
Banco Popular North America
Banco Popular North America
Banco Popular North America
Banco Popular North America
Banco Popular North America
For the year ended December 31, 2007, the reportable segment of
Banco Popular North America, which includes the operations of
E-LOAN, had a net loss of $195.4 million, compared to net income
of $67.5 million for 2006 and $97.6 million for 2005. E-LOAN’s
net loss for the year ended December 31, 2007 amounted to $245.7
million, compared to net losses of $33.0 million in 2006 and $1.6
million in 2005. E-LOAN was acquired by the Corporation in the
fourth quarter of 2005.
The main factors that contributed to the variance in results for
2007 as compared to results a year earlier for the Banco Popular
North America reportable segment included:
• Lower net interest income by $9.4 million, or less than
3%;
• Higher provision for loan losses by $49.0 million, or 105%,
primarily due to higher net charge-offs in the mortgage
and commercial loan portfolios. The provision for loan
losses represented 166% of net charge-offs for 2007,
compared with 116% of net charge-offs in 2006. The net
charge-offs to average loans held-in-portfolio for the Banco
Popular North America operations was 0.62% for the year
ended December 31, 2007, compared with 0.45% in the
previous year. The ratio of allowance for loan losses to
loans held-in-portfolio for the Banco Popular North America
reportable segment was 1.26% at December 31, 2007,
compared with 1.00% at December 31, 2006. The increase
in the allowance for loan losses reflects potential losses
inherent in the loan portfolio as a result of current economic
conditions and deteriorating market trends, primarily in
the subprime mortgage loan sector and in the commercial
portfolio, evidenced by an increase in non-performing
assets. Refer to the Overview of Mortgage Loan Exposure
section in the Credit Risk Management and Loan Quality
area of this MD&A for further information on the
Corporation’s subprime mortgage loan exposure.
• Lower non-interest income by $32.6 million, or 15%,
mainly due to an unfavorable variance in the caption of
gain on sale of loans and valuation adjustments on loans
held-for-sale by $25.7 million mainly due to lower loan
volume originated and sold by E-LOAN, lower price
margins due to market conditions, reduced gains on sale
of SBA loans by BPNA due to lower volume, and unfavorable
lower of cost or market adjustments on mortgage loans
held-for-sale due to less liquidity in the secondary markets.
Also, contributing to the unfavorable variance in non-
interest income for this reportable segment were lower gains
on the sale of real estate properties by $10.4 million. These
unfavorable variances were partially offset by higher service
charges on deposits by $5.3 million;
• Higher operating expenses by $238.7 million, or 53%,
mainly due to the $211.8 million impairment losses related
to E-LOAN’s goodwill and trademark. Also included in the
increase for 2007 are the $9.6 million of restructuring
charges and $10.5 million in impairment losses on long-
lived assets as a result of the E-LOAN restructuring plan.
Other increases in personnel costs, net occupancy and
equipment expenses were partially offset by lower business
promotion expenses; and
• Income tax benefit of $29.5 million in 2007, compared to
income tax expense of $37.3 million in 2006. The variance
is mainly attributed to higher losses in the operations of E-
LOAN, as well as lower taxable income at BPNA.
P o p u l a r F i n a n c i a l H o l d i n g s
P o p u l a r F i n a n c i a l H o l d i n g s
P o p u l a r F i n a n c i a l H o l d i n g s
P o p u l a r F i n a n c i a l H o l d i n g s
P o p u l a r F i n a n c i a l H o l d i n g s
For the year ended December 31, 2007, net loss for the reportable
segment of Popular Financial Holdings totaled $269.4 million,
compared to a net loss of $61.7 million for 2006. Net income
amounted to $10.5 million for 2005. The main factors that
contributed to this variance in results for 2007 compared to 2006
included:
• Lower net interest income by $32.9 million, or 19%, mostly
the result of margin compression, including the impact of
higher cost of funds, and a reduction in earning assets due
to the downsizing of the operation that took effect in 2007;
• Higher provision for loan losses by $121.2 million, or
121%, primarily due to higher net charge-offs in the
mortgage loan portfolio due to the continued credit problems
in the U.S. mainland subprime mortgage market. The
provision for loan losses represented 129% of net charge-
offs for 2007, compared with 131% of net charge-offs in
2006. The net charge-offs to average loans held-in-portfolio
for the Popular Financial Holdings operations was 2.36%
for the year ended December 31, 2007, compared with 0.99%
for the year ended December 31, 2006. The ratio of allowance
32
for loan losses to loans held-in-portfolio for the Popular
Financial Holdings reportable segment was 2.41% at
December 31, 2007, compared with 1.46% at December
31, 2006;
• Non-interest losses of $179.4 million in 2007, compared
to non-interest income of $39.0 million in 2006. The
variance was mainly due to the $90.1 million unfavorable
impact of PFH’s loan recharacterization transaction, lower
gains on the sale of loans resulting because of lower volume
of loans originated and sold as a result of the exiting of the
wholesale subprime mortgage business during 2007, and
lower price margins. Also, the reduction in non-interest
income includes the impact of the unfavorable valuation
adjustments of PFH’s residual interests of $85.1 million in
2007, compared with $18.7 million in 2006;
• Lower operating expenses by $47.0 million, or 23%, mainly
due to the impact of the downsizing of PFH’s operations
during 2007 and the fact that the year 2006 included $14.2
million in goodwill impairment losses and $7.2 million in
impairment losses on long-lived assets. This was in part
offset by $16.6 million in restructuring charges and
impairment losses on long-lived assets taken in 2007 as
part of the PFH Restructuring Plan and PFH Branch Network
Restructuring Plan described in the Operating Expenses
section of this MD&A; and
• Income tax benefit of $150.5 million in 2007, compared to
$32.8 million in 2006, mostly due to higher operating
losses.
ONDITION A A A A A NALYSIS
TATEMENT O FO FO FO FO F C C C C C ONDITION
SSSSS TATEMENT
NALYSIS
NALYSIS
ONDITION
ONDITION
TATEMENT
TATEMENT
NALYSIS
NALYSIS
ONDITION
TATEMENT
A s s e t s
A s s e t s
A s s e t s
A s s e t s
A s s e t s
Refer to the consolidated financial statements included in this
Annual Report for the Corporation’s consolidated statements of
condition as of December 31, 2007 and 2006. Also, refer to the
Statistical Summary 2003-2007 in this MD&A for condensed
statements of condition for the past five years. Earning assets at
calendar year-end 2007 totaled $40.9 billion, a decrease of 6%,
when compared to $43.7 billion at December 31, 2006. This
decline was principally due to the strategic decisions made with
respect to PFH’s reportable segment, which included exiting the
wholesale subprime mortgage origination business since early
2007 and a reduction in loans of approximately $3.2 billion that
resulted from the loan recharacterization transaction discussed
earlier, offset in part by growth in other loan portfolio categories.
The portfolio of investment securities, including trading and
other securities, totaled $10.0 billion at December 31, 2007,
compared with $10.6 billion at December 31, 2006, a decrease of
6%. Notes 6 and 7 to the consolidated financial statements provide
additional information of the Corporation’s available-for-sale and
held-to-maturity investment portfolios. Also, refer to the Market
Risk section of this MD&A, which includes a table with the
breakdown of the trading portfolio by major types of securities at
December 31, 2007. The decline in the Corporation’s investment
securities portfolio was mainly associated with the determination
of not replacing securities that were maturing, in part because
the interest spread was not favorable, and also as part of the
Corporation’s strategy to deleverage the balance sheet and reduce
lower yielding assets.
A breakdown of the Corporation’s loan portfolio, the principal
category of earning assets, is presented in Table G.
The main challenge during 2007 for the Corporation’s
commercial business sector was maintaining portfolio growth
while curtailing delinquency. Commercial loans increased by $1.1
billion, or 8%, from December 31, 2006 to the same date in 2007,
and included growth in commercial mortgage, participations,
franchise, SBA and construction loans, among others. Commercial
construction loans, which are included as part of commercial
loans in Table G, totaled $1.9 billion at December 31, 2007, an
increase of 37%, compared with $1.4 billion at December 31,
2006. The growth in the construction loan sector was focused on
experienced developers, small condos, and the social interest
market.
The decrease in the lease financing portfolio from December
31, 2006 to the end of 2007 was mostly reflected in the Puerto
Rico operations, whose leasing portfolio decreased by
approximately $74 million, or 8%, compared to December 31,
2006. As in the prior year, the Corporation’s lease financing
subsidiary in Puerto Rico (“the Island”) was impacted by strong
competition and slowdown in the Island’s economy. The Banco
Popular North America reportable segment also reflected a decline
in its lease financing portfolio, including the runoff of
underperforming lease financings.
Mortgage loans at December 31, 2007 decreased by $4.3 billion,
or 36%, from December 31, 2006. The PFH reportable segment’s
mortgage loan portfolio was reduced by $4.5 billion. This decline
at PFH was principally the result of the aforementioned strategies,
which included exiting the wholesale mortgage loan origination
channel and completing the loan recharacterization transaction.
The latter strategy of converting on-balance sheet securitizations
to sale transactions resulted in the removal of approximately $3.2
billion in mortgage loans from the Corporation’s books. Also,
PFH completed one new off-balance sheet securitization
transaction in 2007 involving approximately $461 million in
unpaid principal balance of mortgage loans. The reduction in
mortgage loans by PFH was partially offset by increases in the
Banco Popular de Puerto Rico reportable segment. Despite the
slowdown in the housing market, Popular Mortgage in Puerto
Rico increased its loan production due to successful sales efforts
and market share gained from past major competitors. Also, the
Banco Popular North America reportable segment was impacted
2007 Annual Report 33
2007
2007
Popular, Inc. 2007
2007
T a b l e G
T a b l e G
T a b l e G
T a b l e G
T a b l e G
Loans Ending Balances (including Loans Held-for-Sale)
(Dollars in thousands)
Commercial*
Lease financing
Mortgage**
Consumer
Total
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$ 1 5 , 6 2 7 , 1 6 3
$ 1 5 , 6 2 7 , 1 6 3
$ 1 5 , 6 2 7 , 1 6 3
$ 1 5 , 6 2 7 , 1 6 3
$ 1 5 , 6 2 7 , 1 6 3
1 , 1 6 4 , 4 3 9
1 , 1 6 4 , 4 3 9
1 , 1 6 4 , 4 3 9
1 , 1 6 4 , 4 3 9
1 , 1 6 4 , 4 3 9
7 , 4 3 4 , 8 0 0
7 , 4 3 4 , 8 0 0
7 , 4 3 4 , 8 0 0
7 , 4 3 4 , 8 0 0
7 , 4 3 4 , 8 0 0
5 , 6 8 4 , 6 0 0
5 , 6 8 4 , 6 0 0
5 , 6 8 4 , 6 0 0
5 , 6 8 4 , 6 0 0
5 , 6 8 4 , 6 0 0
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
$ 2 9 , 9 1 1 , 0 0 2
2006
$14,536,837
1,226,490
11,695,156
5,278,456
$32,736,939
2005
$12,757,886
1,308,091
12,872,452
4,771,778
$31,710,207
2004
$10,897,747
1,164,606
12,641,329
4,038,579
$28,742,261
2003
$8,571,165
1,053,821
9,708,536
3,268,670
$22,602,192
Five-Year
C.G.R.
13.96%
5.60
(0.09)
12.90
8.84%
As of December 31,
*Includes commercial construction.
**Includes residential construction.
by growth in non-conventional mortgages. Refer to the Overview
of Mortgage Loan Exposure section in the Credit Risk
Management and Loan Quality area of this MD&A for further
information on the Corporation’s mortgage loan exposure.
A breakdown of the Corporation’s consumer loan portfolio at
December 31, 2007 and 2006 follows:
(In thousands)
2007
2007
2007
2007
2007
2006
Change % Change
Personal
Credit cards
Auto
Other
Total
$ 3 , 2 7 6 , 6 7 5
$ 3 , 2 7 6 , 6 7 5
$ 3 , 2 7 6 , 6 7 5
$ 3 , 2 7 6 , 6 7 5
$ 3 , 2 7 6 , 6 7 5
1 , 1 2 8 , 1 3 7
1 , 1 2 8 , 1 3 7
1 , 1 2 8 , 1 3 7
1 , 1 2 8 , 1 3 7
1 , 1 2 8 , 1 3 7
1 , 0 4 0 , 7 4 3
1 , 0 4 0 , 7 4 3
1 , 0 4 0 , 7 4 3
1 , 0 4 0 , 7 4 3
1 , 0 4 0 , 7 4 3
2 3 9 , 0 4 5
2 3 9 , 0 4 5
2 3 9 , 0 4 5
2 3 9 , 0 4 5
2 3 9 , 0 4 5
$ 5 , 6 8 4 , 6 0 0
$ 5 , 6 8 4 , 6 0 0
$ 5 , 6 8 4 , 6 0 0
$ 5 , 6 8 4 , 6 0 0
$ 5 , 6 8 4 , 6 0 0
$2,457,619
1,032,546
1,570,308
217,983
$5,278,456
$819,056
95,591
(529,565)
21,062
$406,144
33%
9
(34)
10
8%
The increase in personal loans from December 31, 2006 to
December 31, 2007 was principally attributed to higher volume
of home equity lines of credit in the Banco Popular North America
operations, particularly from loan originations by E-LOAN. Also,
the increase in personal loans was associated to the Citibank
acquisition in Puerto Rico, which contributed with over $180
million in personal loans at acquisition date. Credit cards also
increased from December 31, 2006 to the same date in 2007,
principally in the Banco Popular de Puerto Rico reportable segment,
whose credit card portfolio grew 8% from the end of 2006, mostly
as a result of higher sales volume, new credit cards launched,
effective mailing campaigns that included convenience checks,
and volume generated for benefits derived from the loyalty rewards
program, among other factors. Banco Popular North America also
contributed with a newly originated credit card portfolio of
approximately $12 million, as a result of initiating the credit
cards issuance business during 2007. Auto loans decreased from
the end of 2006 to the same date in 2007 by $530 million, or 34%.
There was a decline in the auto loan portfolio of the Banco Popular
North America reportable segment by approximately $508 million.
BPNA’s auto loan portfolio continues to runoff because of
management’s decision to cease auto loan originations through
dealer channels. Furthermore, the Corporation completed a sale of
over $275 million in auto loans to a third-party buyer in December
2007, which had been originated by E-LOAN. Also contributing
to the reduction in the Corporation’s auto loan portfolio was the
economic slowdown in the Puerto Rico market, which reduced
automobile sales and decreased the size of the overall auto loan
market. The “other” category of consumer loans includes marine
loans and revolving lines of credit. The increase in this category
is principally due to reserve lines of credit by approximately $16
million from the Citibank portfolio acquired. Despite the growth
in the consumer lending business, this business in Puerto Rico
was negatively impacted by the economic downturn in the Island
which has led to a deterioration of credit quality, as evidenced by
the increase in consumer loan charge-offs, depicted later in the
Credit Risk Management and Loan Quality section of this MD&A.
Servicing assets increased $32 million, or 19%, from
December 31, 2006 to the same date in 2007. Refer to Note 22 to
the consolidated financial statements for further information on
the composition and accounting for servicing assets. The growth
in servicing rights was mainly due to purchased mortgage
servicing rights in the PFH operations, mortgage servicing
rights derived from the off-balance sheet securitization executed
by PFH in 2007 and the loan recharacterization transaction, and
from sales and securitizations of originated loans by the Puerto
Rico operations. Also, the increase was due in part to the adoption
of SFAS No. 156 during 2007, pursuant to which the Corporation
elected to account for residential mortgage servicing rights at
fair value. These favorable impacts were offset in part by reductions
in the servicing rights value, as a result of maturity run-off of the
serviced portfolio.
34
The following table provides a breakdown of the principal
categories that comprise the caption of “Other assets” in the
consolidated statements of condition as of December 31, 2007
and 2006.
of a total of $63.8 million prior to the impairment charge. Refer to
Note 12 to the consolidated financial statements for further
information on goodwill and the composition of other intangible
assets by reportable business segments.
(In thousands)
Net deferred tax assets
Bank-owned life insurance
program
Prepaid expenses
Securitization advances and
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$525,369
$525,369
$525,369
$525,369
$525,369
2006
Change
$359,433 $165,936
2 1 5 , 1 7 1
2 1 5 , 1 7 1
2 1 5 , 1 7 1
2 1 5 , 1 7 1
2 1 5 , 1 7 1
1 8 8 , 2 3 7
1 8 8 , 2 3 7
1 8 8 , 2 3 7
1 8 8 , 2 3 7
1 8 8 , 2 3 7
206,331
168,717
8,840
19,520
related assets
1 6 8 , 5 9 9
1 6 8 , 5 9 9
1 6 8 , 5 9 9
1 6 8 , 5 9 9
1 6 8 , 5 9 9
181,387
(12,788)
Investments under the equity
method
Derivative assets
Others
Total
8 9 , 8 7 0
8 9 , 8 7 0
8 9 , 8 7 0
8 9 , 8 7 0
8 9 , 8 7 0
7 6 , 9 5 8
7 6 , 9 5 8
7 6 , 9 5 8
7 6 , 9 5 8
7 6 , 9 5 8
1 9 2 , 7 9 0
1 9 2 , 7 9 0
1 9 2 , 7 9 0
1 9 2 , 7 9 0
1 9 2 , 7 9 0
$ 1 , 4 5 6 , 9 9 4
$ 1 , 4 5 6 , 9 9 4
$ 1 , 4 5 6 , 9 9 4
$ 1 , 4 5 6 , 9 9 4
$ 1 , 4 5 6 , 9 9 4
66,794
23,076
21,545
55,413
408,816 (216,026)
$10,103
$1,446,891
Explanations for the most significant variances in other assets
follow:
• The decrease in “others” was mainly due to trade receivables
of $232 million outstanding at December 31, 2006 for
mortgage-backed securities sold prior to year-end, with
settlement date in January 2007.
• The increase in net deferred tax assets was mostly associated
with PFH due to the impact of the loss on the loan
recharacterization transaction and on the valuation of PFH’s
residual interests since these losses were recognized for
tax purposes in a different period causing a timing
difference. Also, the increase is due to the net operating
loss carryforwards in certain tax jurisdictions and to the
reversal of a deferred tax liability due to the impairment of
E-LOAN’s trademark. Transactions that were treated as
on-balance sheet securitizations for accounting purposes
were treated as sales for tax purposes since inception. Refer
to Note 27 to the consolidated financial statements for the
composition of deferred tax assets as of December 31, 2007,
compared to the results at December 31, 2006.
Goodwill and other intangible assets at December 31, 2007
reflected a decline of $75 million, or 10%, when compared to
December 31, 2006. This reduction was principally the result of
the aforementioned write-down in E-LOAN’s goodwill and
trademark for $211.8 million, partially offset by recorded goodwill
and core deposit intangibles of $126 million and $21 million,
respectively, that are related to the Citibank retail business
acquisition and Smith Barney's retail brokerage operations by the
Banco Popular de Puerto Rico reportable segment in late 2007.
After recording the estimated impairment charge, the full amount
of E-LOAN’s goodwill of $164.4 million was eliminated while the
balance in trademark remains at approximately $16.4 million, out
Deposits, Borrowings and Other Liabilities
Deposits, Borrowings and Other Liabilities
Deposits, Borrowings and Other Liabilities
Deposits, Borrowings and Other Liabilities
Deposits, Borrowings and Other Liabilities
The composition of the Corporation’s financing to total assets at
December 31, 2007 and 2006 was as follows:
(Dollars in millions)
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
% increase (decrease) % of total assets
2006
from 2006 to 2007
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$ 4 , 5 1 1
$ 4 , 5 1 1
$ 4 , 5 1 1
$ 4 , 5 1 1
$ 4 , 5 1 1
1 5 , 5 5 3
1 5 , 5 5 3
1 5 , 5 5 3
1 5 , 5 5 3
1 5 , 5 5 3
Non-interest bearing
deposits
Interest-bearing core
deposits
Other interest-bearing
deposits
Federal funds and
repurchase agreements 5 , 4 3 7
5 , 4 3 7
5 , 4 3 7
5 , 4 3 7
5 , 4 3 7
Other short-term
borrowings
Notes payable
Others
Stockholders’ equity
8 , 2 7 1
8 , 2 7 1
8 , 2 7 1
8 , 2 7 1
8 , 2 7 1
1 , 5 0 2
1 , 5 0 2
1 , 5 0 2
1 , 5 0 2
1 , 5 0 2
3 , 5 8 2
3 , 5 8 2
3 , 5 8 2
3 , 5 8 2
3 , 5 8 2
4 , 6 2 1
4 , 6 2 1
4 , 6 2 1
4 , 6 2 1
4 , 6 2 1
9 3 49 3 49 3 49 3 49 3 4
$4,222
14,923
5,293
5,762
4,034
8,737
813
3,620
6.8%
1 0 . 2 %
1 0 . 2 %
1 0 . 2 %
1 0 . 2 %
1 0 . 2 %
8.9%
4.2
56.3
(5.6)
(62.8)
(47.1)
14.9
(1.1)
3 5 . 0
3 5 . 0
3 5 . 0
3 5 . 0
3 5 . 0
31.5
1 8 . 6
1 8 . 6
1 8 . 6
1 8 . 6
1 8 . 6
11.2
1 2 . 2
1 2 . 2
1 2 . 2
1 2 . 2
1 2 . 2
12.2
3 . 43 . 43 . 43 . 43 . 4
1 0 . 4
1 0 . 4
1 0 . 4
1 0 . 4
1 0 . 4
2 . 12 . 12 . 12 . 12 . 1
8 . 18 . 18 . 18 . 18 . 1
8.5
18.4
1.7
7.6
The Corporation’s deposits by categories for 2007 and
previous years are presented in Table H. Total deposits increased
$3.9 billion, or 16%, from the end of 2006 to December 31, 2007.
The acquisition of the Citibank retail branches in Puerto Rico in
the fourth quarter of 2007 contributed with approximately $1
billion in deposits, principally in time deposits and savings
accounts.
Time deposits totaled $13.4 billion at December 31, 2007.
When compared to December 31, 2006, this category increased
by $3.1 billion, or 30%. Brokered certificates of deposit reflected
a significant increase of $2.3 billion. The increase in brokered
certificates of deposit is directly related to the Corporation’s
decision to substitute short-term borrowings with deposits as a
result of continued instability in the global financial and capital
markets during the second half of 2007. Refer to the Liquidity
Risk section later in this MD&A for further information on the
Corporation’s banking subsidiaries and holding companies
liquidity position. Also, the increase in time deposits from
December 31, 2006 to December 31, 2007 was due to time deposits
from the Citibank retail branch acquisition, competitive interest
rate campaigns by BPPR focused on certificates of deposit to
individuals, growth in IRA deposits and increased volume of time
deposits gathered through the E-LOAN Internet platform, among
other factors. At December 31, 2007, $791 million in time deposits
were gathered through the E-LOAN on-line platform, an increase
of $365 million, or 86%, when compared to December 31, 2006.
2007 Annual Report 35
2007
2007
Popular, Inc. 2007
2007
Table H
Table H
Table H
Table H
Table H
Deposits Ending Balances
As of December 31,
(Dollars in thousands)
Demand deposits*
Savings, NOW and
money market deposits
Time deposits
Total
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$ 5 , 1 1 5 , 8 7 5
$ 5 , 1 1 5 , 8 7 5
$ 5 , 1 1 5 , 8 7 5
$ 5 , 1 1 5 , 8 7 5
$ 5 , 1 1 5 , 8 7 5
2006
$4,910,848
2005
$4,415,972
2004
$4,173,268
2003
$3,726,707
9 , 8 0 4 , 6 0 5
9 , 8 0 4 , 6 0 5
9 , 8 0 4 , 6 0 5
9 , 8 0 4 , 6 0 5
9 , 8 0 4 , 6 0 5
1 3 , 4 1 3 , 9 9 8
1 3 , 4 1 3 , 9 9 8
1 3 , 4 1 3 , 9 9 8
1 3 , 4 1 3 , 9 9 8
1 3 , 4 1 3 , 9 9 8
$ 2 8 , 3 3 4 , 4 7 8
$ 2 8 , 3 3 4 , 4 7 8
$ 2 8 , 3 3 4 , 4 7 8
$ 2 8 , 3 3 4 , 4 7 8
$ 2 8 , 3 3 4 , 4 7 8
9,200,732
10,326,751
$24,438,331
8,800,047
9,421,986
$22,638,005
8,865,831
7,554,061
$20,593,160
7,839,291
6,531,830
$18,097,828
*Includes interest and non-interest bearing demand deposits.
Five-Year
C.G.R.
8.72%
5.19
15.12
9.97%
Savings, NOW and money market deposits increased 7%,
when compared to December 31, 2006. This growth was mainly
derived from the acquisition of the Citibank branches in Puerto
Rico.
Borrowed funds totaled $11.6 billion at December 31, 2007, a
decrease of $7 billion, or 38%, compared to December 31, 2006.
This decline was principally due to the loan recharacterization
transaction discussed earlier, which reduced the balance of
securitized debt in the form of bond certificates to investors by
approximately $3.1 billion. Also, the Corporation placed greater
reliance on deposits. Several strategies were put in place by the
Corporation’s banking subsidiaries to mitigate the impact of
current market conditions on liquidity risk. Among the strategies
implemented was the utilization of unpledged liquid assets to
raise financing in the repo markets, the proceeds of which were
also used to pay off unsecured borrowings. Furthermore, the
reduction in borrowed funds was also impacted by the strategy to
deleverage the balance sheet and not reinvest proceeds obtained
from maturing securities. Refer to Notes 14 through 18 to the
consolidated financial statements for additional information on
the Corporation’s borrowings at December 31, 2007 and 2006.
Also, refer to the Liquidity Risk section of this MD&A for
additional information on the Corporation’s funding sources at
December 31, 2007.
S t o c k h o l d e r s ’ E q u i t y
S t o c k h o l d e r s ’ E q u i t y
S t o c k h o l d e r s ’ E q u i t y
S t o c k h o l d e r s ’ E q u i t y
S t o c k h o l d e r s ’ E q u i t y
Total stockholders’ equity at December 31, 2007 and December
31, 2006 was $3.6 billion. The reduction in stockholders’ equity
due to the net loss for the year 2007 and to the dividend payouts
was partially offset by the net impact of unrealized gains in the
valuation of available-for-sale securities at year-end 2007 of $21
million, compared to unrealized losses of $155 million in year-
end 2006. Refer to the consolidated statements of condition and of
stockholders’ equity included in the accompanying consolidated
financial statements for further information on its composition.
Also, the disclosures of accumulated other comprehensive income
(loss), an integral component of stockholders’ equity, are included
in the consolidated statements of comprehensive income.
The Corporation offers a dividend reinvestment and stock
purchase plan for its stockholders that allows them to reinvest
their quarterly dividends in shares of common stock at a 5%
discount from the average market price at the time of the issuance,
as well as purchase shares of common stock directly from the
Corporation by making optional cash payments at prevailing
market prices. During 2007, $20.2 million in additional capital
was issued under the plan, compared to $16.5 million in 2006.
The Corporation continues to exceed the well-capitalized
guidelines under the federal banking regulations. At December
31, 2007 and 2006, BPPR, BPNA and Banco Popular, National
Association (“BP, N.A.”) were all well-capitalized. Table I presents
the Corporation’s capital adequacy information for the years 2003
to 2007. Note 21 to the consolidated financial statements presents
further information on the Corporation’s regulatory capital
requirements.
Included within surplus in stockholders’ equity at December
31, 2007 was $374 million corresponding to a statutory reserve
fund applicable exclusively to Puerto Rico banking institutions.
This statutory reserve fund totaled $346 million at December 31,
2006. The Banking Act of the Commonwealth of Puerto Rico
requires that a minimum of 10% of BPPR’s net income for the year
be transferred to a statutory reserve account until such statutory
reserve equals the total of paid-in capital on common and preferred
stock. During 2007, $28 million were transferred to the statutory
reserve. Any losses incurred by a bank must first be charged to
retained earnings and then to the reserve fund. Amounts credited
to the reserve fund may not be used to pay dividends without the
prior consent of the Puerto Rico’s Commissioner of Financial
Institutions. The failure to maintain sufficient statutory reserves
would preclude BPPR from paying dividends. At December 31,
2007 and 2006, BPPR was in compliance with the statutory reserve
requirement. The more relevant capital requirements applicable
to the Corporation are the federal banking agencies capital
requirements included in Table I.
36
T a b l e I
T a b l e I
T a b l e I
T a b l e I
T a b l e I
Capital Adequacy Data
(Dollars in thousands)
Risk-based capital:
Tier I capital
Supplementary (Tier II) capital
Total capital
Risk-weighted assets:
Balance sheet items
Off-balance sheet items
Total risk-weighted assets
Ratios:
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
2004
2003
As of December 31,
$ 3 , 3 6 1 , 1 3 2
$ 3 , 3 6 1 , 1 3 2
$ 3 , 3 6 1 , 1 3 2
$ 3 , 3 6 1 , 1 3 2
$ 3 , 3 6 1 , 1 3 2
4 1 7 , 1 3 2
4 1 7 , 1 3 2
4 1 7 , 1 3 2
4 1 7 , 1 3 2
4 1 7 , 1 3 2
$ 3 , 7 7 8 , 2 6 4
$ 3 , 7 7 8 , 2 6 4
$ 3 , 7 7 8 , 2 6 4
$ 3 , 7 7 8 , 2 6 4
$ 3 , 7 7 8 , 2 6 4
$3,727,860
441,591
$4,169,451
$3,540,270
403,355
$3,943,625
$3,316,009
389,638
$3,705,647
$2,834,599
341,840
$3,176,439
$ 3 0 , 2 9 4 , 4 1 8
$ 3 0 , 2 9 4 , 4 1 8
$ 3 0 , 2 9 4 , 4 1 8
$ 3 0 , 2 9 4 , 4 1 8
$ 3 0 , 2 9 4 , 4 1 8
2 , 9 1 5 , 3 4 5
2 , 9 1 5 , 3 4 5
2 , 9 1 5 , 3 4 5
2 , 9 1 5 , 3 4 5
2 , 9 1 5 , 3 4 5
$ 3 3 , 2 0 9 , 7 6 3
$ 3 3 , 2 0 9 , 7 6 3
$ 3 3 , 2 0 9 , 7 6 3
$ 3 3 , 2 0 9 , 7 6 3
$ 3 3 , 2 0 9 , 7 6 3
$32,519,457
2,623,264
$35,142,721
$29,557,342
2,141,922
$31,699,264
$26,561,212
1,495,948
$28,057,160
$21,384,288
1,411,402
$22,795,690
Tier I capital (minimum required - 4.00%)
Total capital (minimum required - 8.00%)
Leverage ratio*
Equity to assets
Tangible equity to assets
Equity to loans
Internal capital generation rate
1 0 . 1 2 %
1 0 . 1 2 %
1 0 . 1 2 %
1 0 . 1 2 %
1 0 . 1 2 %
1 1 . 3 8
1 1 . 3 8
1 1 . 3 8
1 1 . 3 8
1 1 . 3 8
7 . 3 3
7 . 3 3
7 . 3 3
7 . 3 3
7 . 3 3
8 . 2 0
8 . 2 0
8 . 2 0
8 . 2 0
8 . 2 0
6 . 6 4
6 . 6 4
6 . 6 4
6 . 6 4
6 . 6 4
1 1 . 7 9
1 1 . 7 9
1 1 . 7 9
1 1 . 7 9
1 1 . 7 9
( 6 . 6 1 )
( 6 . 6 1 )
( 6 . 6 1 )
( 6 . 6 1 )
( 6 . 6 1 )
10.61%
11.86
8.05
7.75
6.25
11.66
4.48
11.17%
12.44
7.47
7.06
5.86
11.01
10.93
11.82%
13.21
7.78
7.28
6.59
11.55
10.82
12.43%
13.93
8.00
7.34
6.76
12.28
12.84
* All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank's classification.
The average tangible equity amounted to $3.1 billion and
$3.0 billion for the years ended December 31, 2007 and 2006,
respectively. Total tangible equity was $2.9 billion at December
31, 2007 and $2.8 billion at the end of 2006. The average tangible
equity to average tangible assets ratio for 2007 was 6.64%,
compared with 6.25% in 2006.
I N A N C I N G E E E E E N T I T I E S
A L A N C E S S S S S H E E TH E E TH E E TH E E TH E E T F F F F F I N A N C I N G
OOOOO F FF FF FF FF F-B-B-B-B-B A L A N C E
N T I T I E S
N T I T I E S
I N A N C I N G
I N A N C I N G
A L A N C E
A L A N C E
N T I T I E S
N T I T I E S
I N A N C I N G
A L A N C E
The Corporation, through certain subsidiaries of PFH, conducted
a program of asset securitizations that involved the transfer of
mortgage loans to a special purpose entity depositor, which in
turn transferred those mortgage loans to different securitization
trusts, thus isolating those loans from the Corporation’s assets.
The securitization trusts that constituted “qualified special
purpose entities” (“QSPEs”) under the provisions of SFAS No.
140 and are associated with securitizations that qualified for sale
accounting under SFAS No. 140 are not consolidated in the
Corporation’s financial statements. The investors in these off-
balance sheet securitizations have no recourse to the Corporation’s
assets or revenues. The Corporation’s creditors have no recourse
to any assets or revenues of the special purpose entity depositor,
or the securitization trust funds. As of December 31, 2007 and
2006, the Corporation had mortgage loans of approximately $5.4
billion and $2.3 billion, respectively, in securitization
transactions that qualified for off-balance sheet treatment. These
transactions had liabilities in the form of debt securities payable
to investors from the assets inside each securitization trust of
approximately $5.1 billion and $2.3 billion at the end of 2007 and
2006, respectively. The Corporation retained servicing
responsibilities and certain subordinated interests in these
securitizations in the form of residual interests. Their value is
subject to credit, prepayment and interest rate risks on the
transferred financial assets. The servicing rights and residual
interests retained by the Corporation are recorded in the statement
of condition as of December 31, 2007 at fair value. Refer to the
Significant U.S. Strategic Events and Critical Accounting Policies
/ Estimates sections in this MD&A for further information.
RRRRR I S KI S KI S KI S KI S K M M M M M A N A G E M E N T
A N A G E M E N T
A N A G E M E N T
A N A G E M E N T
A N A G E M E N T
Risk identification and monitoring are key elements in overall
risk management. The Corporation’s primary risk exposures are
market, liquidity, credit and operational risks, all of which are
discussed in the following sections.
Market Risk
Market Risk
Market Risk
Market Risk
Market Risk
Market risk is the risk of loss arising from adverse changes in the
fair value of financial instruments or other assets due to changes
in interest rates, currency exchange rates or equity prices. The
financial results and capital levels of Popular, Inc. are constantly
exposed to market risk. It is a primary responsibility of the
Corporation’s Board of Directors (“the Board”) and management
to ensure that the level of market risk assumed throughout all of
the subsidiaries of Popular as well as on a consolidated basis, is
within policy guidelines approved by the Board. The Board
delegates the monitoring of this risk to the Board’s Risk
Management Committee, and its management to the Market Risk
2007 Annual Report 37
2007
2007
Popular, Inc. 2007
2007
Committee (“the Committee”) of Popular, Inc., which is composed
of certain executive officers, and senior officers from the business,
treasury and finance areas. The Committee’s primary goal is to
ensure that the market risk assumed by the Corporation remains
within the parameters of the Board’s policies.
Interest Rate Risk
Interest Rate Risk
Interest Rate Risk
Interest Rate Risk
Interest Rate Risk
Interest rate risk represents the exposure of the Corporation’s
profitability or market value to changes in interest rates.
Management considers interest rate risk (IRR) a predominant
market risk in terms of its potential impact on earnings.
The Corporation is subject to various categories of interest
rate risk, including:
• Repricing or Term Structure Risk – this risk arises due to
mismatches in the timing of rate changes and cash flows
from the Corporation’s assets and liabilities. For example,
if assets reprice or mature at a faster pace than liabilities
and interest rates are generally declining, earnings could
initially decline.
• Basis Risk – this risk involves changes in the spread
relationship of the different rates that impact the
Corporation’s balance sheet. This type of risk is present
when assets and liabilities have similar repricing frequencies
but are tied to different market interest rate indexes.
• Yield Curve Risk - short-term and long-term market interest
rates may change by different amounts; for example, the
shape of the yield curve may affect new loan yields and
funding costs differently.
• Options Risk – changes in interest rates may shorten or
lengthen the maturities of assets and liabilities. For example,
prepayments, which tend to increase when market rates
decline, may accelerate maturities for mortgage related
products. In addition, call options in the Corporation’s
investment portfolios may be exercised in a declining rate.
Conversely, the opposite would occur in a rising interest
rate scenario.
In addition to the risks detailed above, interest rates may have
an indirect impact on loan demand, credit losses, loan origination
volume, the value of the Corporation’s investment securities
holdings, including residual interests, gains and losses on sales
of securities and loans, the value of mortgage servicing rights,
and other sources of earnings.
In limiting interest rate risk to an acceptable level, management
may alter the mix of floating and fixed rate assets and liabilities,
change pricing schedules, adjust maturities through sales and
purchases of investment securities, and enter into derivative
contracts, among other alternatives.
The Corporation maintains a formal asset and liability
management process to quantify, monitor and control interest
rate risk and to assist management in maintaining stability in the
net interest income under varying interest rate environments.
The Committee implements the market risk policies approved
by the Board as well as the risk management strategies reviewed
and adopted in Committee meetings. The Committee measures
and monitors the level of short and long-term IRR assumed by the
Corporation and its subsidiaries. It uses simulation analysis and
static gap estimates for measuring short-term IRR. Duration
analysis is used to quantify the level of long-term IRR assumed,
and focuses on the estimated economic value of the Corporation,
that is, the difference between the estimated market value of
financial assets less the estimated value of financial liabilities.
Due to the importance of critical assumptions in measuring market
risk, the risk models incorporate third-party developed data for
critical assumptions such as prepayment speeds on mortgage-
related products, estimates on the duration of the Corporation’s
deposits and interest rate scenarios.
Static gap analysis measures the volume of assets and liabilities
maturing or repricing at a future point in time. The repricing
volumes typically include adjustments for anticipated future asset
prepayments and for differences in sensitivity to market rates.
The volume of assets and liabilities repricing during future
periods, particularly within one year, is used as one short-term
indicator of IRR. Table K presents the static gap estimate for the
Corporation as of December 31, 2007. These static measurements
do not reflect the results of any projected activity and are best
used as early indicators of potential interest rate exposures. They
do not incorporate possible action that could be taken to manage
the Corporation’s IRR.
The interest rate sensitivity gap is defined as the difference
between earning assets and interest bearing liabilities maturing
or repricing within a given time period. At December 31, 2007,
the Corporation’s one-year cumulative positive gap was $3.3
billion or 8.12% of total earning assets.
Net interest income simulation analysis performed by legal
entity and on a consolidated basis is another tool used by the
Corporation in estimating the potential change in future earnings
resulting from hypothetical changes in interest rates. Sensitivity
analysis is calculated on a monthly basis using a simulation model,
which incorporates actual balance sheet figures detailed by
maturity and interest yields or costs, the expected balance sheet
dynamics, reinvestments, and other non-interest related data.
Simulations are processed using various interest rate scenarios
to estimate how sensitive future net interest income is to changes
in interest rates. The asset and liability management group also
performs validation procedures on various assumptions used as
part of the sensitivity analysis.
Simulation analyses are based on many assumptions, including
relative levels of market interest rates, interest rate spreads, loan
prepayments and deposit decay. Thus, they should not be relied
38
T a b l e J
T a b l e J
T a b l e J
T a b l e J
T a b l e J
Common Stock Performance
Market Price
High
Low
Cash
Dividends
Declared
Per Share
Book
Value
Per
Share
Dividend
Payout
Ratio
Dividend
Yield *
Price/
Earnings
Ratio
Market/
Book
Ratio
( 2 3 3 . 8 9 % )
( 2 3 3 . 8 9 % )
$ 1 2 . 1 2
$ 1 2 . 1 2
( 2 3 3 . 8 9 % )
$ 1 2 . 1 2 ( 2 3 3 . 8 9 % )
( 2 3 3 . 8 9 % )
$ 1 2 . 1 2
$ 1 2 . 1 2
( 3 9 . 2 6 x )
( 3 9 . 2 6 x )
4 . 3 8 %
4 . 3 8 %
( 3 9 . 2 6 x )
4 . 3 8 % ( 3 9 . 2 6 x )
( 3 9 . 2 6 x )
4 . 3 8 %
4 . 3 8 %
8 7 . 4 6 %
8 7 . 4 6 %
8 7 . 4 6 %
8 7 . 4 6 %
8 7 . 4 6 %
$12$12$12$12$121/2
16161616161/6
17171717171/2
1 91 91 91 91 9
$192/3
201/8
22
211/5
$24
271/2
252/3
28
$287/8
261/3
22
24
$237/9
203/5
202/5
171/2
$8$8$8$8$82/3
11111111113/8
15151515155/6
15151515155/6
$ 0 . 1 6
$ 0 . 1 6
$ 0 . 1 6
$ 0 . 1 6
$ 0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
0 . 1 6
$172/9
172/5
181/2
191/2
$201/9
242/9
23
234/5
$241/2
211/2
20
211/2
$198/9
181/3
17
16
$0.16
0.16
0.16
0.16
$0.16
0.16
0.16
0.16
$0.16
0.16
0.16
0.14
$0.14
0.13
0.14
0.10
12.32
51.02
3.26
14.48
145.70
11.82
32.31
2.60
10.68
178.93
10.95
32.85
2.50
16.11
263.29
9.66
27.05
2.45
12.93
232.14
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
4th4th4th4th4th quarter
quarter
quarter
quarter
quarter
3rd3rd3rd3rd3rd quarter
quarter
quarter
quarter
quarter
2 n d2 n d2 n d2 n d2 n d quarter
quarter
quarter
quarter
quarter
1st1st1st1st1st quarter
quarter
quarter
quarter
quarter
2006
4th quarter
3rd quarter
2nd quarter
1st quarter
2005
4th quarter
3rd quarter
2nd quarter
1st quarter
2004
4th quarter
3rd quarter
2nd quarter
1st quarter
2003
4th quarter
3rd quarter
2nd quarter
1st quarter
* Based on the average high and low market price for the four quarters.
Note: All per share data has been adjusted to reflect the two-for-one stock split effected in the form of a dividend on July 8, 2004.
upon as indicative of actual results. Further, the estimates do not
contemplate actions that management could take to respond to
changes in interest rates. By their nature, these forward-looking
computations are only estimates and may be different from what
may actually occur in the future.
Based on the results of the simulation analyses as of December
31, 2007, the Corporation’s net interest income for the next
twelve months is estimated to increase by $50.4 million in a
hypothetical 200 basis points parallel rising rate scenario, and
the change for the same period, utilizing a similar size declining
rate scenario, is an estimated decrease of $44.3 million. Both
hypothetical rate scenarios consider the gradual change to be
achieved during a twelve-month period from the prevailing rates
at December 31, 2007.
The Corporation’s loan and investment portfolios are subject
to prepayment risk, which results from the ability of a third party
to repay debt obligations prior to maturity. At December 31,
2007 and 2006, net discount associated with loans acquired
represented less than 1% of the total loan portfolio, while net
premiums associated with portfolios of AFS and HTM securities
approximated 2% of these investment securities portfolios.
Prepayment risk also could have a significant impact on the
duration of mortgage-backed securities and collateralized
mortgage obligations, since prepayments could shorten the
2007 Annual Report 39
2007
2007
Popular, Inc. 2007
2007
Table K
Table K
Table K
Table K
Table K
Interest Rate Sensitivity
(Dollars in thousands)
Assets:
Money market investments
Investment and trading securities
Loans
Other assets
Total
Liabilities and stockholders’ equity:
Savings, NOW, money market and other
interest bearing demand accounts
Other time deposits
Federal funds purchased and assets
sold under agreements to repurchase
Other short-term borrowings
Notes payable
Non-interest bearing deposits
Other non-interest bearing liabilities
and minority interest
Stockholders’ equity
Total
Interest rate swaps
Interest rate sensitive gap
Cumulative interest rate
sensitive gap
Cumulative interest rate sensitive
gap to earning assets
As of December 31, 2007
By Repricing Dates
After
three months
but within
six months
After
six months
but within
nine months
After
nine months
but within
one year
After one
year
Non-interest
bearing
funds
$399
204,831
1,447,674
$394
499,261
1,495,593
$998,672
1,017,525
$100
5,575,921
12,776,804
0-30
days
$871,747
1,837,550
10,700,337
Within
31-90
days
$134,072
867,905
2,473,069
13,409,634
3,475,046
1,652,904
1,995,248
2,016,197
18,352,825
2,054,835
2,069,485
2,704,165
1,201,067
736,410
13,595
3,109,235
1,306,568
120,100
85,827
2,450,131
1,231,682
1,027,080
8,341,261
3,526,385
1,426,532
180,812
549,453
43,060
605,763
2,600,839
$3,509,583
3,509,583
4,510,789
Total
$1,006,712
9,984,140
29,911,002
3,509,583
44,411,437
10,409,691
13,413,998
5,437,265
1,501,979
4,621,352
4,510,789
$8,765,962
385,315
5,028,987
$4,635,325
$3,180,396
$1,274,742
$1,632,843
$15,895,017
189,925
(970,354)
(105,641)
(1,633,133)
(4,728)
715,778
(204,401)
178,953
(260,470)
2,197,338
5,028,987
4,058,633
2,425,500
3,141,278
3,320,231
5,517,569
12.30%
9.92%
5.93%
7.68%
8.12%
13.49%
934,481
3,581,882
$9,027,152
934,481
3,581,882
$44,411,437
weighted average life of these portfolios. Table L, which presents
the maturity distribution of earning assets, takes into
consideration prepayment assumptions, as determined by
management, based on the expected interest rate scenario.
Duration analysis measures longer-term IRR, in particular the
duration of the market value of equity. It expresses in general
terms the sensitivity of the market value of equity to changes in
interest rates. The estimated market value of equity is obtained
from the market value of the cash flows from the Corporation’s
financial assets and liabilities, which are primarily payments of
interest and repayments of principal. Thus, the market value of
equity incorporates all expected future cash flows from net interest
income as well as principal repayments, whereas other measures
of IRR focus primarily on short-term net interest income.
The duration of the market value of portfolio equity (“MVPE”)
is a measure of its riskiness. The MVPE is equal to the estimated
market value of the Corporation’s assets minus the estimated
market value of the liabilities. The duration of MVPE is equal to
the product of the market value of assets times its duration, minus
the product of the market value of liabilities times its duration,
divided by the market value of equity. In general, the longer the
duration of MVPE, the more sensitive is its market value to
changes in interest rates.
Duration measures the expected length of a financial asset or
liability. In particular, it equals the weighted average maturity of
the present value of all the cash flows of a financial asset or liability
where the weights are equal to the present value of each cash flow.
The present value of cash flows occurring in the future is the
estimated market value as of a certain date. The sensitivity of the
market value of a financial asset or liability to changes in interest
rates is primarily a function of its duration. In general terms, the
longer the duration of an asset or liability, the greater is the
sensitivity of its market value to interest rate changes. Since
duration measures the term of a financial asset or liability, it is
usually expressed in terms of years or months.
40
Duration of equity is evaluated by management on a monthly
basis. The duration of equity at December 31, 2007 was in
compliance with the Corporation’s established MVPE policy limits
in a most likely interest rate scenario.
T r a d i n g
T r a d i n g
T r a d i n g
T r a d i n g
T r a d i n g
The Corporation’s trading activities are another source of market
risk and are subject to policies and risk guidelines approved by
the Board of Directors to manage such risks. Most of the
Corporation’s trading activities are limited to mortgage banking
activities and the market-making activities of the Corporation’s
broker-dealer business. In anticipation of customer demand, the
Corporation carries an inventory of capital market instruments
and maintains market liquidity by quoting bid and offer prices to
and trading with other market makers and clients. Positions are
also taken in interest rate sensitive instruments, based on
expectations of future market conditions. These activities
constitute the proprietary trading business and are conducted by
the Corporation to provide customers with securities inventory
and liquidity. Also, as indicated in the Critical Accounting
Policies / Estimates in this MD&A, the Corporation had $40
million in residual interests derived from PFH’s off-balance sheet
securitization transactions classified as trading securities.
Trading instruments are recognized at market value, with
changes resulting from fluctuations in market prices, interest
rates or exchange rates reported in current period income. Further
information on the Corporation’s risk management and trading
activities is included in Note 30 to the consolidated financial
statements.
In the opinion of management, the size and composition of the
trading portfolio does not represent a potentially significant source
of market risk for the Corporation.
At December 31, 2007, the trading portfolio of the Corporation
amounted to $768 million and represented 2% of total assets,
compared with $382 million and 1% a year earlier. Mortgage-
backed securities represented 90% of the trading portfolio at the
end of 2007, compared with 55% in 2006. The mortgage-backed
securities are investment grade securities, all of which are rated
AAA by at least one of the three major rating agencies at December
31, 2007. A significant portion of the trading portfolio is hedged
against market risk by positions that offset the risk assumed.
This portfolio was composed of the following at December 31,
2007:
(Dollars in thousands)
Amount
Average Yield*
Weighted
Mortgage-backed securities
Commercial paper
U.S. Treasury and agencies
Puerto Rico and U.S. Government obligations
Interest-only strips
Other
*Not on a taxable equivalent basis.
$687,754
6,331
273
14,097
42,312
17,188
$767,955
6.32%
5.69
3.13
5.63
14.92
4.47
6.73%
At December 31, 2007, the trading portfolio of the Corporation
had an estimated duration of 4.0 years and a one-month value at
risk (VAR) of approximately $3.6 million, assuming a confidence
level of 95%. VAR is a key measure of market risk for the
Corporation. VAR represents the maximum amount that the
Corporation can expect to lose with 95% confidence within one
month in the course of its risk taking activities. Its purpose is to
describe the amount of capital needed to absorb potential losses
from adverse market volatility. There are numerous assumptions
and estimates associated with VAR modeling, and actual results
could differ from these assumptions and estimates.
The Corporation enters into forward contracts to sell mortgage-
backed securities with terms lasting less than a month which are
accounted for as trading derivatives. These contracts are
recognized at fair value with changes directly reported in current
period income. Refer to the Derivatives section that follows in
this MD&A for additional information. At December 31, 2007,
the fair value of these forward contracts was not significant.
The Corporation does not participate in any trading activities
involving commodity contracts.
D e r i v a t i v e s
D e r i v a t i v e s
D e r i v a t i v e s
D e r i v a t i v e s
D e r i v a t i v e s
Derivatives are used by the Corporation to protect against changes
in net interest income and cash flows as part of its overall interest
rate risk management strategy. Derivative instruments that the
Corporation may use include, among others, interest rate swaps
and caps, index options, and forward contracts. The Corporation
does not use highly leveraged derivative instruments in its interest
rate risk management strategy. The Corporation also enters into
foreign exchange contracts and interest rate swaps and caps for
the benefit of commercial customers. The Corporation
economically hedges its exposure related to these commercial
customer derivatives by entering into offsetting third-party
contracts with approved, reputable counterparties with
substantially matching terms and currencies. Refer to Note 30 to
the consolidated financial statements for further information on
2007 Annual Report 41
2007
2007
Popular, Inc. 2007
2007
the Corporation’s involvement in derivative instruments and
hedging activities.
specified price or yield. These securities are hedging a forecasted
transaction and thus qualify for cash flow hedge accounting.
The Corporation’s derivatives activities are entered primarily
to offset the impact of market volatility on the economic value of
assets or liabilities. The net effect on the market value of potential
changes in interest rates of derivatives and other financial
instruments is analyzed. The effectiveness of these hedges is
monitored to ascertain that the Corporation is reducing market
risk as expected. Derivatives transactions are generally executed
with instruments with a high correlation to the hedged asset or
liability. The underlying index or instrument of the derivatives
used by the Corporation is selected based on its similarity to the
asset or liability being hedged. As a result of interest rate
fluctuations, hedged fixed and variable interest rate assets and
liabilities will appreciate or depreciate in fair value. The effect of
this unrealized appreciation or depreciation is expected to be
substantially offset by the Corporation’s gains or losses on the
derivative instruments that are linked to these hedged assets and
liabilities. Management will assess if circumstances warrant
liquidating or replacing the derivatives position in the
hypothetical event that high correlation is reduced. Based on the
Corporation’s derivative instruments outstanding at December
31, 2007, it is not anticipated that such a scenario would have a
material impact on the Corporation’s financial condition or results
of operations.
Certain derivative contracts also present credit risk because
the counterparties may not meet the terms of the contract. If a
counterparty fails to perform, the Corporation’s credit risk is
equal to the net fair value of the derivative contract. The
Corporation minimizes credit risk through approvals, limits and
monitoring procedures. The Corporation deals exclusively with
counterparties that have high quality credit ratings. Further, as
applicable under the terms of the master arrangements, the
Corporation may obtain collateral, where appropriate, to reduce
risk. The Corporation has not incurred losses from counterparty
nonperformance on derivatives. Credit risk related to derivatives
is not considered significant at December 31, 2007.
Cash Flow Hedges
In a cash flow hedging strategy, the Corporation manages the
variability of cash payments due to interest rate fluctuations by
the effective use of derivatives linked to hedged assets and
liabilities. The notional amount of derivatives designated as cash
flow hedges as of December 31, 2007 amounted to $343 million.
The cash flow hedges outstanding related to forward contracts or
“to be announced” (“TBA”) mortgage-backed securities that are
sold and bought for future settlement to hedge the sale of mortgage-
backed securities and loans prior to securitization, had a notional
amount of $143 million at December 31, 2007. The seller agrees
to deliver on a specified future date, a specified instrument, at a
In conjunction with the issuance of medium-term notes, the
Corporation entered into interest rate swaps to convert floating
rate debt to fixed rate debt with the objective of minimizing the
exposure to changes in cash flows due to higher interest rates. At
December 31, 2007, these contracts had a notional amount of
$200 million. Refer to Note 30 to the consolidated financial
statements for additional quantitative information on these
derivative contracts.
Fair Value Hedges
The Corporation did not have any outstanding derivatives
designated as fair value hedges at December 31, 2007.
Trading and Non-Hedging Derivative Activities
The Corporation takes derivatives positions based on market
expectations or to benefit from price differentials between financial
instruments and markets. However, these derivatives instruments
are mostly utilized to economically hedge a related asset or
liability. Also, to a lesser extent, the Corporation may also enter
into various derivatives to provide these types of products to
customers. These types of free-standing derivatives are carried at
fair value with changes in fair value recorded as part of the results
of operations for the period.
Following is a description of the most significant of the
Corporation’s derivative activities that do not qualify for hedge
accounting as defined in SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (as amended). Refer to Note
30 to the consolidated financial statements for additional
quantitative and qualitative information on these derivative
instruments.
During 2006 and most of 2007, the Corporation had interest
rate caps in conjunction with a series of securitizations of
mortgage loans in order to limit the interest rate payable to the
security holders. These contracts were designated as non-hedging
derivatives and were marked-to-market, thus impacting earnings.
However, at the end of 2007, these caps were no longer required
to be consolidated by the Corporation as a result of the
recharacterization transaction described in the Significant U.S.
Strategic Events section of this MD&A since they pertained to
the bond certificates issued by the trust. During 2007, the
Corporation recognized an increase in interest expense of $3.1
million due to unfavorable changes in fair value associated with
interest rate caps, compared to $8.2 million in additional interest
expense for 2006.
At December 31, 2007, the Corporation also had outstanding
$2.0 billion in notional amount of interest rate swap agreements
with a negative fair value (liability) of $4.0 million, which were
42
not designated as accounting hedges, some of which had offsetting
positions. The agreements seek various strategies, including
among others:
• utilizing the instruments in the Corporation’s capacity as
an intermediary on behalf of its customers;
• economically hedging the cost of short-term borrowings;
• economically hedging the payments on the bond certificates
offered as part of an on-balance sheet securitization;
• economically converting to a fixed-rate the cost of funding
a portion of the auto loans held-in-portfolio; and
• economically hedging the changes in fair value of loans
acquired and originated prior to securitization.
For the year ended December 31, 2007, the impact of the
mark-to-market of interest rate swaps not designated as accounting
hedges was a net decrease in earnings of approximately $11.6
million, primarily in the interest expense category of the statement
of operations, compared with an earnings reduction of
approximately $1.8 million in 2006 mainly in the trading profit
(loss) category of the income statement. Some of the strategies
for which the derivatives held by the Corporation were utilized
are not expected to be employed by the Corporation in the near
term or are not expected to have a significant impact during
2008. The Corporation cancelled all swaps related to the auto
loans because a substantial amount of that loan portfolio was sold
in December 2007. Additionally, the Corporation is no longer
entering into swaps to economically hedge changes in the fair
value of loans prior to securitization because that strategy was
related to the operations of PFH that were exited in 2007. The
Corporation has $200 million remaining in swaps that are
economically hedging the cost of short-term borrowing. These
swaps will mature in December 2008. Additionally, at December
31, 2007, the Corporation continued to hold an interest swap
with a notional amount of $185 million that is associated with
hedging the payments of bond certificates offered as part of one
on-balance sheet securitization that remained outstanding at year-
end 2007 because it did not qualify for recharacterization as a
result of the existence of the derivative instrument. The
Corporation will account for the related bond certificate at fair
value upon adoption of SFAS No. 159 in 2008.
The Corporation also enters into interest rate lock
commitments (“IRLCs”) in connection with one of its subsidiary’s
mortgage banking activities to fund mortgage loans at interest
rates previously agreed (locked) by both the Corporation with
the customer for specified periods of time. When the borrower
locks its interest rate, the Corporation effectively extends a put
option to the customer, whereby the customer is not obligated to
enter into the loan agreement but the Corporation must honor the
interest rate for the specified time period. The Corporation is
exposed to interest rate risk during the period of the IRLC through
the sale of the underlying loan due to changes in interest rates.
These IRLCs are recognized at fair value with changes in fair
value recorded in the consolidated statement of operations.
Outstanding IRLCs expose the Corporation to the risk that the
price of the loans associated with the commitments might decline
from inception of the rate lock to funding of the loan due to
increases in mortgage interest rates. To protect against this risk,
the Corporation utilizes forward loan sales commitments to
economically hedge the risk of potential changes in the value of
the loans that would result from the commitments. The
Corporation expects that the changes in the fair value of these
derivative instruments will offset changes in the fair value of the
IRLCs. At December 31, 2007, the Corporation had outstanding
IRLCs with a notional amount of $149 million and a negative fair
value (liability) of $128 thousand.
Additionally, at December 31, 2007, the Corporation had
forward contracts with a notional amount of $693 million and a
negative fair value (liability) of $3.2 million not designated as
accounting hedges. These forward contracts are considered
derivatives under SFAS No. 133 and are recorded at fair value.
Subsequent changes in the value of these forward contracts are
recorded in the statement of operations. These forward contracts
are principally used to economically hedge the changes in fair
value of mortgage loans held-for-sale and mortgage pipeline
through both mandatory and best efforts forward sale agreements.
These forward contracts are entered into in order to optimize the
gain on sales of loans and / or mortgage-backed securities. For
the year ended December 31, 2007, the impact of the mark-to-
market of the forward contracts not designated as accounting
hedges was a reduction to earnings of $11.2 million, which was
included in the categories of trading account profit and gain on
sale of loans in the consolidated statement of operations. In 2006,
the unfavorable impact to earnings was $1.9 million.
Furthermore, the Corporation has over-the-counter option
contracts which are utilized in order to limit the Corporation’s
exposure on customer deposits whose returns are tied to the S&P
500 or to certain other equity securities or commodity indexes.
The Corporation, through its Puerto Rico banking subsidiary,
BPPR, offers certificates of deposit with returns linked to these
indexes to its retail customers, principally in connection with
IRA accounts, and certificates of deposit sold through its broker-
dealer subsidiary. At December 31, 2007, these deposits amounted
to $187 million, or less than 1% of the Corporation’s total
deposits. In these certificates, the customer’s principal is
guaranteed by BPPR and insured by the FDIC to the maximum
extent permitted by law. The instruments pay a return based on
the increase of these indexes, as applicable, during the term of the
instrument. Accordingly, this product gives customers the
opportunity to invest in a product that protects the principal
2007 Annual Report 43
2007
2007
Popular, Inc. 2007
2007
invested but allows the customer the potential to earn a return
based on the performance of the indexes.
other operating income in the consolidated statements of
operations.
The risk of issuing certificates of deposit with returns tied to
the applicable indexes is hedged by BPPR. BPPR purchases index
options from financial institutions with strong credit standings,
whose return is designed to match the return payable on the
certificates of deposit issued. By hedging the risk in this manner,
the effective cost of the deposits raised by this product is fixed.
The contracts have a maturity and an index equal to the terms of
the pool of client’s deposits they are economically hedging.
The purchased option contracts are initially accounted for at
cost (i.e., amount of premium paid) and recorded as a derivative
asset. The derivative asset is marked-to-market on a monthly
basis with changes in fair value charged to earnings. The deposits
are hybrid instruments containing embedded options that must
be bifurcated in accordance with SFAS No. 133. The initial value
of the embedded option (component of the deposit contract that
pays a return based on changes in the applicable indexes) is
bifurcated from the related certificate of deposit and is initially
recorded as a derivative liability and a corresponding discount
on the certificate of deposit is recorded. Subsequently, the
discount on the deposit is accreted and included as part of interest
expense while the bifurcated option is marked-to-market with
changes in fair value charged to earnings. The purchased option
contracts are marked-to-market on a quarterly basis.
The purchased index options are used to economically hedge
the bifurcated embedded option. These option contracts do not
qualify for hedge accounting in accordance with the provisions
of SFAS No. 133 and therefore cannot be designated as accounting
hedges. At December 31, 2007, the notional amount of the index
options on deposits approximated $211 million with a fair value
of $46 million (asset) while the embedded options had a notional
value of $187 million with a fair value of $44 million (liability).
Refer to Note 30 to the consolidated financial statements for a
description of other non-hedging derivative activities utilized
by the Corporation during 2007 and 2006.
F o r e i g n E x c h a n g e
F o r e i g n E x c h a n g e
F o r e i g n E x c h a n g e
F o r e i g n E x c h a n g e
F o r e i g n E x c h a n g e
The Corporation conducts business in certain Latin American
markets through several of its processing and information
technology services and products subsidiaries. Also, it holds
interests in Consorcio de Tarjetas Dominicanas, S.A.
(“CONTADO”) and Centro Financiero BHD, S.A. (“BHD”) in the
Dominican Republic. Although not significant, some of these
businesses are conducted in the country’s foreign currency. The
resulting foreign currency translation adjustment, from operations
for which the functional currency is other than the U.S. dollar, is
reported in accumulated other comprehensive loss in the
consolidated statements of condition, except for highly-
inflationary environments in which the effects are included in
During the year ended December 31, 2006, approximately
$0.8 million in net remeasurement gains on the investments held
by the Corporation in the Dominican Republic were reflected in
other operating income instead of accumulated other
comprehensive loss. In 2007, the Corporation ceased to consider
the Dominican Republic as a “highly inflationary economy” and
as such, the foreign currency translation adjustment was reported
as part of other comprehensive loss. Refer to the consolidated
statement of comprehensive income in the financial statements
for related amounts corresponding to the year 2007.
At December 31, 2007, the Corporation had approximately
$35 million in an unfavorable foreign currency translation
adjustment as part of accumulated other comprehensive loss,
compared to unfavorable adjustments of $37 million at December
31, 2006 and $36 million at December 31, 2005.
Liquidity Risk
Liquidity Risk
Liquidity Risk
Liquidity Risk
Liquidity Risk
For a financial institution, liquidity risk may arise whenever the
institution cannot generate enough cash from either assets or
liabilities to meet its obligations when they become due, without
incurring unacceptable losses. Cash requirements for a financial
institution are primarily made up of deposit withdrawals,
contractual loan funding, the repayment of borrowings as they
mature and the ability to fund new and existing investments as
opportunities arise. An institution’s liquidity may be pressured
if, for example, its credit rating is downgraded, it experiences a
sudden and unexpected substantial cash outflow, or some other
event causes counterparties to avoid exposure to the institution.
An institution is also exposed to liquidity risk if markets on
which it depends are subject to loss of liquidity. The objective of
effective liquidity management is to ensure that the Corporation
remains sufficiently liquid to meet all of its financial obligations,
finance expected future growth and maintain a reasonable safety
margin for cash commitments under both normal operating
conditions and under unpredictable circumstances of industry or
market stress.
To achieve this objective, the Board of Directors, through the
Risk Management Committee, is responsible for approving
policies regarding liquidity risk management as well as approving
operating and contingency procedures, and supervising their
implementation. Liquidity is managed at the level of the holding
companies that own the banking and non-banking subsidiaries.
Also, it is managed at the level of the banking and non-banking
subsidiaries. The Corporation’s Corporate Treasurer is responsible
for implementing the policies and procedures approved by the
Risk Management Committee and for monitoring the liquidity
position on an ongoing basis.
44
The Corporation has established policies and procedures to
assist it in remaining sufficiently liquid to meet all of its financial
obligations, finance expected future growth and maintain a
reasonable safety margin for cash commitments under both normal
operating conditions and unsettled market environments.
including its terms, is included in Notes 14 through 18 to the
consolidated financial statements. Also, the consolidated
statements of cash flows in the accompanying consolidated
financial statements provide information on the Corporation’s
cash inflows and outflows.
Liquidity, Funding and Capital Resources
Liquidity, Funding and Capital Resources
Liquidity, Funding and Capital Resources
Liquidity, Funding and Capital Resources
Liquidity, Funding and Capital Resources
The U.S. credit markets have been marked by unprecedented
instability and disruption since the beginning of the third quarter
of 2007, making most funding activities much more challenging
for financial institutions. Credit spreads have widened
significantly and rapidly, as many investors allocated their funds
to only the highest-quality financial assets such as U.S. government
securities. The result of these actions by market participants
made it more difficult for corporate borrowers to raise financing
in the credit markets and reduced the value of most financial
assets except the highest-quality obligations.
Several sectors have been significantly impacted, including
the money markets, the corporate debt market and more recently,
the municipal securities and student loan markets. A primary
catalyst of the market disruptions has been an abrupt shift by
investors away from non-government securities into U.S.
Government obligations, and the unwillingness to assume many
types of risk.
The Corporation has historically financed a portion of its
business in the money and corporate bond markets, both of which
have been affected by financial market developments since the
beginning of the third quarter of 2007. As it became more
challenging to raise financing in the capital markets, the
Corporation’s management took actions to reduce the use of
borrowings to finance its businesses and thus ensure access to
stable sources of liquidity. These actions, which are explained
below, included, for example, replacing short-term unsecured
borrowings with deposits and increasing secured lines of credit.
The Corporation’s liquidity position is closely monitored on
an ongoing basis. Management believes that its current sources
of liquidity are adequate to meet the funding needs in the normal
course of business. Sources of liquidity include both those available
to the banking affiliates and to a lesser extent, those expected to
be available with third party providers. The former include access
to stable base of core deposits and secured sources of credit. The
latter include credit lines and anticipated debt offerings in the
capital markets. In addition to these, asset sales can be a source of
liquidity to the Corporation. Even if some of these alternatives
may not be available temporarily, it is expected that in the normal
course of business, our funding sources are adequate.
The following sections provide further information on the
Corporation’s major funding activities and needs, as well as the
risks involved in these activities. A more detailed description of
the Corporation’s borrowings and available lines of credit,
B a n k i n g S u b s i d i a r i e s
B a n k i n g S u b s i d i a r i e s
B a n k i n g S u b s i d i a r i e s
B a n k i n g S u b s i d i a r i e s
B a n k i n g S u b s i d i a r i e s
Primary sources of funding for the Corporation’s banking
subsidiaries (BPPR, BPNA and BP,N.A., or “the banking
subsidiaries”) include retail and commercial deposits, purchased
funds, institutional borrowings, and to a lesser extent, loan sales.
The principal uses of funds for the banking subsidiaries include
loan and investment portfolio growth, repayment of obligations
as they become due, dividend payments to the holding company,
and operational needs. In addition, the Corporation’s banking
subsidiaries maintain borrowing facilities with the Federal Home
Loan Banks ("FHLB") and at the discount window of the Federal
Reserve Bank of New York ("FED"), and have a considerable amount
of collateral that can be used to raise funds under these facilities.
Borrowings from the FHLB or the FED discount window require
the Corporation to post securities or whole loans as collateral.
The banking subsidiaries must maintain their FHLB memberships
to continue accessing this source of funding.
To mitigate exposure to funding risk for the banking
subsidiaries in the current environment, concrete steps have been
taken by management to reduce the need to access the money
markets for financing, including relying more on deposits than
borrowings.
Deposits
Deposits are a key source of funding as they tend to be less volatile
than institutional borrowings and their cost is less sensitive to
changes in market rates. Core deposits are generated from a large
base of consumer, corporate and institutional customers.
Total deposits at the Corporation increased from $24.4 billion
at December 31, 2006 to $28.3 billion at December 31, 2007, an
increase of $3.9 billion or 16%. As indicated previously in this
MD&A, the growth in deposits was impacted by the acquisition
of the Citibank retail branches in Puerto Rico and by measures
taken in the fourth quarter of 2007 to raise brokered certificates of
deposit in the U.S. national CD market.
Core deposits have historically provided the Corporation with
a sizable source of relatively stable and low-cost funds. As indicated
in the glossary, for purposes of defining core deposits, the
Corporation excludes brokered certificates of deposits with
denominations under $100,000.
Core deposits totaled $20.1 billion, or 71% of total deposits,
at December 31, 2007, compared to $19.1 billion and 78% at
December 31, 2006. Core deposits financed 49% of the
Corporation’s earning assets at December 31, 2007 compared to
44% at December 31, 2006.
Certificates of deposit with denominations of $100,000 and
over at December 31, 2007 totaled $5.3 billion, or 19% of total
deposits. Their distribution by maturity was as follows:
(In thousands)
3 months or less
3 to 6 months
6 to 12 months
Over 12 months
$2,839,025
859,462
664,980
914,223
$5,277,690
The Corporation had $3.1 billion in brokered certificates of
deposit at December 31, 2007, which represented 11% of its total
deposits, compared to $866 million and 4% at December 31,
2006. Approximately 2% of the brokered certificates of deposit
outstanding at December 31, 2007 are callable, but only at the
option of the Corporation. Brokered certificates of deposit, which
are typically sold through an intermediary to small retail investors,
provide access to longer-term funds that are available in the market
area and provide the ability to raise additional funds without
pressuring retail deposit pricing. In the event that any of the
Corporation’s banking subsidiaries fall under the regulatory
capital ratios of a well-capitalized institution, that banking
subsidiary faces the risk of not being able to raise brokered
deposits. Each of the Corporation's banking subsidiaries were
considered well-capitalized at December 31, 2007. One of the
strategies followed by management in response to the
unprecedented market disruptions described above, was the
utilization of brokered certificates of deposit to replace
uncommitted lines of credit.
Average deposits for the year ended December 31, 2007
represented 58% of average earning assets, compared with 52%
and 51% for the years ended December 31, 2006 and 2005,
respectively. Table M summarizes average deposits for the past
five years.
The Corporation’s ability to compete successfully in the
marketplace for deposits depends on various factors, including
pricing, service, convenience and financial stability as reflected
by operating results and credit ratings (by nationally recognized
credit rating agencies). Although a downgrade in the credit rating
of the Corporation may impact its ability to raise deposits or the
rate it is required to pay on such deposits, management does not
believe that the impact should be material. Deposits at all of the
Corporation’s banking subsidiaries are federally insured and this
is expected to mitigate the effect of a downgrade in credit ratings.
2007 Annual Report 45
2007
2007
Popular, Inc. 2007
2007
Borrowings
Liquidity on the liability side is also generated through the ability
to obtain wholesale funding through a variety of sources, including
advances from FHLB, federal funds purchased, repurchase
agreements whereby investment securities and loans are pledged
as collateral, and advances under lines of credit with correspondent
banks, among other sources.
Borrowings at the banking subsidiaries, excluding
intercompany balances between the three entities, amounted to
$6.2 billion at December 31, 2007, compared with $8.1 billion at
December 31, 2006.
The use of borrowings was decreased substantially at the
banking subsidiaries during 2007. Management decided to
eliminate the use of unsecured short-term borrowings, primarily
by raising deposits. Another strategy implemented by management
during the second half of 2007 included the utilization of unpledged
liquid assets to raise financing in the repo markets, the proceeds
of which were also used to pay off unsecured borrowings. Short-
term unsecured borrowings at the banking subsidiaries excluding
intercompany balances between the three entities were reduced
from $3.8 billion at December 31, 2006 to $626 million at
December 31, 2007, which represents a decrease of $3.2 billion
or 84%. Outstanding repurchase agreements at the banking
subsidiaries, also excluding the intercompany balances between
the three entities, were $3.8 billion at December 31, 2007, an
increase of $384 million or 11%, when compared to December
31, 2006.
The Corporation’s banking subsidiaries have the ability to
borrow funds from the FHLB at competitive prices. At December
31, 2007, the banking subsidiaries had short-term and long-term
credit facilities authorized with the FHLB aggregating $2.6 billion
based on assets pledged with the FHLB at that date. Outstanding
borrowings under these credit facilities totaled $1.7 billion at
December 31, 2007, compared with $781 million at year-end
2006. Such advances are collateralized by securities and mortgage
loans and do not have restrictive covenants. Refer to Note 17 to
the consolidated financial statements for additional information.
At December 31, 2007, the banking subsidiaries had a
borrowing capacity at the FED discount window of approximately
$3.0 billion, which remained unused, compared with $2.9 billion
at December 31, 2006. This facility is a collateralized source of
credit that is highly reliable even under difficult market conditions.
The amount available under this line is dependent upon the balance
of loans and securities pledged as collateral.
Bank Holding Companies
Bank Holding Companies
Bank Holding Companies
Bank Holding Companies
Bank Holding Companies
The principal sources of funding for the holding companies have
included dividends received from its banking and non-banking
subsidiaries and proceeds from the issuance of medium-term notes,
commercial paper, junior subordinated debentures and equity.
46
Banking laws place certain restrictions on the amount of dividends
a bank may make to its parent company. Such restrictions have
not had, and are not expected to have, any material effect on the
Corporation’s ability to meet its cash obligations. The principal
uses of these funds include the repayment of maturing debt,
dividend payments to shareholders and subsidiary funding through
capital or debt.
The Corporation’s bank holding companies (“BHCs”, Popular,
Inc., Popular North America and Popular International Bank, Inc.)
have borrowed in the money markets and the corporate debt market
primarily to finance their non-banking subsidiaries. The recent
restructuring and asset sales related to the Corporation’s U.S.
non-banking business will substantially reduce the BHC’s need
for capital markets borrowings in the future. However, it may
pursue such transactions if market conditions are sufficiently
favorable, to sell assets or refund maturing debt.
Current conditions have made market access more uncertain.
As an alternative to capital markets financing, the Corporation
worked on several initiatives to ensure that adequate funding
sources are available, notwithstanding potential market
conditions.
At December 31, 2007, the BHCs had borrowings (excluding
intercompany balances) maturing as indicated in the table below:
(In thousands)
2008
2009
2010
2011
2012 and thereafter
$1,736,802
914,843
2,000
1,000
1,123,305
$3,777,950
The BHCs renewed a revolving credit agreement in October
2007. This facility was used as backup for the Corporation’s
commercial paper program, which was a source of short-term
funding. Due to adverse market conditions, the size of the facility
was reduced from $555 million at December 31, 2006 to $235
million in October 2007. In December 2007, the entire balance of
commercial paper outstanding backed-up by this facility was
repaid and the revolving credit facility was terminated.
During the fourth quarter of 2007, the Corporation successfully
completed a capital markets-based financing and issued $275
million of its 6.85% senior notes maturing in December 2012.
These funds were used to repay short-term borrowings. Also, the
Corporation successfully negotiated a committed credit facility
with a leading global banking institution, whereby the
Corporation can borrow up to $500 million secured by PFH loans
eligible per terms under the credit line agreement. This credit
line is intended to serve as a contingent source of readily-available
liquidity, and matures in November 2008.
The BHCs have additional sources of liquidity available, in
the form of credit facilities available from affiliate banking
subsidiaries and third party providers, as well as dividends that
can be paid by the subsidiaries and assets that could be sold or
financed.
N o n - b a n k i n g s u b s i d i a r i e s
N o n - b a n k i n g s u b s i d i a r i e s
N o n - b a n k i n g s u b s i d i a r i e s
N o n - b a n k i n g s u b s i d i a r i e s
N o n - b a n k i n g s u b s i d i a r i e s
The principal sources of funding for the non-banking subsidiaries
include internally generated cash flows from operations, borrowed
funds from the holding companies or their direct parent companies,
wholesale funding and asset securitizations, loan sales repurchase
agreements and warehousing lines of credit. The principal uses of
funds for the non-banking subsidiaries include loan portfolio
growth, repayment of maturing debt and operational needs.
The Corporation, as a result of previously announced U.S.
restructuring initiatives and expected asset sales, has exited its
PFH non-banking lending businesses. Consequently, what will
remain is primarily a discontinued business line, principally with
a portfolio of mortgage and consumer loans which is running off.
The financing required for this remaining business is expected
to be minimal.
Any operating cash needs that may be required by the
discontinued business are expected to be provided by funding
from affiliates. Additional sources of liquidity can be provided by
asset sales and secured financings.
The Corporation, acting as servicer in certain securitization
transactions, is required under certain servicing agreements to
advance its own funds to meet contractual remittance requirements
for investors, process foreclosures and pay property taxes and
insurance premiums. Funds are also advanced to maintain and
market real estate properties on behalf of investors. As the servicer,
the Corporation is required to advance funds only to the extent
that it believes the advances are recoverable. The advances have
the highest standing in terms of repayment priority over payments
made to bondholders of each securitization trust. Servicing
advance requirements have increased in 2007 primarily as a result
of slower prepayment rates and higher delinquency levels. The
Corporation funds these advances from several internal and external
funding sources.
Other Funding Sources
Other Funding Sources
Other Funding Sources
Other Funding Sources
Other Funding Sources
The Corporation may also raise funding through approved, but
uncommitted revolving lines of credit or federal funds lines with
authorized counterparties. These lines are available at the option
of the counterparty.
The investment securities portfolio provides an additional
source of liquidity, which may be created through either securities
sales or repurchase agreements. The Corporation’s portfolio
consists primarily of liquid U.S. Treasury and government
sponsored agency securities that can be used to raise funds in the
2007 Annual Report 47
2007
2007
Popular, Inc. 2007
2007
Table L
Table L
Table L
Table L
Table L
Maturity Distribution of Earning Assets
(In thousands)
Money market securities
Investment and trading securities
Loans:
Commercial
Construction
Lease financing
Consumer
Mortgage
Total
As of December 31, 2007
Maturities
After one year
through five years
After five years
Fixed
interest
rates
Variable
interest
rates
Fixed
interest
rates
Variable
interest
rates
$3,494,566
$128,169
$2,302,180
2,602,186
21,734
674,842
1,710,400
1,721,474
2,691,172
631,303
398,694
339,714
1,289,815
15,219
9,028
200,086
2,217,324
$1,902,719
12,286
342,252
326,036
One year
or less
$1,006,712
3,808,688
5,199,899
1,260,830
480,569
3,033,168
2,830,252
Total
$1,006,712
9,733,603
13,685,791
1,941,372
1,164,439
5,684,600
7,434,800
$17,620,118
$10,225,202
$4,189,052
$6,033,652
$2,583,293
$40,651,317
Notes: Equity securities available-for-sale and other investment securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock held by the
Corporation, are not included in this table.
Loans held-for-sale have been allocated according to the expected sale date.
repo markets. At December 31, 2007, the investment and trading
securities portfolios, as shown in Table L, totaled $9.7 billion, of
which $3.8 billion, or 39%, had maturities of one year or less.
Mortgage-related investments in Table L are presented based on
expected maturities, which may differ from contractual maturities,
since they could be subject to prepayments. The availability of
the repurchase agreement would be subject to having sufficient
available un-pledged collateral at the time the transactions are to
be consummated. The Corporation’s un-pledged investment and
trading securities, excluding other investment securities,
amounted to $1.9 billion as of December 31, 2007. A substantial
portion of these securities could be used to raise financing quickly
in the U.S. money markets.
Additional liquidity may be provided through loan maturities,
prepayments and sales. The loan portfolio can also be used to
obtain funding in the capital markets. In particular, mortgage
loans and some types of consumer loans, have secondary markets
which the Corporation may use. The maturity distribution of the
loan portfolio as of December 31, 2007 is presented in Table L. As
of that date, $12.8 billion or 43% of the loan portfolio was expected
to mature within one year. The contractual maturities of loans
have been adjusted to include prepayments based on historical
data and prepayment trends.
Another potential source of funding is the issuance of shares of
common or preferred stock, or hybrid securities.
Risks to Liquidity
Risks to Liquidity
Risks to Liquidity
Risks to Liquidity
Risks to Liquidity
The importance of the Puerto Rico market for the Corporation is
an additional risk factor that could affect its financing activities.
In the case of an extended economic slowdown in Puerto Rico, the
credit quality of the Corporation could be affected and, as a result
of higher credit costs, profitability may decrease. The substantial
integration of Puerto Rico with the U.S. economy may limit the
probability of a prolonged recession in Puerto Rico, but a U.S.
recession, concurrently with a slowdown in Puerto Rico, may
make a recovery in the local economic cycle more challenging.
Factors that the Corporation does not control, such as the
economic outlook of its principal markets and regulatory
changes, could affect its ability to obtain funding. In order to
prepare for the possibility of such a scenario, management has
adopted contingency plans for raising financing under stress
scenarios when important sources of funds that are usually fully
available, are temporarily unavailable. These plans call for using
alternate funding mechanisms such as the pledging or
securitization of certain asset classes and accessing committed
credit lines and loan facilities put in place with the FHLB, leading
commercial banks and the FED. The Corporation has a substantial
amount of assets available for raising funds through these channels
and is confident that it has adequate alternatives to rely on under
a scenario where some primary funding sources are temporarily
unavailable.
Total lines of credit outstanding are not necessarily a measure
of the total credit available on a continuing basis. Certain of these
48
Table M
Table M
Table M
Table M
Table M
Average Total Deposits
(Dollars in thousands)
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
2004
2003
Five-Year
C.G.R.
Non-interest bearing demand deposits
$ 4 , 0 4 3 , 4 2 7
$ 4 , 0 4 3 , 4 2 7
$ 4 , 0 4 3 , 4 2 7
$ 4 , 0 4 3 , 4 2 7
$ 4 , 0 4 3 , 4 2 7
$3,969,740
$4,068,397
$3,918,452
$3,495,099
4.62%
Savings accounts
NOW, money market and other interest
5 , 6 9 7 , 5 0 9
5 , 6 9 7 , 5 0 9
5 , 6 9 7 , 5 0 9
5 , 6 9 7 , 5 0 9
5 , 6 9 7 , 5 0 9
5,440,101
5,676,452
5,407,600
5,190,527
3.60
bearing demand accounts
4 , 4 2 9 , 4 4 8
4 , 4 2 9 , 4 4 8
4 , 4 2 9 , 4 4 8
4 , 4 2 9 , 4 4 8
4 , 4 2 9 , 4 4 8
3,877,678
3,731,905
2,965,941
2,550,480
12.10
For the Year
Certificates of deposit:
Under $100,000
$100,000 and over
Certificates of deposit
Other time deposits
3 , 9 4 9 , 2 6 2
3 , 9 4 9 , 2 6 2
3 , 9 4 9 , 2 6 2
3 , 9 4 9 , 2 6 2
3 , 9 4 9 , 2 6 2
5 , 9 2 8 , 9 8 3
5 , 9 2 8 , 9 8 3
5 , 9 2 8 , 9 8 3
5 , 9 2 8 , 9 8 3
5 , 9 2 8 , 9 8 3
9 , 8 7 8 , 2 4 5
9 , 8 7 8 , 2 4 5
9 , 8 7 8 , 2 4 5
9 , 8 7 8 , 2 4 5
9 , 8 7 8 , 2 4 5
1 , 5 2 0 , 4 7 1
1 , 5 2 0 , 4 7 1
1 , 5 2 0 , 4 7 1
1 , 5 2 0 , 4 7 1
1 , 5 2 0 , 4 7 1
3,768,653
4,963,534
8,732,187
1,244,426
3,382,445
4,266,983
7,649,428
1,126,887
3,067,220
3,144,173
6,211,393
905,669
2,877,946
2,881,836
5,759,782
762,080
Total interest bearing deposits
2 1 , 5 2 5 , 6 7 3
2 1 , 5 2 5 , 6 7 3
2 1 , 5 2 5 , 6 7 3
2 1 , 5 2 5 , 6 7 3
2 1 , 5 2 5 , 6 7 3
19,294,392
18,184,672
15,490,603
14,262,869
7.05
15.23
11.52
15.10
9.37
Total deposits
$ 2 5 , 5 6 9 , 1 0 0
$ 2 5 , 5 6 9 , 1 0 0
$ 2 5 , 5 6 9 , 1 0 0
$ 2 5 , 5 6 9 , 1 0 0
$ 2 5 , 5 6 9 , 1 0 0
$23,264,132
$22,253,069
$19,409,055
$17,757,968
8.53%
lines could be subject to collateral requirements, standards of
creditworthiness, leverage ratios and other regulatory
requirements, among other factors.
Maintaining adequate credit ratings on Popular’s debt
obligations is an important factor for liquidity, because the credit
ratings influence the Corporation’s ability to borrow, the cost at
which it can raise financing and access to funding sources. The
credit ratings are based on the financial strength, credit quality
and concentrations in the loan portfolio, the level and volatility of
earnings, capital adequacy, the quality of management, the
liquidity of the balance sheet, the availability of a significant
base of core retail and commercial deposits, and the Corporation’s
ability to access a broad array of wholesale funding sources, among
other factors. Changes in the credit rating of the Corporation or
any of its subsidiaries to a level below “investment grade” may
affect the Corporation’s ability to raise funds in the capital markets.
The Corporation’s counterparties are sensitive to the risk of a
rating downgrade. In the event of a downgrade, it may be expected
that the cost of borrowing funds in the institutional market would
increase. In addition, the ability of the Corporation to raise new
funds or renew maturing debt may be more difficult.
In December 2007, Moody’s Investor Service (“Moodys”)
downgraded by one notch to “A3”, the senior debt rating of the
Corporation and reduced the short-term rating to “P-2”. The
ratings were put on “watch negative”, which implies that within
a short period of time there was the possibility of an additional
downgrade. The funding challenges at the bank holding company
as well as the profitability of the U.S. business were given as the
primary concerns underlying the downgrades.
In January 2008, Moodys upgraded the ratings outlook to
“stable” and removed the ratings watch which had been in effect.
Initiatives executed by management to address the bank holding
companies’ funding challenges were cited as prompting the
change, although the profitability of the U.S. business continues
to be a ratings concern.
After the end of the third quarter of 2007, Fitch Ratings reduced
the short-term credit rating of Popular, Inc. and Popular North
America, Inc. to “F-2” from “F-1”, and placed their long-term
senior debt rating of “A-” on negative rating watch. Fitch Ratings
mentioned that the rating actions reflected credit quality pressures
from our sub-prime loan exposure as well as a more difficult
environment for bank holding company funding. In both cases,
Fitch Ratings maintained that it believes that both situations are
challenging but manageable.
In January 2008, Fitch Ratings announced that it was affirming
the Corporation’s senior debt rating at “A-” as well as removing
the rating from “watch negative”. The outlook was maintained
“negative”. Management actions related to bank holding company
liquidity were highlighted by the agency as underlying the
removal of the “watch”, but U.S. business profitability concerns
have kept the ratings outlook negative, until these challenges are
resolved.
Standard & Poor’s Rating Services (“S&P”) currently rates our
debt “BBB+” for long-term debt and “A-2” for short-term
obligations, both with a stable outlook.
Credit ratings are an important factor in accessing the credit
markets. Even though the Corporation is currently several notches
above the investment-grade threshold with each of the rating
agencies, the possibility of ratings downgrades can affect our
ability to raise unsecured financing at competitive rates.
The Corporation and BPPR’s debt ratings at December 31,
2007 were as follows:
Popular, Inc.
BPPR
Short-term
debt
F-2
P-2
A-2
Fitch
Moody’s
S&P
Long-term Short-term Long-term
debt
F-1
P-1
A-2
debt
A-
A3
BBB+
debt
A-
A2
A-
The ratings above are subject to revisions or withdrawal at any
time by the assigning rating agency. Each rating should be
evaluated independently of any other rating.
Some of the Corporation’s borrowings and deposits are subject
to “rating triggers”, contractual provisions that accelerate the
maturity of the underlying obligations in the case of a change in
rating. Therefore, the need for the Corporation to raise funding in
the marketplace could increase more than usual in the case of a
rating downgrade. The amount of obligations subject to rating
triggers that could accelerate the maturity of the underlying
obligations was $38 million at December 31, 2007.
In the course of borrowing from institutional lenders, the
Corporation has entered into contractual agreements to maintain
certain levels of debt, capital and asset quality, among other
financial covenants. If the Corporation were to fail to comply
with those agreements, it may result in an event of default. Such
failure may accelerate the repayment of the related obligations. An
event of default could also affect the ability of the Corporation to
raise new funds or renew maturing borrowings. At December 31,
2007, the Corporation had $215 million in outstanding
obligations subject to covenants, including those which are
subject to rating triggers. At December 31, 2007, one of the
Corporation’s U.S. subsidiaries was not complying with a
particular covenant with respect to one credit facility. A written
waiver was obtained. Obligations outstanding under this credit
facility approximated $87 million at December 31, 2007, and
was paid in full in February 2008.
Contractual Obligations and Commercial
Contractual Obligations and Commercial
Contractual Obligations and Commercial
Contractual Obligations and Commercial
Contractual Obligations and Commercial
C o m m i t m e n t s
C o m m i t m e n t s
C o m m i t m e n t s
C o m m i t m e n t s
C o m m i t m e n t s
The Corporation has various financial obligations, including
contractual obligations and commercial commitments, which
require future cash payments on debt and lease agreements. Also,
in the normal course of business, the Corporation enters into
contractual arrangements whereby it commits to future purchases
of products or services from third parties. Obligations that are
legally binding agreements whereby the Corporation agrees to
purchase products or services with a specific minimum quantity
2007 Annual Report 49
2007
2007
Popular, Inc. 2007
2007
defined at a fixed, minimum or variable price over a specified
period of time are defined as purchase obligations.
At December 31, 2007, the aggregate contractual cash
obligations including purchase obligations and borrowings
maturities were:
Payments Due by Period
(In millions)
Less than
1 year
1 to 3
years
3 to 5 After 5
years
years Total
Certificates of deposit
Fed funds and repurchase
agreements
Other short-term
borrowings
Long-term debt
Purchase obligations
Annual rental
commitments under
operating leases
Capital leases
Total contractual cash
$9,911
$2,534
$854
$115
$13,414
4,038
237
1,502
1,490
170
-
1,302
67
49
1
74
3
763
-
654
29
55
3
399
5,437
-
1,175
9
1,502
4,621
275
203
19
381
26
obligations
$17,161
$4,217
$2,358
$1,920
$25,656
Purchase obligations include major legal and binding
contractual obligations outstanding at the end of 2007, primarily
for services, equipment and real estate construction projects.
Services include software licensing and maintenance, facilities
maintenance, supplies purchasing, and other goods or services
used in the operation of the business. Generally, these contracts
are renewable or cancelable at least annually, although in some
cases to secure favorable pricing concessions, the Corporation
has committed to contracts that may extend for several years.
As of December 31, 2007, the Corporation’s liability on its
pension and postretirement benefit plans amounted to $164.0
million. During 2008, the Corporation expects to contribute
$5.7 million to the pension and benefit restoration plans, and
$6.3 million to the postretirement benefit plan to fund current
benefit payment requirements. Obligations to these plans are based
on current and projected obligations of the plans, performance of
the plan assets, if applicable, and any participant contributions.
Refer to Note 24 to the consolidated financial statements for further
information on these plans. Management believes the effect of the
pension and postretirement plans on liquidity is not significant
to the Corporation’s overall financial condition.
As of December 31, 2007, the liability for uncertain tax
positions, excluding associated interest and penalties, was $22.2
million pursuant to FIN No. 48, which was described in the
Critical Accounting Policies section. This liability represents
an estimate of tax positions that the Corporation has taken in its
tax returns which may ultimately not be sustained upon
examination by the tax authorities. The ultimate amount and
50
timing of any future cash settlements cannot be predicted with
reasonable certainty. Under the statute of limitation, the liability
for uncertain tax positions expire as follows: 2008 - $2.3 million,
2009 - $4.2 million, 2010 - $4.4 million, 2011 - $5.9 million and
2012 - $5.4 million.
A number of business and asset acquisition agreements to
which the Corporation is a party may require the Corporation to
make contingent payments in future years if certain predetermined
goals, such as revenue or loan origination targets, are achieved
within a specified time. Management estimates that the maximum
future payments under these agreements at December 31, 2007
approximated $5.8 million.
The Corporation also utilizes lending-related financial
instruments in the normal course of business to accommodate the
financial needs of its customers. The Corporation’s exposure to
credit losses in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit, standby
letters of credit and commercial letters of credit is represented by
the contractual notional amount of these instruments. The
Corporation uses credit procedures and policies in making those
commitments and conditional obligations as it does in extending
loans to customers. Since many of the commitments may expire
without being drawn upon, the total contractual amounts are not
representative of the Corporation’s actual future credit exposure
or liquidity requirements for these commitments.
At December 31, 2007 the contractual amounts related to the
Corporation’s off-balance sheet lending and other activities were:
Amount of Commitment – Expiration Period
Less than
1 year
1 to 3 3 to 5 After 5
years
years
years Total
$6,240
$1,149
$370
$151
$7,910
(In millions)
Commitments to
extend credit
Commercial letters
of credit
Standby letters of
credit
Commitments to originate
mortgage loans
Unfunded investment obligations
25
145
95
-
1
27
18
7
2
-
-
-
-
-
-
32
26
174
113
39
The Corporation is a member of the Visa USA network through
its subsidiary BPNA. On October 3, 2007, the Visa organization
completed a series of restructuring transactions to combine its
affiliated operating companies, including Visa USA, under a single
holding company, Visa, Inc. As a result of Visa’s restructuring,
the Corporation’s membership interest in Visa USA was exchanged
for an approximately 0.00874% equity interest in Visa Inc. Class
USA stock. On November 11, 2007, Visa Inc. filed a registration
statement with the Securities and Exchange Commission for the
offer and sale of its common stock to the public. Visa has disclosed
that it plans to use the proceeds from its initial public offering to
partially redeem Visa USA members’ equity interests and to fund
the settlement of certain Visa USA related litigation.
Pursuant to the Visa USA bylaws, BPNA is obligated to
indemnify Visa, Inc. for certain losses. On October 3, 2007, a
Loss Sharing Agreement (“LSA”) became effective which reaffirmed
the Corporation’s obligation to indemnify Visa, Inc. for potential
future settlement of certain litigation. The Corporation’s
indemnification obligation is limited to its 0.00874%
proportionate equity interest in Visa USA. The Corporation
recorded an estimated liability related to its obligation to indemnify
Visa for covered litigation of $223 thousand as of December 31,
2007.
If the Visa initial public offering is successfully completed,
the Corporation is expected to receive cash in partial redemption
of its equity interest currently carried at zero value. Further,
management expects that the indemnification obligation to Visa
will be reduced when Visa either disburses funds for negotiated
settlements, or funds an escrow account designated for settlement
of covered litigation. Management expects that the gain to be
realized from redemption of Visa shares will more than exceed the
indemnification obligations recorded to date.
BPPR is a member of Visa International, as such is not impacted
by the indemnification obligation.
Refer to the notes to the consolidated financial statements for
further information on the Corporation’s contractual obligations,
commercial commitments, and derivative contracts.
Total
$6,505
$1,202
$372
$183
$8,262
The Corporation also enters into derivative contracts under
which it is required either to receive cash or pay cash, depending
on changes in interest rates. These contracts are carried at fair
value on the consolidated statements of condition with the fair
value representing the net present value of the expected future
cash receipts and payments based on market rates of interest as of
the statement of condition date. The fair value of the contract
changes daily as interest rates change.
Credit Risk Management and Loan Quality
Credit Risk Management and Loan Quality
Credit Risk Management and Loan Quality
Credit Risk Management and Loan Quality
Credit Risk Management and Loan Quality
Credit risk represents the possibility of loss from the failure of a
borrower or counterparty to perform according to the terms of a
credit-related contract. Credit risk arises primarily from the
Corporation’s lending activities, as well as from other on- and
off-balance sheet credit instruments. Credit risk management is
based on analyzing the creditworthiness of the borrower, the
adequacy of underlying collateral given current events and
conditions, and the existence and strength of any guarantor
support.
2007 Annual Report 51
2007
2007
Popular, Inc. 2007
2007
The Corporation manages credit risk by maintaining sound
underwriting standards, monitoring and evaluating loan portfolio
quality, its trends and collectibility, and assessing reserves and
loan concentrations. Also, credit risk is mitigated by recruiting
qualified and highly skilled credit officers, implementing and
monitoring lending policies and collateral requirements, and
instituting credit review procedures to ensure appropriate actions
to comply with laws and regulations. The Corporation’s credit
policies require prompt identification and quantification of asset
quality deterioration or potential loss in order to ensure the
adequacy of the allowance for loan losses. Included in these
policies, primarily determined by the amount, type of loan and
risk characteristics of the credit facility, are various approval
levels and lending limit constraints, ranging from the branch or
department level to those that are more centralized. When
considered necessary, the Corporation requires collateral to support
credit extensions and commitments, which is generally in the
form of real estate and personal property, cash on deposit and
other highly liquid instruments.
At December 31, 2007, the Corporation’s credit exposure was
centered in its $29.9 billion total loan portfolio, which represented
73% of its earning assets. The portfolio composition for the last
five years is presented in Table G.
The Corporation’s Credit Strategy Committee (“CRESCO”)
oversees all credit-related activities and is responsible for
managing the Corporation’s overall credit exposure and
developing credit policies, standards and guidelines that define,
quantify, and monitor credit risk. Through the CRESCO,
management reviews asset quality ratios, trends and forecasts,
problem loans, evaluates the provision for loan losses and assesses
the methodology and adequacy of the allowance for loan losses on
a monthly basis. The analysis of the allowance adequacy is
presented to the Risk Management Committee of the Board of
Directors for review, consideration and ratification on a quarterly
basis.
The Corporation also has a Corporate Credit Risk Management
Division (“CCRMD”), which is centralized and independent of
the lending function. It oversees the credit risk rating system and
reviews the adequacy of the allowance for loan losses in accordance
with generally accepted accounting principles (“GAAP”) and
regulatory standards. In addition, there is a Credit Risk
Management (“CRM”) function at the Corporation's Puerto Rico
and U.S. mainland operations. The CCRMD’s functions include
managing and controlling the Corporation’s credit risk, which
is accomplished through various techniques applied at different
stages of the credit-granting process. A CRM representative, who
is a permanent member of the Executive Credit Committee,
oversees adherence to policies and procedures established for the
initial underwriting of the credit portfolio. Also, the CRM performs
ongoing monitoring of the portfolio, including potential areas of
concern for specific borrowers and / or geographic regions. The
CRM strives to identify problem loans early and has specialized
workout officers, who are independent of the originating unit,
that handle substantially all commercial loans which are past due
over 90 days, have filed bankruptcy, or are considered problem
loans based on their risk profile.
The Corporation also has a Credit Process Review Group within
the CRM, which performs annual comprehensive credit process
reviews of several middle markets, construction, asset-based and
corporate banking lending groups in BPPR. This group evaluates
the credit risk profile of each originating unit along with each
unit’s credit administration effectiveness, including the
assessment of the risk rating representative of the current credit
quality of the loans, and the evaluation of collateral documentation.
The monitoring performed by this group contributes to assess
compliance with credit policies and underwriting standards,
determine the current level of credit risk, evaluate the effectiveness
of the credit management process and identify control deficiencies
that may arise in the credit-granting process. Based on its findings,
the Credit Process Review Group recommends corrective actions,
if necessary, that help in maintaining a sound credit process.
CCRMD has contracted an outside loan review firm to perform the
credit process reviews in the U.S. mainland operations. The
CCRMD and CRM participate in defining the review plan with
the outside loan review firm and actively participate in the
discussions of the results of the loan reviews with the business
units. The CRM may periodically review the work performed by
the outside loan review firm. CRM reports the results of the loan
process reviews to the Audit Committee of the Corporation’s
Board of Directors. Beginning in 2008, the loan review function
for the U.S. mainland operations will have an internal officer in
charge of this process. The loan review plan for 2008 will be
conducted by this internal resource in a joint effort with the outside
loan review firm.
The Corporation issues certain credit-related off-balance sheet
financial instruments including commitments to extend credit,
standby letters of credit and commercial letters of credit to meet
the financing needs of its customers. For these financial
instruments, the contract amount represents the credit risk
associated with failure of the counterparty to perform in accordance
with the terms and conditions of the contract, and the decline in
value of the underlying collateral. The credit risk associated with
these financial instruments varies depending on the counterparty’s
creditworthiness and the value of any collateral held. Refer to Note
28 to the consolidated financial statements and to the Contractual
Obligations and Commercial Commitments section of this MD&A
for the Corporation’s involvement in these credit-related
activities.
The Corporation is also exposed to credit risk by using
derivative instruments, but manages the level of risk by only
52
dealing with counterparties of good credit standing, entering
into master netting agreements whenever possible and, when
appropriate, obtaining collateral. Refer to Note 30 to the
consolidated financial statements for further information on the
Corporation’s involvement in derivative instruments and hedging
activities.
The Corporation manages the exposure to a single borrower,
industry or product type through participations and loan sales.
The Corporation maintains a diversified portfolio intended to
spread its risk and reduce its exposure to economic downturns,
which may occur in different segments of the economy or in
particular industries. Industry and loan type diversification is
reviewed quarterly.
The Corporation’s credit risk exposure is spread among
individual consumers, small and medium businesses, as well as
corporate borrowers engaged in a wide variety of industries. Only
327 of these commercial lending relationships have credit relations
with an aggregate exposure of $10 million or more. Highly
leveraged transactions and credit facilities to finance speculative
real estate ventures are minimal, and there are no loans to less
developed countries. The Corporation limits its exposure to
concentrations of credit risk by the nature of its lending limits.
The Corporation has made a substantial number of loans to
subprime borrowers mainly through its subsidiary PFH. The actual
rates of delinquencies, foreclosures and losses on these loans could
be higher during economic slowdowns. Rising unemployment,
higher interest rates or declines in housing prices tend to have a
greater negative effect on the ability of such borrowers to repay
their mortgage loans. All the factors mentioned above also impact
the value of residual interests created as a result of off-balance
sheet securitizations conducted through PFH. Refer to the
Overview of Mortgage Loan Exposure section for further
information.
Geographical and Government Risk
Geographical and Government Risk
Geographical and Government Risk
Geographical and Government Risk
Geographical and Government Risk
The Corporation is also exposed to geographical and government
risk. The Corporation’s assets and revenue composition by
geographical area and by business segment is presented in Note
32 to the consolidated financial statements.
A significant portion of the Corporation’s financial activities
and credit exposure is concentrated in Puerto Rico. Consequently,
its financial condition and results of operations are dependent on
the Island’s economic conditions. An extended economic
slowdown or recessionary cycle, adverse political or economic
developments in Puerto Rico or natural disasters, such as
hurricanes affecting the Island, could result in a downturn in loan
originations, an increase in the level of non-performing assets, an
increase in the rate of foreclosure loss on mortgage loans and a
reduction in the value of the Corporation’s loans and loan
servicing portfolio, all of which would adversely affect the
Corporation’s profitability and financial condition.
The economy of Puerto Rico continued deteriorating during
2007. The weak fiscal position of the P.R. Government and strained
consumer finances, which were impacted by the effects of rising
unemployment rates, oil prices, utilities and taxes, among others,
affected the P.R. economy considerably. The current state of the
economy and uncertainty in the private and public sectors has
had an adverse effect on the credit quality of the Corporation’s
loan portfolios. A prolonged economic slowdown, which has led
to a recessionary cycle could cause those adverse effects to
continue, as delinquency rates may continue to increase in the
short-term until more sustainable growth resumes.
Even though Puerto Rico’s Government and many of its
instrumentalities are investment-grade rated borrowers in the U.S.
capital markets, the current fiscal situation of the Puerto Rico
("P.R. Government") led nationally recognized rating agencies to
downgrade the credit rating of the P.R. Government's debt
obligations during 2006. In November 2007, Moody’s changed
the outlook of the P.R. Government’s credit ratings to “stable”
from “negative”. In justifying its change in outlook, Moody’s
recognized the progress the P.R. Government has made in
addressing the fiscal challenges it has faced in recent years. In
particular, it mentioned the controls imposed on public spending
and the implementation of the sales tax as two favorable
developments. The rating agencies have maintained the negative
outlook for the Puerto Rico obligation bonds. Factors, such as
the government’s ability to implement meaningful steps to curb
operating expenditures, improve managerial and budgetary
controls, and eliminate the government’s reliance on loans from
the Government Development Bank of Puerto Rico to cover budget
deficits, will be key determinants of future rating changes.
At December 31, 2007, the Corporation had $1.0 billion of
credit facilities granted to or guaranteed by the P.R. Government
and its political subdivisions, of which $150 million were
uncommitted lines of credit. Of these total credit facilities granted,
$914 million in loans were outstanding at December 31, 2007. A
substantial portion of the Corporation’s credit exposure to the
Government of Puerto Rico are either collateralized loans or
obligations that have a specific source of income or revenues
identified for its repayment. Some of these obligations consist of
senior and subordinated loans to public corporations that obtain
revenues from rates charged for services or products, such as
water and electric power utilities. Public corporations have varying
degrees of independence from the Central Government and many
receive appropriations or other payments from it. The Corporation
also has loans to various municipalities for which the good faith,
credit and unlimited taxing power of the applicable municipality
has been pledged to their repayment. These municipalities are
required by law to levy special property taxes in such amounts as
2007 Annual Report 53
2007
2007
Popular, Inc. 2007
2007
shall be required for the payment of all of its general obligation
bonds and loans. Another portion of these loans consists of special
obligations of various municipalities that are payable from the
basic real and personal property taxes collected within such
municipalities. The good faith and credit obligations of the
municipalities have a first lien on the basic property taxes.
Furthermore, as of December 31, 2007, the Corporation had
outstanding $178 million in Obligations of Puerto Rico, States
and Political Subdivisions as part of its investment portfolio.
Refer to Notes 6 and 7 to the consolidated financial statements for
additional information. Of that total, $155 million was exposed
to the creditworthiness of the P.R. Government and its
municipalities. Of that portfolio, $55 million was in the form of
Puerto Rico Commonwealth Appropriation Bonds, which are
currently rated Ba1, one notch below investment grade, by
Moody’s, while Standard & Poor’s Rating Services ("S&P") rates
them as investment grade. At December 31, 2007, the
Appropriation Bonds represented approximately $1.8 million in
unrealized losses in the Corporation’s portfolio of investment
securities available-for-sale. The Corporation is closely monitoring
the political and economic situation of the Island and evaluates
the portfolio for any declines in value that management may
consider being other-than-temporary. Management has the intent
and ability to hold these investments for a reasonable period of
time or up to maturity for a forecasted recovery of fair value up to
(or beyond) the cost of these investments.
As further detailed in Notes 6 and 7 to the consolidated financial
statements, a substantial portion of the Corporation’s investment
securities represented exposure to the U.S. Government in the
form of U.S. Treasury securities and obligations of U.S.
Government sponsored entities. In addition, $134 million of
residential mortgages and $352 million in commercial loans were
insured or guaranteed by the U.S. Government or its agencies at
December 31, 2007.
Overview of Mortgage Loan Exposure
Overview of Mortgage Loan Exposure
Overview of Mortgage Loan Exposure
Overview of Mortgage Loan Exposure
Overview of Mortgage Loan Exposure
Deteriorating conditions in the U.S. mainland housing market
and, to a lesser extent, in Puerto Rico accelerated throughout
2007. As many lenders have been forced out of business or have
severely curtailed their operations and most remaining lenders
have increased nonconforming mortgage interest rates and
tightened underwriting standards, many borrowers, particularly
subprime borrowers and borrowers in markets with declining
housing prices, have been unable to refinance existing loans.
Borrowers in markets with declining housing prices may find
themselves unable to refinance their loans, as a result of diminished
equity in their homes.
In a stressed housing market with increasing delinquencies
and declining housing prices, such as currently exists, the
adequacy of collateral securing the loan becomes a much more
important factor in determining future loan performance, as a
borrower with more equity in the property has a greater vested
interest in keeping the loan current than a borrower with little to
no equity in the property. Also, in the event that the Corporation
has to foreclose on a property, the extent to which the outstanding
balance on the loan exceeds the collateral value will determine the
severity of loss.
The residential mortgage loan origination business has
historically been cyclical, with periods of strong growth and
profitability followed by periods of shrinking volumes and
industry-wide losses. Because the Corporation made loans to
borrowers that have FICO® scores of 660 or below, the actual
rates of delinquencies, foreclosures and losses on these loans could
be higher during economic slowdowns. Rising unemployment,
higher interest rates, declines in housing prices and an overall
tightening of credit standards by lenders tend to have a greater
negative effect on the ability of such borrowers to repay their
mortgage loans.
The following table provides information on the Corporation’s
mortgage loan exposure for loans held-in-portfolio, (thus
excluding loans held-for-sale) at December 31, 2007. Subprime
mortgage loans refer to mortgage loans made to individuals with
a FICO® score of 660 or below. FICO® scores are used as an
indicator of the probability of default for loans.
(In billions)
Banco Popular de Puerto Rico
Banco Popular North America
Popular Financial Holdings:
- Owned-in-trust
- Owned - originated through wholesale channels
("centralized")
- Owned - originated through consumer branches
Sub-total
Other not classified as prime or subprime loans
Total Popular, Inc.
Prime Subprime
loans
$1,119
510
loans
$1,236
1,199
Total
$2,355
1,709
57
229
286
199
74
$1,959
716
69
$3,449
915
143
5,408
663
$6,071
Mortgage loans held-in-portfolio that are considered subprime
under the above definition for the Banco Popular de Puerto Rico
reportable segment approximated 42% of its total mortgage loans
held-in-portfolio as of December 31, 2007. The Corporation,
however, believes that the particular characteristics of BPPR’s
subprime portfolio limit its exposure under current market
conditions. BPPR’s loans are fixed-rate fully amortizing, full-
documentation loans that do not have the level of layered risk
associated with subprime loans offered by certain major U.S.
mortgage loan originators. Deteriorating economic conditions
have impacted the mortgage delinquency rates in Puerto Rico
increasing the levels of non-accruing mortgage loans. However,
BPPR has not to date experienced significant increases in losses.
The annualized ratio of mortgage loans net charge-offs to average
54
mortgage loans held-in-portfolio for this subprime portfolio was
0.04% for the year ended December 31, 2007.
BPNA’s mortgage loans held-in-portfolio considered subprime
under the above definition, isolating E-LOAN, approximated 71%
of its total mortgage loans held-in-portfolio as of December 31,
2007. This portfolio has principally two products - either 7/1
ARMs (fixed-rate interest until end of year seven in which interest
rate begins to reset annually until maturity) or 30 years fixed-rate
mortgages that do not have the level of layered risk associated
with subprime loans offered by certain major U.S. mortgage loan
originators. For example, BPNA’s subprime mortgage loan
portfolio has minimal California market exposure, loans are
underwritten to the fully indexed rate, and there are no interest-
only, piggybacks or option ARM loans (Refer to Glossary for
general descriptions of these loan types). Furthermore, the loans
are 100% owner occupied. Also, the first interest rate reset on the
7/1 ARMs is not until 2012. Deteriorating economic conditions
in the U.S. mainland housing market have impacted the mortgage
industry delinquency rates; however, the levels of non-accruing
mortgage loans in BPNA’s subprime mortgage portfolio have been
lower than PFH’s subprime mortgage portfolio. The non-accruing
loans to loans held-in-portfolio ratio for BPNA’s subprime
mortgage loans was 3.67% at December 31, 2007. The annualized
ratio of mortgage loans net charge-offs to average mortgage loans
held-in-portfolio for this subprime portfolio was 1.28% for the
year ended December 31, 2007. As a result of higher delinquency
and net charge-offs experience, BPNA recorded a higher provision
for loan losses in the fourth quarter of 2007 to cover for inherent
losses in this portfolio. The average loan to value (“LTV”) at
December 31, 2007 in BPNA’s portfolio was 89.36%. Effective
late December 2007, BPNA launched several initiatives designed
to reduce the overall credit exposure in the portfolio that involve
the purchase, by either the borrower or BPNA, of private mortgage
insurance.
Mortgage loans held-in-portfolio for PFH, excluding Popular
FS, that are considered subprime approximated 73% of its total
mortgage loans held-in-portfolio as of December 31, 2007. In the
past, PFH originated mortgage loans through various channels
including bulk acquisitions, mortgage loan brokers and its retail
branch network. As part of the PFH Restructuring Plan, PFH
ceased originating loans through all channels except for loans
originated directly through its consumer finance branches and
the customer loan center. This resulted in a significant reduction
in total originations of mortgage loans at PFH during 2007. Also,
as a result of the loan recharacterization transaction discussed
previously, the Corporation reduced its exposure to subprime
mortgage loans by the end of 2007. The loan recharacterization
transaction contributed with a reduction of approximately $2.4
billion in subprime mortgages based on portfolio data reported in
the Corporation’s Form 10-Q as of September 30, 2007. Also, as
indicated in the Events Subsequent to Year-End 2007 section of
this MD&A, during December 2007, the Corporation reclassified
approximately $1.4 billion carrying amount in mortgage and
consumer loans originated through PFH’s consumer branches
from loans held-in-portfolio to loans held-for-sale with the intent
to sell these loans by the end of the first quarter of 2008. Since the
exposure in this held-for-sale portfolio is short-term and a sales
price was set with the prospective buyer, these loans are excluded
from the previous tabular presentation which segregates prime
and subprime mortgage loans. The prospective sale of this
consumer branch portfolio is expected to reduced the
Corporation’s subprime mortgage loan exposure in its portfolio
of loans to be held until maturity by over $700 million.
Approximately $287 million of the loans held-in-portfolio by
PFH as of December 31, 2007 were identified as “owned-in-trust”
for purposes of these disclosures. These loans were pledged as
collateral for asset-backed securities issued by the Corporation
(in the form of bond certificates) as a financing vehicle through
on-balance sheet securitization transactions. Because these loan
securitizations did not meet the sale criteria under SFAS No. 140,
the transactions were treated as on-balance sheet securitizations
for accounting purposes. These “owned-in-trust” loans do not
pose the same magnitude of risk to the Corporation as those loans
owned outright because the potential losses related to “owned-in-
trust” loans above overcollaterization levels will be borne by the
holde rs o f t he b onds and no t by t he C o rpora tion .
Overcollateralization is defined as a type of credit enhancement
by which an issuer of bond certificates pledges mortgage loans as
collateral in excess of the principal amount of bond certificates
issued to cover possible losses. As of December 31, 2007, the
collateral balance on the five securitizations deals accounted as
“on-balance sheet securitizations” approximated $308 million,
which exceeded the outstanding balance of the bond certificates
by $24 million. The allowance for loan losses recorded for these
“owned-in-trust” loans amounted to approximately $5.3 million
at December 31, 2007.
An additional risk factor related to the residential mortgage
loan sector is the repricing of adjustable rate mortgage loans
(“ARMs”). In the U.S. mortgage market, a substantial amount of
ARMs were originated in recent years. These loans typically have
a low fixed rate for an initial period (two or three years) and
afterwards the rate “floats” or adjusts periodically based on a market
rate of interest, such as LIBOR. Of PFH’s subprime mortage loans
held-in-portfolio at December 31, 2007, $320 million or 32%
were ARMs. Many of the ARMs currently outstanding are schedule
to reset before the end of 2008. It is possible that in some of these
loans, when rates adjust, there will be a substantial increase in the
underlying loan payment, possibly enough to pressure the cash
flow of the underlying debtor and increase the likehood of
delinquency.
The table below provides information on PFH’s mortgage loans
held-in-portfolio segregated between owned and “owned-in-trust”
loans.
Owned (a)
Owned-in-Trust (b)
12-31-07
12-31-06
12-31-07
12-31-06
$1,063
$925
$138
8.76%
85.59%
$286
$284
$2
8.76%
81.45%
$112
596
4.31%
21.35%
6.20%
2.38%
3.88%
8.89%
$2,191
$1,868
$323
8.87%
82.66%
$69
607
2.95%
8.66%
2.54%
0.89%
2.48%
2.75%
$4,543
$4,511
$32
7.55%
83.39%
$140
620
2.18%
10.93%
3.48%
1.30%
1.84%
4.31%
($ in millions)
Current Balance (c)
($ in millions)
First Liens
Second Liens
Weighted-average coupon (WAC)
Avg. Loan-to-Value (LTV) (d)
Avg. Loan Balance ($ in thousands) $91
606
Avg. FICO score (e)
3.81%
Bankruptcy (% of $)
18.52%
Total Delinquency
4.78%
30 Days (% of $)
2.41%
60 Days (% of $)
4.80%
90+ Days (% of $)
6.53%
Foreclosure (% of $)
Business Channel
29%
Broker
24%
Asset Acquisition
Retail Mortgage (call centers)
7%
Customer Loan Center ("CLC") (f) 23%
14%
Decentralized (branches)
3%
Other
Product Type
60%
Fixed-rate
29%
ARM (Adjustable rate mortgage)
4%
Balloon
1%
Interest only - Fixed
6%
Interest only - ARM
(a) Owned portfolio - represents mortgage loans originated / acquired, but not sold / securitized.
(b) Owned-in-trust - represents mortgage loans securitized in on-balance sheet securitizations, as
such, are part of PFH’s portfolio under SFAS No. 140.
(c) Excluding deferred fees, origination costs, net premiums and other items.
(d) LTV – a lending risk ratio calculated by dividing the total amount of the mortgage or loan by the
fair value of the property. The LTV presented is based on amounts at loan origination date.
(e) FICO® - the Corporation uses external credit scores as a useful measure for assessing the credit
quality of a borrower. These scores are numbers supplied by credit information providers, based
on statistical models that summarize an individual’s credit record. FICO® scores, developed by Fair
Isaac Corporation, are the most commonly used credit scores.
(f) CLC - unit that anticipates possible refinancing needs of the customer and makes efforts to retain
the customer by offering the company’s products.
17%
72%
6%
4%
-
1%
22%
17%
5%
6%
47%
3%
53%
10%
16%
19%
-
2%
35%
51%
13%
-
1%
69%
20%
10%
-
1%
62%
21%
16%
-
1%
The U.S. government and the mortgage industry have taken
steps to limit the negative effects of the subprime mortgage crisis
on the financial markets and the economy as a whole. Many of
these initiatives have focused on lenders being able to modify
mortgages so that distressed or potentially distressed debtors
can continue to make payments on their mortgages. Refer to the
Off-Balance Financing Entities section in this MD&A for
information on certain of these market initiatives.
Non-Performing Assets
Non-Performing Assets
Non-Performing Assets
Non-Performing Assets
Non-Performing Assets
A summary of non-performing assets by loan categories and related
ratios is presented in Table N. Non-performing assets include
past-due loans that are no longer accruing interest, renegotiated
2007 Annual Report 55
2007
2007
Popular, Inc. 2007
2007
loans and real estate property acquired through foreclosure. During
2004, the Corporation adopted the standard industry practice of
placing commercial and construction loans on non-accrual status
if payments of principal or interest are delinquent 90 days or
more, instead of 60 days or more, which was its previous policy.
The level of non-performing loans has been mostly impacted
by the effects of a continuing downturn in the economy of Puerto
Rico and a slowdown in the U.S. economy, which has affected
both the commercial and consumer sectors. The Puerto Rico
economy continued to contract during 2007 as it has been
impacted by consumers’ finances under stress, unemployment
rates at high levels, rising operational costs which pressure
businesses, caution on capital spending, slowdown in the housing
market, among other factors. The growth of the U.S. economy
also fell in the latter part of 2007, in part, as a result of the credit
crunch that took effect in the second half of 2007. The slowdown
was triggered by a slump in building activity as housing prices
significanttly declined. Also, the U.S. economy faced the threats
of lower consumer spending while, at the same time, addressing
inflation as oil and other commodity costs were rising. With the
aim of boosting the economy and avoiding a recession in the U.S.
mainland, the U.S. Government approved an economic stimulus
package during early 2008, which includes a series of tax rebates.
The economic stimulus package, which is also applicable to
Puerto Rico, is anticipated to also have a positive impact on the
economy of Puerto Rico. Also, as indicated in the Net Interest
Income section of this MD&A, the FED reduced its key interest
rate to 3% as it tries to stimulate economic momentum.
Non-performing commercial loans as of December 31, 2007
reflected an increase of $204 million from December 31, 2006,
mainly due to deteriorating economic conditions in Puerto Rico
and the U.S. mainland. The percentage of non-performing
commercial loans to commercial loans held-in-portfolio rose from
1.09% at the end of 2006 to 2.32% at the same date in 2007. For
December 31, 2005, this ratio was 1.06%. Of the total increase in
non-performing commercial loans between the end of 2006 and
2007, $95 million of the increase pertained to commercial
construction loans. Commercial loans considered impaired under
the Corporation’s criteria for FAS 114 amounted to $322 million
at December 31, 2007, compared with $208 million at the same
date in 2006.
Non-performing consumer loans represented 0.94%, 0.92%
and 0.83% of consumer loans held-in-portfolio at December 31,
2007, 2006, and 2005, respectively. The ratio for 2007 remained
at a level very close to 2006, in part, because the portfolio growth
in consumer loans has been mostly in credit cards which are not
placed in non-accrual status under the Corporation’s policy and
in home equity lines of credit which is mostly a relatively newly
originated portfolio from the 2007 vintage. The increase in this
56
Table N
Table N
Table N
Table N
Table N
Non-Performing Assets
(Dollars in thousands)
Non-accrual loans:
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
As of December 31,
2005
2004
2003
Commercial (including construction)
Lease financing
Mortgage
Consumer
Total non-performing loans
Other real estate
Total non-performing assets
Accruing loans past-due
90 days or more
Non-performing assets to loans held-in-portfolio
Non-performing loans to loans held-in-portfolio
Non-performing assets to assets
Interest lost
$ 3 6 2 , 0 1 9
$ 3 6 2 , 0 1 9
$ 3 6 2 , 0 1 9
$ 3 6 2 , 0 1 9
$ 3 6 2 , 0 1 9
1 0 , 1 8 2
1 0 , 1 8 2
1 0 , 1 8 2
1 0 , 1 8 2
1 0 , 1 8 2
3 4 9 , 3 8 1
3 4 9 , 3 8 1
3 4 9 , 3 8 1
3 4 9 , 3 8 1
3 4 9 , 3 8 1
4 9 , 0 9 0
4 9 , 0 9 0
4 9 , 0 9 0
4 9 , 0 9 0
4 9 , 0 9 0
7 7 0 , 6 7 2
7 7 0 , 6 7 2
7 7 0 , 6 7 2
7 7 0 , 6 7 2
7 7 0 , 6 7 2
8 1 , 4 1 0
8 1 , 4 1 0
8 1 , 4 1 0
8 1 , 4 1 0
8 1 , 4 1 0
$ 8 5 2 , 0 8 2
$ 8 5 2 , 0 8 2
$ 8 5 2 , 0 8 2
$ 8 5 2 , 0 8 2
$ 8 5 2 , 0 8 2
$ 1 0 9 , 5 6 9
$ 1 0 9 , 5 6 9
$ 1 0 9 , 5 6 9
$ 1 0 9 , 5 6 9
$ 1 0 9 , 5 6 9
3 . 0 4 %
3 . 0 4 %
3 . 0 4 %
3 . 0 4 %
3 . 0 4 %
2 . 7 5
2 . 7 5
2 . 7 5
2 . 7 5
2 . 7 5
1 . 9 2
1 . 9 2
1 . 9 2
1 . 9 2
1 . 9 2
$ 7 1 , 0 3 7
$ 7 1 , 0 3 7
$ 7 1 , 0 3 7
$ 7 1 , 0 3 7
$ 7 1 , 0 3 7
$158,214
11,898
499,402
48,074
717,588
84,816
$802,404
$99,996
2.51%
2.24
1.69
$58,223
$133,746
2,562
371,885
39,316
547,509
79,008
$626,517
$86,662
2.02%
1.77
1.29
$46,198
$122,593
3,665
395,749
32,010
554,017
59,717
$613,734
$168,266
7,494
344,916
36,350
557,026
53,898
$610,924
$79,091
2.19%
1.98
1.38
$45,089
$75,557
2.74%
2.49
1.68
$45,541
ratio from 2005 to 2006 resulted from higher delinquency levels,
partially offset by portfolio growth.
Non-performing mortgage loans, which decreased by $150
million, or 30%, since December 31, 2006, represented 41% of
total non-performing assets and 5.75% of total mortgage loans
held-in-portfolio at December 31, 2007, compared with 62% and
4.51%, respectively, at December 31, 2006, and 59% and 3.02%,
respectively, at December 31, 2005. The decline was directly
related to the PFH loan recharacterization transaction which
resulted in a reduction in non-performing mortgage loans of
approximately $316 million, which was partially offset by increases
in non-performing mortgage loans in PFH’s remaining owned
portfolio, the Puerto Rico operations and BPNA in the amount of
$167 million. The increase at these reportable segments was mainly
due to the continued deterioration in the subprime market in the
U.S. mainland, as well as higher delinquencies triggered by
deteriorating economic conditions in Puerto Rico. The increase
in non-performing mortgage loans since December 31, 2005 to
2006 was also due to similar factors, which were already being
experienced to a lesser extent during 2006. Ratios of mortgage
loans net charge-offs as a percentage of the average mortgage
loans held-in-portfolio are presented later in the Allowance for
Loan Losses section of this MD&A.
Non-performing financing leases represented 0.93% of the lease
financing portfolio at December 31, 2007, compared with 0.97%
at the end of 2006, remaining at a relatively stable level. Non-
performing financing leases represented 0.20% of the lease
financing portfolio at December 31, 2005.The increase in non-
performing leases for 2006, compared to the earlier year, was
mainly the impact of a system conversion. The new lease system
identifies non-accruing leases at actual days past due instead of
installments past due, which was the previous system parameter.
The impact in interest reversals or charge-offs, as a result of this
system conversion, was not significant.
Other real estate owned, representing real estate property
acquired through foreclosure, at December 31, 2007 reflected a
decrease of $3 million, or 4%, compared with December 31,
2006. This decline resulted because of the elimination of $68
million in other real estate property, as a result of PFH’s loan
recharacterization transaction since the properties belong to the
trust and had to be excluded from the Corporation’s accounting
records at the time the securitization was recharacterized as a sale
transaction. This decline was offset by increases in other of the
Corporation’s reportable segments. With the slowdown in the
housing market, there is a continued economic deterioration in
certain geographic areas, which also has a softening effect on the
market for resale of repossessed real estate properties. Defaulted
loans have increased, and these loans move through the default
process to the other real estate classification. The combination of
increased flow of defaulted loans from the loan portfolio to other
real estate owned and the slowing of the liquidation market has
resulted in an increase in the number of units on hand.
Under the standard industry practice, closed-end consumer
loans are not customarily placed on non-accrual status prior to
being charged-off. Excluding the closed-end consumer loans from
non-accruing at December 31, 2007, adjusted non-performing
assets would have been $803 million, or 2.87%, of loans held-in-
portfolio, compared with $754 million or 2.36%, respectively, at
December 31, 2006. The allowance to non-performing loans ratio
at December 31, 2007 and 2006 would have been 76.06% and
2007 Annual Report 57
2007
2007
Popular, Inc. 2007
2007
78.00%, respectively. The decline in this ratio reflects a higher
proportion of real estate secured loans in non-performing status.
Given the change in policy in 2004 for placing commercial loans
on non-accrual status as previously discussed, and excluding the
closed-end consumer loans from non-accruing at December 31,
2005, adjusted non-performing assets would have been $587
million, or 1.89%, of loans held-in-portfolio, and the allowance to
non-performing loans ratio would have been 90.85% at December
31, 2005.
Once a loan is placed in non-accrual status, the interest
previously accrued and uncollected is charged against current
earnings and thereafter income is recorded only to the extent of
any interest collected. Refer to Table N for information on the
interest income that would have been realized had these loans
been performing in accordance with their original terms.
In addition to the non-performing loans discussed earlier, there
were $50 million of commercial loans at December 31, 2007,
which in management’s opinion are currently subject to potential
future classification as non-performing, and therefore are
considered impaired for purposes of the analysis under SFAS No.
114. At December 31, 2006 and 2005, these potential problem
loans approximated $103 million and $30 million, respectively.
The decline from December 31, 2006 to the same date in 2007 was
mainly due to a particular commercial lending relationship in the
Corporation’s Puerto Rico banking operations.
Another key measure used to evaluate and monitor the
Corporation’s asset quality is loan delinquencies. Loans delinquent
30 days or more and delinquencies as a percentage of their related
portfolio category at December 31, 2007 and 2006 are presented
below.
(Dollars in millions)
Loans delinquent 30 days or more
Total delinquencies as a percentage
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$ 2 , 0 1 1
$ 2 , 0 1 1
$ 2 , 0 1 1
$ 2 , 0 1 1
$ 2 , 0 1 1
2006
$1,917
of total loans:
Commercial
Lease financing
Mortgage
Consumer
Total
4 . 9 7 %
4 . 9 7 %
4 . 9 7 %
4 . 9 7 %
4 . 9 7 %
4 . 3 6
4 . 3 6
4 . 3 6
4 . 3 6
4 . 3 6
1 2 . 2 8
1 2 . 2 8
1 2 . 2 8
1 2 . 2 8
1 2 . 2 8
4 . 7 5
4 . 7 5
4 . 7 5
4 . 7 5
4 . 7 5
6 . 7 2 %
6 . 7 2 %
6 . 7 2 %
6 . 7 2 %
6 . 7 2 %
2.93%
9.30
9.97
4.00
5.86%
Accruing loans past due 90 days or more are composed
primarily of credit cards, FHA / VA and other insured mortgage
loans, and delinquent mortgage loans included in the Corporation’s
financial statements pursuant to GNMA’s buy-back option
program. Under SFAS No. 140, servicers of loans underlying
Ginnie Mae mortgage-backed securities must report as their own
assets the defaulted loans that they have the option to purchase,
even when they elect not to exercise that option. Also, accruing
loans past due 90 days or more include residential conventional
loans purchased from other financial institutions that, although
delinquent, the Corporation has received timely payment from
the sellers / servicers, and, in some instances, have partial
guarantees under recourse agreements.
Allowance for Loan Losses
Allowance for Loan Losses
Allowance for Loan Losses
Allowance for Loan Losses
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on evaluations of inherent
risks in the loan portfolio. The Corporation’s management
evaluates the adequacy of the allowance for loan losses on a monthly
basis. Some of the factors that management considers in
determining the allowance are current economic conditions and
the resulting impact on Popular’s loan portfolio, the composition
of the portfolio by loan types and risk profiles, historical loss
experience, the current level of the allowance in relation to total
loans and to historical loss levels, results of periodic credit
reviews of individual loans, collateral values of properties securing
certain loans, regulatory requirements and loan impairment
measurement, among others.
The Corporation’s methodology to determine its allowance
for loan losses follows the guidance in SFAS No. 114 (as amended
by SFAS No. 118) and SFAS No. 5. Under SFAS No. 114,
commercial loans over a predetermined amount are identified for
impairment evaluation on an individual basis and specific
impairment reserves are calculated. SFAS No. 5 provides for the
recognition of a loss contingency for a group of homogeneous
loans, which are not individually evaluated under SFAS No. 114,
when it is probable that a loss has been incurred and the amount
can be reasonably estimated. To determine the allowance for loan
losses under SFAS No. 5, the Corporation applies a historic loss
and volatility factor to specific loan balances segregated by loan
type and legal entity.
The result of the exercise described above is compared to
stress-tested levels of historic losses over a period of time, recent
tendencies of losses and industry trends. Management considers
all indicators derived from the process described herein, along
with qualitative factors that may cause estimated credit losses
associated with the loan portfolios to differ from historical loss
experience. The final outcome of the provision for loan losses and
the appropriate level of the allowance for loan losses for each
subsidiary and the Corporation is a determination made by the
CRESCO, which actively reviews the Corporation’s allowance
for loan losses.
Management’s evaluation of the quantitative factors (historical
net charge-offs, statistical loss estimates, etc.), as well as
qualitative factors (current economic conditions, portfolio
composition, delinquency trends, etc.), results in the final
determination of the provision for loan losses to maintain a level
of allowance for loan losses which is deemed to be adequate. Since
the determination of the allowance for loans losses considers
58
Table O
Table O
Table O
Table O
Table O
Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands)
Balance at beginning of year
Allowances acquired
Provision for loan losses
Impact of change in reporting period*
Charge-offs:
Commercial (including construction)
Lease financing
Mortgage
Consumer
Recoveries:
Commercial (including construction)
Lease financing
Mortgage
Consumer
Net loans charged-off:
Commercial
Lease financing
Mortgage
Consumer
Write-downs related to loans transferred
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$ 5 2 2 , 2 3 2
$ 5 2 2 , 2 3 2
$ 5 2 2 , 2 3 2
$ 5 2 2 , 2 3 2
$ 5 2 2 , 2 3 2
7 , 2 9 0
7 , 2 9 0
7 , 2 9 0
7 , 2 9 0
7 , 2 9 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
-----
1 , 0 9 2 , 1 7 2
1 , 0 9 2 , 1 7 2
1 , 0 9 2 , 1 7 2
1 , 0 9 2 , 1 7 2
1 , 0 9 2 , 1 7 2
9 8 , 5 4 2
9 8 , 5 4 2
9 8 , 5 4 2
9 8 , 5 4 2
9 8 , 5 4 2
2 3 , 7 2 2
2 3 , 7 2 2
2 3 , 7 2 2
2 3 , 7 2 2
2 3 , 7 2 2
1 4 4 , 6 5 4
1 4 4 , 6 5 4
1 4 4 , 6 5 4
1 4 4 , 6 5 4
1 4 4 , 6 5 4
2 2 2 , 1 5 5
2 2 2 , 1 5 5
2 2 2 , 1 5 5
2 2 2 , 1 5 5
2 2 2 , 1 5 5
4 8 9 , 0 7 3
4 8 9 , 0 7 3
4 8 9 , 0 7 3
4 8 9 , 0 7 3
4 8 9 , 0 7 3
1 9 , 9 8 5
1 9 , 9 8 5
1 9 , 9 8 5
1 9 , 9 8 5
1 9 , 9 8 5
8 , 6 9 5
8 , 6 9 5
8 , 6 9 5
8 , 6 9 5
8 , 6 9 5
1 , 3 1 4
1 , 3 1 4
1 , 3 1 4
1 , 3 1 4
1 , 3 1 4
3 5 , 9 8 2
3 5 , 9 8 2
3 5 , 9 8 2
3 5 , 9 8 2
3 5 , 9 8 2
6 5 , 9 7 6
6 5 , 9 7 6
6 5 , 9 7 6
6 5 , 9 7 6
6 5 , 9 7 6
7 8 , 5 5 7
7 8 , 5 5 7
7 8 , 5 5 7
7 8 , 5 5 7
7 8 , 5 5 7
1 5 , 0 2 7
1 5 , 0 2 7
1 5 , 0 2 7
1 5 , 0 2 7
1 5 , 0 2 7
1 4 3 , 3 4 0
1 4 3 , 3 4 0
1 4 3 , 3 4 0
1 4 3 , 3 4 0
1 4 3 , 3 4 0
1 8 6 , 1 7 3
1 8 6 , 1 7 3
1 8 6 , 1 7 3
1 8 6 , 1 7 3
1 8 6 , 1 7 3
4 2 3 , 0 9 7
4 2 3 , 0 9 7
4 2 3 , 0 9 7
4 2 3 , 0 9 7
4 2 3 , 0 9 7
2006
$461,707
-
287,760
2,510
751,977
55,605
24,526
59,613
149,776
289,520
17,283
10,643
979
30,870
59,775
38,322
13,883
58,634
118,906
229,745
2005
$437,081
6,291
195,272
1,586
640,230
64,559
20,568
48,212
108,110
241,449
22,067
10,939
775
29,145
62,926
42,492
9,629
47,437
78,965
178,523
2004
$408,542
27,185
178,657
-
614,384
64,931
37,125
33,032
103,393
238,481
19,778
11,385
1,440
28,575
61,178
45,153
25,740
31,592
74,818
177,303
2003
$372,797
13,697
195,939
-
582,433
80,069
22,995
29,495
100,040
232,599
20,594
11,477
467
26,170
58,708
59,475
11,518
29,028
73,870
173,891
to loans held-for-sale
Balance at end of year
Loans held-in-portfolio:
Outstanding at year end
Average
Ratios:
Allowance for loan losses to year
end loans held-in-portfolio
Recoveries to charge-offs
Net charge-offs to average loans
held-in-portfolio
Net charge-offs earnings coverage
Allowance for loan losses to net
charge-offs
Provision for loan losses to:
Net charge-offs
Average loans held-in-portfolio
Allowance to non-performing assets
Allowance to non-performing loans
1 2 0 , 2 4 3
1 2 0 , 2 4 3
1 2 0 , 2 4 3
1 2 0 , 2 4 3
1 2 0 , 2 4 3
-
-
-
-
$ 5 4 8 , 8 3 2
$ 5 4 8 , 8 3 2
$ 5 4 8 , 8 3 2
$ 5 4 8 , 8 3 2
$ 5 4 8 , 8 3 2
$522,232
$461,707
$437,081
$408,542
$ 2 8 , 0 2 1 , 4 5 6
$ 2 8 , 0 2 1 , 4 5 6
$ 2 8 , 0 2 1 , 4 5 6
$ 2 8 , 0 2 1 , 4 5 6
$ 2 8 , 0 2 1 , 4 5 6
3 2 , 1 8 1 , 5 9 6
3 2 , 1 8 1 , 5 9 6
3 2 , 1 8 1 , 5 9 6
3 2 , 1 8 1 , 5 9 6
3 2 , 1 8 1 , 5 9 6
$32,017,017
31,246,079
$31,011,026
28,830,965
$27,991,533
24,881,341
$22,330,600
20,258,913
1 . 9 6 %
1 . 9 6 %
1 . 9 6 %
1 . 9 6 %
1 . 9 6 %
1 3 . 4 9
1 3 . 4 9
1 3 . 4 9
1 3 . 4 9
1 3 . 4 9
1 . 3 1
1 . 3 1
1 . 3 1
1 . 3 1
1 . 3 1
1 . 0 4 x
1 . 0 4 x
1 . 0 4 x
1 . 0 4 x
1 . 0 4 x
1 . 3 0
1 . 3 0
1 . 3 0
1 . 3 0
1 . 3 0
1 . 3 3
1 . 3 3
1 . 3 3
1 . 3 3
1 . 3 3
1 . 7 5 %
1 . 7 5 %
1 . 7 5 %
1 . 7 5 %
1 . 7 5 %
6 4 . 4 1
6 4 . 4 1
6 4 . 4 1
6 4 . 4 1
6 4 . 4 1
7 1 . 2 1
7 1 . 2 1
7 1 . 2 1
7 1 . 2 1
7 1 . 2 1
1.63%
20.65
0.74
3.27x
2.27
1.25
0.92%
65.08
72.78
1.49%
26.06
0.62
4.94x
2.59
1.09
0.68%
73.69
84.33
1.56%
25.65
0.71
4.59x
2.47
1.01
0.72%
71.22
78.89
1.83%
25.24
0.86
4.59x
2.35
1.13
0.97%
66.87
73.34
*Represents the net effect of provision for loan losses, less net charge-offs corresponding to the impact of the change in fiscal period at certain subsidiaries described in the
overview section (change from fiscal to calendar reporting year for non-banking subsidiaries).
2007 Annual Report 59
2007
2007
Popular, Inc. 2007
2007
Table P
Table P
Table P
Table P
Table P
Allocation of the Allowance for Loan Losses
(Dollars in millions)
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
2004
2003
As of December,
Percentage of
Percentage of
Percentage of
Percentage of
Percentage of
Percentage of
Allowance
Allowance
Loans in Each
Loans in Each
Allowance
Loans in Each Allowance Loans in Each
Allowance
Allowance
Loans in Each
Loans in Each
f o r
f o r
Category to
Category to
f o r
Category to
f o r
f o r
Category to
Category to
Category to
Total Loans*
Total Loans*
Loan Losses
Loan Losses
Total Loans* Loan Losses Total Loans*
Loan Losses Total Loans*
Total Loans*
Loan Losses
Loan Losses
for
Percentage of
Percentage of
Allowance Loans in Each Allowance Loans in Each Allowance Loans in Each
Category to
Loan Losses Total Loans* Loan Losses Total Loans* Loan Losses Total Loans*
Percentage of
Category to
Category to
for
for
for
Commercial
Lease financing
Mortgage
Consumer
Total
$ 2 2 2 . 7
$ 2 2 2 . 7
$ 2 2 2 . 7
$ 2 2 2 . 7
$ 2 2 2 . 7
2 5 . 6
2 5 . 6
2 5 . 6
2 5 . 6
2 5 . 6
7 0 . 0
7 0 . 0
7 0 . 0
7 0 . 0
7 0 . 0
2 3 0 . 5
2 3 0 . 5
2 3 0 . 5
2 3 0 . 5
2 3 0 . 5
$ 5 4 8 . 8
$ 5 4 8 . 8
$ 5 4 8 . 8
$ 5 4 8 . 8
$ 5 4 8 . 8
5 5 . 7 %
5 5 . 7 %
5 5 . 7 %
5 5 . 7 %
5 5 . 7 %
3 . 93 . 93 . 93 . 93 . 9
2 1 . 7
2 1 . 7
2 1 . 7
2 1 . 7
2 1 . 7
1 8 . 7
1 8 . 7
1 8 . 7
1 8 . 7
1 8 . 7
1 0 0 . 0 %
1 0 0 . 0 %
1 0 0 . 0 %
1 0 0 . 0 %
1 0 0 . 0 %
$204.0
24.8
92.2
201.2
$522.2
45.3%
3.8
34.6
16.3
100.0%
$184.4
27.6
72.7
177.0
$461.7
40.7%
4.2
39.7
15.4
100.0%
$179.0
28.7
67.7
161.7
$437.1
38.9%
4.2
42.5
14.4
100.0%
$171.5
29.8
55.5
151.7
$408.5
38.4%
4.7
42.3
14.6
100.0%
*Note: For purposes of this table, the term loans refers to loans held-in-portfolio (excludes loans held-for-sale).
projections and assumptions, actual losses can vary from the
estimated amounts.
Refer to Table O for a summary of the activity in the allowance
for loan losses and selected loan losses statistics for the past 5
years.
Table P details the breakdown of the allowance for loan losses
by loan categories. The breakdown is made for analytical purposes,
and it is not necessarily indicative of the categories in which
future loan losses may occur.
Also, the following table presents net charge-offs to average
loans held-in-portfolio by loan category for the years ended
December 31, 2007, 2006 and 2005:
Commercial
(including construction)
Lease financing
Mortgage
Consumer
Total
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
0 . 5 2 %
0 . 5 2 %
0 . 5 2 %
0 . 5 2 %
0 . 5 2 %
1 . 2 8
1 . 2 8
1 . 2 8
1 . 2 8
1 . 2 8
1 . 3 7
1 . 3 7
1 . 3 7
1 . 3 7
1 . 3 7
3 . 4 1
3 . 4 1
3 . 4 1
3 . 4 1
3 . 4 1
1 . 3 1 %
1 . 3 1 %
1 . 3 1 %
1 . 3 1 %
1 . 3 1 %
0.28%
1.08
0.51
2.38
0.74%
0.36%
0.74
0.42
1.81
0.62%
The increase in the ratio of commercial loans net charge-offs
to average loans held-in-portfolio for the year ended December
31, 2007 was mostly associated with deterioration in the
economic conditions in Puerto Rico and in the U.S. mainland.
The ratio of commercial loans net charge-offs to average
commercial loans held-in-portfolio in the Banco Popular de Puerto
Rico reportable segment was 0.62% for the year ended December
31, 2007, compared to 0.33% for the previous year. Also, an
increase was experienced in the Banco Popular North America
reportable segment, whose ratio was 0.31% for 2007, compared
with 0.21% for 2006. The allowance for loan losses corresponding
to commercial loans held-in-portfolio represented 1.43% of that
portfolio at December 31, 2007, compared with 1.41% in 2006
and 1.46% in 2005. The ratio of allowance to non-performing
loans in the commercial loan category was 61.50% at the end of
2007, compared with 129.0% in 2006 and 137.9% in 2005. The
decrease in this ratio from 2006 to 2007 was related to the
significant increase in commercial non-performing loans which
are mostly secured by real estate and other collateral and for which
no specific reserves were considered necessary as part of the SFAS
No. 114 impairment analysis. The portion of the allowance for
loan losses related to impaired loans at December 31, 2007, 2006
and 2005 was $54 million, $37 million and $20 million,
respectively. Further disclosures with respect to impaired loans
are included in Note 7 to the consolidated financial statements.
The increase in net charge-offs to average loans held-in-
portfolio in the lease financing portfolio from 2006 to 2007 was
the result of higher delinquencies in the Banco Popular de Puerto
Rico reportable segment. This was partially offset by a decrease in
net charge-offs to average loans held-in-portfolio in the lease
financing portfolio of the Banco Popular North America operations.
There was a large amount of charge-offs in the U.S. leasing
subsidiary during 2006 related to a particular customer lending
relationship. The allowance for loan losses to the lease financing
portfolio was 2.34% at December 31, 2007, compared with 2.03%
at the same date in 2006 and 2.11% in 2005.
Mortgage loans net charge-offs as a percentage of average
mortgage loans held-in-portfolio increased primarily due to the
slowdown in the housing sector and higher delinquency levels,
primarily in the Corporation’s U.S. subprime mortgage loan
portfolio. This increase also reflects the impact of the reduction
in the mortgage loan portfolio at PFH. The increase in net charge-
offs on mortgage loans for 2007, when compared to 2006, included
an increase of $34 million in net charge-offs on second liens
mortgages at PFH. The mortgage loans net charge-offs to average
mortgage loans held-in-portfolio ratio at PFH, excluding Popular
FS, for 2007 was 2.10%, compared with 0.77% in 2006 and 0.62%
in 2005. Refer to the Overview of Mortgage Loan Exposure section
60
in this MD&A for information on PFH’s mortgage loan portfolio,
including credit statistics. Deteriorating economic conditions
have also impacted the mortgage delinquency rates in Puerto
Rico, thus increasing the levels of non-accruing mortgage loans.
However, no significant increase in losses has occurred. The
mortgage loans net charge-off to average mortgage loans held-in-
portfolio ratio in the Banco Popular de Puerto Rico reportable
segment was 0.04% for the year ended December 31, 2007.
Historically, the Corporation has experienced a low level of losses
in its Puerto Rico mortgage loan portfolio. The Corporation’s
allowance for loan losses for mortgage loans held-in-portfolio
represented 1.15% of that portfolio at December 31, 2007,
compared with 0.83% in 2006 and 0.59% in 2005. The increase
in this ratio from 2006 to 2007 was the result of higher trend of net
charge-offs, the inherent losses in the subprime portfolio due to
economic conditions and the slowdown in that sector’s housing
market, which has affected home values and thus, impacts the
initial write-downs to fair value at the time of a property foreclosure.
Consumer loans net-charge offs for 2007 reflected an increase
of 57%, when compared to 2006, and also as a percentage of the
average consumer loan portfolio. The increase in this ratio was
associated with higher delinquencies in Puerto Rico and growth
in unsecured consumer loans, primarily personal loans and credit
cards. The allowance for loan losses for consumer loans held-in-
portfolio represented 4.39% of that portfolio at December 31,
2007, compared with 3.86% in 2006 and 3.71% in 2005. The
increase in this ratio was the result of increased levels of
delinquencies and charge-offs coupled with higher loan volumes.
Included in Table O as part of the reconciliation of the allowance
for loan losses as of December 31, 2007 was $120 million of write-
downs in value due to credit considerations arising from loan
transfers to held-for-sale. This amount principally consisted of
$74 million pertaining to the loans recharacterized in December
2007 and $43 million related to the $1.5 billion portfolio that will
be sold by PFH in the first quarter of 2008. The loans were
reclassified from held-in-portfolio to held-for-sale at the lower of
cost or fair value at the time the decision to sell was made. The
charge-off ratios included in Table O does not consider the removal
of the allowance for loan losses upon the transfer of loans to held-
for-sale.
Operational Risk Management
Operational Risk Management
Operational Risk Management
Operational Risk Management
Operational Risk Management
Operational risk can manifest itself in various ways, including
errors, fraud, business interruptions, inappropriate behavior of
employees, and failure to perform in a timely manner, among
others. These events can potentially result in financial losses and
other damages to the Corporation, including reputational harm.
The successful management of operational risk is particularly
important to a diversified financial services company like Popular
because of the nature, volume and complexity of its various
businesses.
To monitor and control operational risk and mitigate related
losses, the Corporation maintains a system of comprehensive
policies and controls. The Corporation’s Operational Risk
Committee (“ORCO”), which is composed of senior level
representatives from the business lines and corporate functions,
provides executive oversight to facilitate consistency of effective
policies, best practices, controls and monitoring tools for
managing and assessing all types of operational risks across the
Corporation. The Operational Risk Management Division, within
the Corporation’s Risk Management Group, serves as ORCO’s
operating arm and is responsible for establishing baseline
processes to measure, monitor, limit and manage operational risk.
In addition, the Internal Audit Division provides oversight about
policy compliance and ensures adequate attention is paid to correct
the identified issues.
Operational risks fall into two major categories: business
specific and corporate-wide affecting all business lines. The
primary responsibility for the day-to-day management of business
specific risks relies on business unit managers. Accordingly,
business unit managers are responsible of ensuring that appropriate
risk containment measures, including corporate-wide or business
segment specific policies and procedures, controls and
monitoring tools, are in place to minimize risk occurrence and
loss exposures. Examples of these include personnel management
practices, data reconciliation processes, transaction processing
monitoring and analysis and contingency plans for systems
interruptions. To manage corporate-wide risks, specialized groups
such as Legal, Information Security, Business Continuity, Finance
and Compliance, assist the business units in the development and
implementation of risk management practices specific to the needs
of the individual businesses.
Operational risk management plays a different role in each
category. For business specific risks, the Operational Risk
Management Group works with the segments to ensure consistency
in policies, processes, and assessments. With respect to
corporate-wide risks, such as information security, business
continuity, legal and compliance, the risks are assessed and a
consolidated corporate view is developed and communicated to
the business level.
LLLLL OSSOSSOSSOSSOSS M M M M MITIGATION
ECURITIZED M M M M MORTGAGE
ITIGATION F F F F F OROROROROR S S S S SECURITIZED
ORTGAGE
ORTGAGE
ECURITIZED
ECURITIZED
ITIGATION
ITIGATION
ORTGAGE
ORTGAGE
ECURITIZED
ITIGATION
LLLLL O A N S
O A N S
O A N S
O A N S
O A N S
Loan Modification Program
Loan Modification Program
Loan Modification Program
Loan Modification Program
Loan Modification Program
In October 2007, in response to market conditions and guidance
issued by the American Securitization Forum (“ASF”) and the
SEC’s Office of Chief Accountant (the “OCA”), PFH instituted a
loan modification program (the “Modification Program”) for its
2007 Annual Report 61
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Popular, Inc. 2007
2007
securitized U.S. subprime residential adjustable-rate mortgage
loans (“Subprime ARM Loans”). In addition to having to comply
with parameters set forth in the transaction documents governing
the securitized loans, a concern was raised by the industry that
modifying a Subprime ARM Loan owned by a QSPE could result in
disqualification of that QSPE, thereby disallowing the related
securitization transaction from being accounted for using off-
balance sheet accounting treatment. The OCA, in a July 18, 2007
Memorandum to SEC Chairman Christopher Cox regarding
“Accounting for Loan Modifications,” concluded that, subject to
certain limitations, modifying a Subprime ARM Loan when default
is “reasonably foreseeable” does not preclude continued off-balance
sheet treatment for the related QSPE under SFAS No. 140.
Consistent with the above-referenced guidance and the
transaction documents governing the securitization transactions,
the Modification Program permitted PFH, as servicer, to modify
a Subprime ARM Loan if, among other things, the modification:
• would be consistent with generally accepted servicing
practices;
• would be in the collective best interest of the holders of the
related asset-backed securities;
• would be in response to a default or a “reasonably foreseeable”
default; and
• would provide the borrower with a long term and sustainable
solution.
Permissible modifications to a Subprime ARM Loan under the
Modification Program included the postponement of the loan’s
interest rate reset date, conversion to a fixed-rate loan and
reduction of the loan’s interest rate cap on reset.
The ASF Framework and Subprime ARM Loans
The ASF Framework and Subprime ARM Loans
The ASF Framework and Subprime ARM Loans
The ASF Framework and Subprime ARM Loans
The ASF Framework and Subprime ARM Loans
On December 6, 2007, the ASF, working with various constituency
groups as well as representatives of U.S. federal government
agencies, issued the Streamlined Foreclosure and Loss Avoidance
Framework for Securitized Subprime Adjustable Rate Mortgage Loans
(the “ASF Framework”). The ASF Framework provides guidance
for servicers to streamline borrower evaluation procedures and to
facilitate the use of foreclosure and loss prevention efforts in an
attempt to reduce the number of U.S. subprime residential mortgage
borrowers who might default in the coming year because the
borrowers cannot afford to pay the increased loan interest rate
after their Subprime ARM Loan interest rate resets.
The ASF Framework is focused on Subprime ARM Loans that
have an initial fixed interest rate period of 36 months or less, are
included in securitized pools, were originated between January 1,
2005 and July 31, 2007, and have an initial interest rate reset date
between January 1, 2008 and July 31, 2010. The ASF Framework
directs servicers to categorize Subprime ARM Loans into one of
three segments:
• Segment 1: Current Subprime ARM Loans (under the ASF
Framework, “current” means a Subprime ARM Loan that is
not more than 30 days delinquent, and has not been more
than 1 x 60 days delinquent in the last 12 months, both
determined under the OTS method) where the borrower is
likely to be able to refinance into any available mortgage
product, including FHA, FHA Secure or other readily
available mortgage industry products.
• Segment 2: Current Subprime ARM Loans where the
borrower is unlikely to be able to refinance into any readily
available mortgage industry product.
(cid:132) Subprime ARM Loans belong in Segment 2 (a “Segment 2
Subprime ARM Loan”), if
(cid:132) they have a current loan-to-value ratio (based on the
first lien Subprime ARM Loan only) greater than 97%,
or
(cid:132) t h e y d o n o t s a t i s f y t h e o t h e r F H A S e c u r e
requirements, including that program’s delinquency
history, debt-to-income ratio at origination and loan
amount standards, and the servicer cannot determine
whether they are eligible for another mortgage
i n d u s t r y p r o d u c t w i t h o u t c o n d u c t i n g a n
underwriting analysis.
(cid:132) Subject to certain limitations, Segment 2 Subprime ARM
loans are eligible for a fast track loan modification under
which the interest rate will be kept at the existing initial
rate, generally for five years following the upcoming
reset date.
• Segment 3: Subprime ARM Loans where the borrower is not
Current and is demonstrating difficulty meeting the
introductory rate on the Subprime ARM Loan.
Since its issuance on December 6, 2007, PFH, in its capacity
as servicer and in conjunction with its Modification Program,
has followed the guidance provided by the ASF Framework with
respect to Subprime ARM Loans. While a uniform industry
definition of what constitutes a “subprime loan” does not exist,
PFH generally considers a loan to be a Subprime ARM Loan if its
FICO score is less than 660.
The following supplemental information regarding PFH’s
implementation of the ASF Framework with respect to Subprime
ARM Loans securitized by PFH is provided as of December 31,
2007:
• Segment 1:
(cid:132) Amount of Subprime ARM Loans that fall within this
category: $398 million
(cid:132) During 2007, $996.3 thousand worth of loans in this
segment were subject to a loan modification.
62
• Segment 2:
(cid:132) Amount of Subprime ARM Loans that fall within this
category: $62.4 million
(cid:132) During 2007, $175.9 thousand worth of loans in this
segment were subject to a loan modification.
• Segment 3:
(cid:132) Amount of Subprime ARM Loans that fall within this
category: $128.3 million
(cid:132) During 2007, $1.92 million worth of loans in this segment
were subject to loss mitigation activities.
On January 8, 2008, the OCA issued a letter (the “OCA Letter”)
addressing accounting issues that may be raised by the ASF
Framework. Specifically, the OCA Letter expressed the view that
if a Segment 2 Subprime ARM Loan is modified pursuant to the
ASF Framework and that loan could legally be modified, the OCA
will not object to continued status of the transferee as a QSPE
under SFAS No. 140. In reaching its ultimate conclusion, the
OCA noted that the ASF Framework indicated that for a Segment
2 Subprime ARM Loan, the servicer could presume that the borrower
would be unable to pay pursuant to the original terms of the loan
after the interest rate reset, and thus, a default on the loan would
be “reasonably foreseeable” in the absence of a modification.
Concurrent with the issuance of the OCA Letter, the OCA
requested the FASB to immediately address the issues that have
arisen in the application of the QSPE guidance in SFAS No. 140.
Any loan modifications we make in accordance with the ASF
Framework will not have an impact on our off-balance sheet
accounting treatment of the Subprime ARM Loans securitized by
PFH and currently owned by QSPEs and will not have a material
effect on our accounting treatment of our retained interests in
those securitizations of Subprime ARM Loans.
The following supplemental information regarding QSPE’s that
own Subprime ARM Loans that were securitized by PFH is provided
as of December 31, 2007:
Total assets ............................................................ $5.34 billion
Subprime ARM Loan ......................................... $1.51 billion
Other assets (including real estate owned) ...... $0.15 billion
Total beneficial interest isssued ............................ $5.05 billion
Held by third-party investors .......................... $5.01 billion
Retained by the Corporation ........................... $0.04 billion
As of December 31, 2007 and 2006 the amount of loans
classified as real estate owned in QSPE’s that owned Subprime
ARM Loans totaled $153.6 million and $13.3 million respectively.
The $140.3 million increase was due to a $39.5 million increase
in defaults and the progression of delinquent loans into real estate
owned status and the addition of $100.7 million of loans in real
estate owned status owned by securitization trusts that prior to
December 31, 2007 did not qualify as QSPE’s.
R e c e n t l y I s s u e d A c c o u n t i n g P r o n o u n c e m e n t s a n d
R e c e n t l y I s s u e d A c c o u n t i n g P r o n o u n c e m e n t s a n d
R e c e n t l y I s s u e d A c c o u n t i n g P r o n o u n c e m e n t s a n d
R e c e n t l y I s s u e d A c c o u n t i n g P r o n o u n c e m e n t s a n d
R e c e n t l y I s s u e d A c c o u n t i n g P r o n o u n c e m e n t s a n d
I n t e r p r e t a t i o n s
I n t e r p r e t a t i o n s
I n t e r p r e t a t i o n s
I n t e r p r e t a t i o n s
I n t e r p r e t a t i o n s
SFAS No. 157 “Fair Value Measurements”
SFAS No. 157, issued in September 2006, defines fair value,
establishes a framework of measuring fair value and requires
enhanced disclosures about fair value measurements. SFAS No.
157 requires companies to disclose the fair value of its financial
instruments according to a fair value hierarchy. The fair value
hierarchy ranks the quality and reliability of the information used
to determine fair values. Financial assets carried at fair value will
be classified and disclosed in one of the three categories in
accordance with the hierarchy. The three levels of the fair value
hierarchy are (1) quoted market prices for identical assets or
liabilities in active markets, (2) observable market-based inputs
or unobservable inputs that are corroborated by market data, and
(3) unobservable inputs that are not corroborated by market data.
SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the FASB decided to
issue a final staff position that defers for one year the effective date
for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value on a nonrecurring basis. The
staff position also amends SFAS No. 157 to exclude SFAS No. 13
“Accounting for Leases” and its related interpretive accounting
pronouncements that address leasing transactions. The
Corporation adopted the provisions of SFAS No. 157 that were
not deferred, commencing in the first quarter of 2008. The
provisions of SFAS 157 are to be applied prospectively. The
Corporation is currently assessing the impact of SFAS No. 157
on its consolidated financial statements, including disclosures.
SFAS No. 159 “The Fair Value Option for Financial Assets and
Financial Liabilities - Including an Amendment of FASB Statement
No. 115”
In February 2007, the FASB issued SFAS No. 159, which provides
companies with an option to report selected financial assets and
liabilities at fair value. The election to measure a financial asset
or liability at fair value can be made on an instrument-by-instrument
basis and is irrevocable. The difference between the carrying
amount and the fair value at the election date is recorded as a
transition adjustment to opening retained earnings. Subsequent
changes in fair value are recognized in earnings. The statement
also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities.
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It also requires entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value on
the face of the balance sheet. The new statement does not eliminate
disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value
measurements included in SFAS No. 157, “Fair Value
Measurements,” and SFAS No. 107, “Disclosures about Fair Value
of Financial Instruments.” The Corporation adopted the provisions
of SFAS No. 159 in January 2008. Refer to the Events Subsequent
to Year-End 2007 section for a discussion of the estimated impact
of the adoption of SFAS No. 159.
FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”
In April 2007, the FASB issued Staff Position FSP FIN No. 39-1,
which defines “right of setoff” and specifies what conditions must
be met for a derivative contract to qualify for this right of setoff.
It also addresses the applicability of a right of setoff to derivative
instruments and clarifies the circumstances in which it is
appropriate to offset amounts recognized for those instruments in
the statement of financial position. In addition, this FSP permits
the offsetting of fair value amounts recognized for multiple
derivative instruments executed with the same counterparty under
a master netting arrangement and fair value amounts recognized
for the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable) arising from the
same master netting arrangement as the derivative instruments.
This interpretation is effective for fiscal years beginning after
November 15, 2007, with early application permitted. The
adoption of FSP FIN No. 39-1 in 2008 did not have a material
impact on the Corporation’s consolidated financial statements.
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 07-1 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.
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.
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
64
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 in 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 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.
Glossary of Selected Financial
Terms
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Allowance for Loan Losses
Allowance for Loan Losses
Allowance for Loan Losses - The reserve established to cover
Allowance for Loan Losses
Allowance for Loan Losses
credit losses inherent in loans held-in-portfolio.
and interest), whereas average life computes the average time
needed to collect one dollar of principal.
Asset Securitization
Asset Securitization
Asset Securitization - The process of converting receivables
Asset Securitization
Asset Securitization
and other assets that are not readily marketable into securities
that can be placed and traded in capital markets.
Earning Assets
Earning Assets
Earning Assets - Assets that earn interest, such as loans,
Earning Assets
Earning Assets
investment securities, money market investments and trading
account securities.
Basis Point
Basis Point
Basis Point - Equals to one-hundredth of one percent. Used to
Basis Point
Basis Point
express changes or differences in interest yields and rates.
Efficiency Ratio
Efficiency Ratio
Efficiency Ratio - Non-interest expense divided by net interest
Efficiency Ratio
Efficiency Ratio
income plus recurring non-interest income.
Book Value Per Common Share
Book Value Per Common Share
Book Value Per Common Share - Total common shareholders’
Book Value Per Common Share
Book Value Per Common Share
equity divided by the total number of common shares outstanding.
Effective Tax Rate
Effective Tax Rate
Effective Tax Rate - Income tax expense divided by income
Effective Tax Rate
Effective Tax Rate
before taxes.
Brokered Certificate of Deposit - Deposit purchased from a
Brokered Certificate of Deposit
Brokered Certificate of Deposit
Brokered Certificate of Deposit
Brokered Certificate of Deposit
broker acting as an agent for depositors. The broker, often a
securities broker-dealer, pools CDs from many small investors
and markets them to financial institutions and negotiates a higher
rate for CDs placed with the purchaser.
Cash Flow Hedge -
Cash Flow Hedge -
Cash Flow Hedge - A derivative designated as hedging the
Cash Flow Hedge -
Cash Flow Hedge -
exposure to variable cash flows of a forecasted transaction.
Common Shares Outstanding
Common Shares Outstanding
Common Shares Outstanding - Total number of shares of
Common Shares Outstanding
Common Shares Outstanding
common stock issued less common shares held in treasury.
Core Deposits
Core Deposits
Core Deposits - A deposit category that includes all non-interest
Core Deposits
Core Deposits
bearing deposits, savings deposits and certificates of deposit
under $100,000, excluding brokered certificates of deposit with
denominations under $100,000. These deposits are considered a
stable source of funds.
C u m u l a t i v e T o t a l R e t u r n t o C o m m o n S t o c k h o l d e r s
C u m u l a t i v e T o t a l R e t u r n t o C o m m o n S t o c k h o l d e r s
C u m u l a t i v e T o t a l R e t u r n t o C o m m o n S t o c k h o l d e r s -
C u m u l a t i v e T o t a l R e t u r n t o C o m m o n S t o c k h o l d e r s
C u m u l a t i v e T o t a l R e t u r n t o C o m m o n S t o c k h o l d e r s
Was obtained by dividing (i) the cumulative amount of dividends
per share, assuming dividend reinvestment since the measurement
point December 31, 2001 plus (ii) the change in the per share
price since the measurement date, by the share price at the
measurement date.
Derivative
Derivative
Derivative - A contractual agreement between two parties to
Derivative
Derivative
exchange cash or other assets in response to changes in an external
factor, such as an interest rate or a foreign exchange rate.
Dividend Payout Ratio
Dividend Payout Ratio
Dividend Payout Ratio - Dividends paid on common shares
Dividend Payout Ratio
Dividend Payout Ratio
divided by net income applicable to shares of common stock.
Duration
Duration
Duration - Expected life of a financial instrument taking into
Duration
Duration
account its coupon yield / cost, interest payments, maturity and
call features. Duration attempts to measure actual maturity, as
opposed to final maturity. Duration measures the time required to
recover a dollar of price in present value terms (including principal
Fair Value Hedge -
Fair Value Hedge -
Fair Value Hedge - A derivative designated as hedging the
Fair Value Hedge -
Fair Value Hedge -
exposure to changes in the fair value of a recognized asset or
liability or a firm commitment.
GapGapGapGapGap - The difference that exists at a specific period of time
between the maturities or repricing terms of interest-sensitive
assets and interest-sensitive liabilities.
Goodwill
Goodwill
Goodwill - The excess of the purchase price of net assets over
Goodwill
Goodwill
the fair value of net assets acquired in a business combination.
Interest-only Loan - A non-amortized loan in which interest
Interest-only Loan
Interest-only Loan
Interest-only Loan
Interest-only Loan
is due at regular intervals until maturity, when the entire balance
is due.
Interest-only Strip
Interest-only Strip
Interest-only Strip - The holder receives interest payments
Interest-only Strip
Interest-only Strip
based on the current value of the loan collateral. High prepayments
can return less to the holder than the dollar amount invested.
Interest Rate Caps / Floors
Interest Rate Caps / Floors
Interest Rate Caps / Floors - An interest rate cap is a
Interest Rate Caps / Floors
Interest Rate Caps / Floors
contractual agreement between two counterparties in which the
buyer, in return for paying a fee, will receive cash payments from
the seller at specified dates if rates go above a specified interest
rate level known as the strike rate (cap). An interest rate floor is a
contractual agreement between two counterparties in which the
buyer, in return for paying a fee, will receive cash payments from
the seller at specified dates if interest rates go below the strike
rate.
Interest Rate Swap
Interest Rate Swap
Interest Rate Swap – Financial transactions in which two
Interest Rate Swap
Interest Rate Swap
counterparties agree to exchange streams of payments over time
according to a predetermined formula. Swaps are normally used to
transform the market exposure associated with a loan or bond
borrowing from one interest rate base (fixed-term or floating rate).
66
Interest-Sensitive Assets / Liabilities - Interest-earning
Interest-Sensitive Assets / Liabilities
Interest-Sensitive Assets / Liabilities
Interest-Sensitive Assets / Liabilities
Interest-Sensitive Assets / Liabilities
assets / liabilities for which interest rates are adjustable within a
specified time period due to maturity or contractual arrangements.
Four basic payment options that exist are the minimum payment
option, interest-only payment, 30-year payment and 15-year
payment.
Net Charge-Offs - The amount of loans written-off as
Net Charge-Offs
Net Charge-Offs
Net Charge-Offs
Net Charge-Offs
uncollectible, net of the recovery of loans previously written-off.
Net Income Applicable to Common Stock
Net Income Applicable to Common Stock
Net Income Applicable to Common Stock - Net income
Net Income Applicable to Common Stock
Net Income Applicable to Common Stock
less dividends paid on the Corporation’s preferred stock.
Basic
Basic
Net Income Per Common Share
Net Income Per Common Share
Basic - Net income
Net Income Per Common Share - Basic
Net Income Per Common Share
Basic
Net Income Per Common Share
applicable to common stock divided by the number of weighted-
average common shares outstanding.
Diluted
Diluted
Net Income Per Common Share
Net Income Per Common Share
Diluted - Net income
Net Income Per Common Share - Diluted
Net Income Per Common Share
Diluted
Net Income Per Common Share
applicable to common stock divided by the sum of weighted-
average common shares outstanding plus the effect of common
stock equivalents that have the potential to be converted into
common shares.
Net Interest Income
Net Interest Income
Net Interest Income -The difference between the revenue
Net Interest Income
Net Interest Income
generated on earning assets, less the interest cost of funding
those assets.
Net Interest Margin
Net Interest Margin
Net Interest Margin - Net interest income divided by total
Net Interest Margin
Net Interest Margin
average earning assets.
Net Interest Spread
Net Interest Spread
Net Interest Spread - Difference between the average yield on
Net Interest Spread
Net Interest Spread
earning assets and the average rate paid on interest bearing
liabilities, and the contribution of non-interest bearing funds
supporting earning assets (primarily demand deposits and
stockholders’ equity).
Non-Performing Assets - Includes loans on which the accrual
Non-Performing Assets
Non-Performing Assets
Non-Performing Assets
Non-Performing Assets
of interest income has been discontinued due to default on interest
and / or principal payments or other factors indicative of doubtful
collection, loans for which the interest rates or terms of repayment
have been renegotiated, and real estate which has been acquired
through foreclosure.
Options Adjustable Rate Mortgage - is an adjustable rate
Options Adjustable Rate Mortgage
Options Adjustable Rate Mortgage
Options Adjustable Rate Mortgage
Options Adjustable Rate Mortgage
mortgage (“ARM”) which consists of taking an index (i.e 12-
month Treasury Average, Cost of Deposit Index, etc.), then
adding a margin to total the final interest rate. Unlike other
ARM’s where the principal and interest or simple interest payment
is calculated from the total of the index and margin, the Options
ARM may offer 4 monthly payment options every month
depending on the loan program, giving the borrower the
opportunity to choose which payment gets made based on the
borrower’s economic condition at the time the payment is due.
Option Contract
Option Contract
Option Contract - Conveys a right, but not an obligation, to
Option Contract
Option Contract
buy or sell a specified number of units of a financial instrument at
a specific price per unit within a specified time period. The
instrument underlying the option may be a security, a futures
contract (for example, an interest rate option), a commodity, a
currency, or a cash instrument. Options may be bought or sold on
organized exchanges or over the counter on a principal-to-
principal basis or may be individually negotiated. A call option
gives the holder the right, but not the obligation, to buy the
underlying instrument. A put option gives the holder the right,
but not the obligation, to sell the underlying instrument.
Overcollaterization
Overcollaterization
Overcollaterization - A type of credit enhancement by which
Overcollaterization
Overcollaterization
an issuer of securities pledged collateral in excess of what is
needed to adequately cover the repayment of the securities plus a
reserve. By pledging collateral with a higher face value than the
securities being offered for sale, an issuer of mortgage-backed
bonds can get a more favorable rating from a rating agency and
also guard against the possibility that the bonds may be called
before maturity because of mortgage prepayments.
Overhead Ratio
Overhead Ratio
Overhead Ratio - Operating expenses less non-interest income
Overhead Ratio
Overhead Ratio
divided by net interest income.
Piggyback Loan
Piggyback Loan
Piggyback Loan - is a home financing option in which a
Piggyback Loan
Piggyback Loan
property is purchased using more than one mortgage from two
or more lenders. As compared with standard home mortgage
programs, combined rates for piggyback loans are often higher
than standard loans. This is because of the risk amounts that
each lender is assuming. Also, many piggyback loans attach a
large balloon payment at the end of a loan that is substantially
larger than the standard mortgage payments.
Provision For Loan Losses
Provision For Loan Losses
Provision For Loan Losses - The periodic expense needed to
Provision For Loan Losses
Provision For Loan Losses
maintain the level of the allowance for loan losses at a level
consistent with management’s assessment of the loan portfolio in
light of current economic conditions and market trends, and
taking into account loan impairment and net charge-offs.
Return on Assets
Return on Assets
Return on Assets - Net income as a percentage of average total
Return on Assets
Return on Assets
assets.
Return on Equity
Return on Equity
Return on Equity - Net income applicable to common stock as
Return on Equity
Return on Equity
a percentage of average common stockholders’ equity.
2007 Annual Report 67
2007
2007
Popular, Inc. 2007
2007
Servicing Right - A contractual agreement to provide certain
Servicing Right
Servicing Right
Servicing Right
Servicing Right
billing, bookkeeping and collection services with respect to a
pool of loans.
Tangible Equity - Consists of stockholders’ equity less
Tangible Equity
Tangible Equity
Tangible Equity
Tangible Equity
goodwill and other intangible assets.
Tier 1 Leverage Ratio - Tier 1 Risk-Based Capital divided by
Tier 1 Leverage Ratio
Tier 1 Leverage Ratio
Tier 1 Leverage Ratio
Tier 1 Leverage Ratio
average adjusted quarterly total assets. Average adjusted quarterly
assets are adjusted to exclude non-qualifying intangible assets
and disallowed deferred tax assets.
T i e r 1 R i s k - B a s e d C a p i t a l
T i e r 1 R i s k - B a s e d C a p i t a l
T i e r 1 R i s k - B a s e d C a p i t a l - C o n s i s t s o f c o m m o n
T i e r 1 R i s k - B a s e d C a p i t a l
T i e r 1 R i s k - B a s e d C a p i t a l
stockholders’ equity (including the related surplus, retained
earnings and capital reserves), qualifying noncumulative perpetual
preferred stock, qualifying trust preferred securities and minority
interest in the equity accounts of consolidated subsidiaries, less
goodwill and other disallowed intangible assets, disallowed
portion of deferred tax assets and the deduction for nonfinancial
equity investments.
Total Risk-Adjusted Assets
Total Risk-Adjusted Assets
Total Risk-Adjusted Assets - The sum of assets and credit
Total Risk-Adjusted Assets
Total Risk-Adjusted Assets
equivalent off-balance sheet amounts that have been adjusted
according to assigned regulatory risk weights, excluding the
non-qualifying portion of allowance for loan and lease losses,
goodwill and other intangible assets.
Total Risk-Based Capital
Total Risk-Based Capital
Total Risk-Based Capital - Consists of Tier 1 Capital plus
Total Risk-Based Capital
Total Risk-Based Capital
the allowance for loan losses, qualifying subordinated debt and
the allowed portion of the net unrealized gains on available-for-
sale equity securities.
Treasury Stock - Common stock repurchased and held by the
Treasury Stock
Treasury Stock
Treasury Stock
Treasury Stock
issuing corporation for possible future issuance.
68
Statistical Summary 2003-2007
Statements of Condition
(In thousands)
A s s e t s
A s s e t s
A s s e t s
A s s e t s
A s s e t s
Cash and due from banks
Money market investments:
Federal funds sold and securities purchased
under agreements to resell
Time deposits with other banks
Bankers’ acceptances
Trading securities, at fair value
Investment securities available-for-sale,
at fair value
Investment securities held-to-maturity, at amortized cost
Other investment securities, at lower of cost or
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
2004
2003
As of December 31,
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
$950,158
$906,397
$716,459
$688,090
8 8 3 , 6 8 6
8 8 3 , 6 8 6
8 8 3 , 6 8 6
8 8 3 , 6 8 6
8 8 3 , 6 8 6
1 2 3 , 0 2 6
1 2 3 , 0 2 6
1 2 3 , 0 2 6
1 2 3 , 0 2 6
1 2 3 , 0 2 6
-----
1 , 0 0 6 , 7 1 2
1 , 0 0 6 , 7 1 2
1 , 0 0 6 , 7 1 2
1 , 0 0 6 , 7 1 2
1 , 0 0 6 , 7 1 2
7 6 7 , 9 5 5
7 6 7 , 9 5 5
7 6 7 , 9 5 5
7 6 7 , 9 5 5
7 6 7 , 9 5 5
286,531
15,177
-
301,708
382,325
740,770
8,653
-
749,423
519,338
879,321
319
-
879,640
385,139
764,780
8,046
67
772,893
605,119
8 , 5 1 5 , 1 3 5
8 , 5 1 5 , 1 3 5
8 , 5 1 5 , 1 3 5
8 , 5 1 5 , 1 3 5
8 , 5 1 5 , 1 3 5
4 8 4 , 4 6 6
4 8 4 , 4 6 6
4 8 4 , 4 6 6
4 8 4 , 4 6 6
4 8 4 , 4 6 6
9,850,862
91,340
11,716,586
153,104
11,162,145
340,850
10,051,579
186,821
realizable value
Loans held-for-sale, at lower of cost or market
Loans held-in-portfolio:
Less - Unearned income
Allowance for loan losses
Premises and equipment, net
Other real estate
Accrued income receivable
Servicing Assets
Other assets
Goodwill
Other intangible assets
2 1 6 , 5 8 4
2 1 6 , 5 8 4
2 1 6 , 5 8 4
2 1 6 , 5 8 4
2 1 6 , 5 8 4
1 , 8 8 9 , 5 4 6
1 , 8 8 9 , 5 4 6
1 , 8 8 9 , 5 4 6
1 , 8 8 9 , 5 4 6
1 , 8 8 9 , 5 4 6
2 8 , 2 0 3 , 5 6 6
2 8 , 2 0 3 , 5 6 6
2 8 , 2 0 3 , 5 6 6
2 8 , 2 0 3 , 5 6 6
2 8 , 2 0 3 , 5 6 6
1 8 2 , 1 1 0
1 8 2 , 1 1 0
1 8 2 , 1 1 0
1 8 2 , 1 1 0
1 8 2 , 1 1 0
5 4 8 , 8 3 2
5 4 8 , 8 3 2
5 4 8 , 8 3 2
5 4 8 , 8 3 2
5 4 8 , 8 3 2
2 7 , 4 7 2 , 6 2 4
2 7 , 4 7 2 , 6 2 4
2 7 , 4 7 2 , 6 2 4
2 7 , 4 7 2 , 6 2 4
2 7 , 4 7 2 , 6 2 4
5 8 8 , 1 6 3
5 8 8 , 1 6 3
5 8 8 , 1 6 3
5 8 8 , 1 6 3
5 8 8 , 1 6 3
8 1 , 4 1 0
8 1 , 4 1 0
8 1 , 4 1 0
8 1 , 4 1 0
8 1 , 4 1 0
2 1 6 , 1 1 4
2 1 6 , 1 1 4
2 1 6 , 1 1 4
2 1 6 , 1 1 4
2 1 6 , 1 1 4
1 9 6 , 6 4 5
1 9 6 , 6 4 5
1 9 6 , 6 4 5
1 9 6 , 6 4 5
1 9 6 , 6 4 5
1 , 4 5 6 , 9 9 4
1 , 4 5 6 , 9 9 4
1 , 4 5 6 , 9 9 4
1 , 4 5 6 , 9 9 4
1 , 4 5 6 , 9 9 4
6 3 0 , 7 6 1
6 3 0 , 7 6 1
6 3 0 , 7 6 1
6 3 0 , 7 6 1
6 3 0 , 7 6 1
6 9 , 5 0 3
6 9 , 5 0 3
6 9 , 5 0 3
6 9 , 5 0 3
6 9 , 5 0 3
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
297,394
719,922
32,325,364
308,347
522,232
31,494,785
595,140
84,816
248,240
164,999
1,446,891
667,853
107,554
$47,403,987
Equity
Equity
Liabilities and Stockholders
Liabilities and Stockholders
Equity
Liabilities and Stockholders’’’’’ Equity
Liabilities and Stockholders
Equity
Liabilities and Stockholders
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and assets
sold under agreements to repurchase
Other short-term borrowings
Notes payable
Subordinated notes
Other liabilities
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Preferred stock
Common stock
Surplus
Retained earnings
Treasury stock - at cost
Accumulated other comprehensive (loss) income,
$ 4 , 5 1 0 , 7 8 9
$ 4 , 5 1 0 , 7 8 9
$ 4 , 5 1 0 , 7 8 9
$ 4 , 5 1 0 , 7 8 9
$ 4 , 5 1 0 , 7 8 9
2 3 , 8 2 3 , 6 8 9
2 3 , 8 2 3 , 6 8 9
2 3 , 8 2 3 , 6 8 9
2 3 , 8 2 3 , 6 8 9
2 3 , 8 2 3 , 6 8 9
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
2 8 , 3 3 4 , 4 7 8
5 , 4 3 7 , 2 6 5
5 , 4 3 7 , 2 6 5
5 , 4 3 7 , 2 6 5
5 , 4 3 7 , 2 6 5
5 , 4 3 7 , 2 6 5
1 , 5 0 1 , 9 7 9
1 , 5 0 1 , 9 7 9
1 , 5 0 1 , 9 7 9
1 , 5 0 1 , 9 7 9
1 , 5 0 1 , 9 7 9
4 , 6 2 1 , 3 5 2
4 , 6 2 1 , 3 5 2
4 , 6 2 1 , 3 5 2
4 , 6 2 1 , 3 5 2
4 , 6 2 1 , 3 5 2
-----
9 3 4 , 3 7 2
9 3 4 , 3 7 2
9 3 4 , 3 7 2
9 3 4 , 3 7 2
9 3 4 , 3 7 2
4 0 , 8 2 9 , 4 4 6
4 0 , 8 2 9 , 4 4 6
4 0 , 8 2 9 , 4 4 6
4 0 , 8 2 9 , 4 4 6
4 0 , 8 2 9 , 4 4 6
1 0 91 0 91 0 91 0 91 0 9
1 8 6 , 8 7 5
1 8 6 , 8 7 5
1 8 6 , 8 7 5
1 8 6 , 8 7 5
1 8 6 , 8 7 5
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
5 6 8 , 1 8 4
5 6 8 , 1 8 4
5 6 8 , 1 8 4
5 6 8 , 1 8 4
5 6 8 , 1 8 4
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
$4,222,133
20,216,198
24,438,331
5,762,445
4,034,125
8,737,246
-
811,424
43,783,571
110
186,875
1,753,146
526,856
1,594,144
(206,987)
319,103
699,181
31,308,639
297,613
461,707
30,549,319
596,571
79,008
245,646
141,489
1,184,311
653,984
110,208
$48,623,668
$3,958,392
18,679,613
22,638,005
8,702,461
2,700,261
9,893,577
-
1,240,002
45,174,306
115
186,875
1,736,443
452,398
1,456,612
(207,081)
302,440
750,728
28,253,923
262,390
437,081
27,554,452
545,681
59,717
207,542
57,183
989,191
411,308
39,101
$44,401,576
233,144
271,592
22,613,879
283,279
408,542
21,922,058
485,452
53,898
176,152
56,792
712,245
191,490
27,390
$36,434,715
$4,173,268
16,419,892
20,593,160
$3,726,707
14,371,121
18,097,828
6,436,853
3,139,639
10,180,710
125,000
821,491
41,296,853
102
5,835,587
1,996,624
6,992,025
125,000
633,129
33,680,193
105
186,875
186,875
837,566
1,680,096
314,638
278,840
1,129,793
1,601,851
(206,437) (205,527)
net of tax
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
3 , 5 8 1 , 8 8 2
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
$ 4 4 , 4 1 1 , 4 3 7
(233,728)
3,620,306
$47,403,987
(176,000)
3,449,247
$48,623,668
35,454
3,104,621
$44,401,576
19,014
2,754,417
$36,434,715
Statistical Summary 2003-2007
Statements of Operations
(In thousands, except per
common share information)
Interest IIIIIncome:
ncome:
ncome:
Interest
Interest
ncome:
Interest
ncome:
Interest
Loans
Money market investments
Investment securities
Trading securities
Total interest income
Less - Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Net gain on sale and valuation adjustment of
investment securities
Trading account (loss) profit
(Loss) gain on sale of loans and valuation adjustments
on loans held-for-sale
All other operating income
Operating EEEEE xpenses:
xpenses:
xpenses:
Operating
Operating
xpenses:
Operating
xpenses:
Operating
Personnel costs
All other operating expenses
(Loss) income before tax, minority interest and
cumulative effect of accounting change
Income tax (benefit) expense
Net gain of minority interest
(Loss) income before cumulative effect of accounting
change
Cumulative effect of accounting change, net of tax
2007 Annual Report 69
2007
2007
Popular, Inc. 2007
2007
For the year ended December 31,
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
2004
2003
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
2 5 , 1 9 0
2 5 , 1 9 0
2 5 , 1 9 0
2 5 , 1 9 0
2 5 , 1 9 0
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 1 , 8 9 8
4 1 , 8 9 8
4 1 , 8 9 8
4 1 , 8 9 8
4 1 , 8 9 8
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
$2,486,453
29,626
516,237
32,125
3,064,441
1,636,531
1,427,910
287,760
$2,116,299
30,736
488,814
30,010
2,665,859
1,241,652
1,424,207
195,272
$1,751,150
25,660
413,492
25,963
2,216,265
840,754
1,375,511
178,657
$1,550,036
25,881
422,295
36,026
2,034,238
749,550
1,284,688
195,939
8 8 6 , 7 4 0
8 8 6 , 7 4 0
8 8 6 , 7 4 0
8 8 6 , 7 4 0
8 8 6 , 7 4 0
1,140,150
1,228,935
1,196,854
1,088,749
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
4,359
35,288
52,113
30,051
15,254
(159)
71,094
(10,214)
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
6 8 0 , 5 9 1
6 8 0 , 5 9 1
6 8 0 , 5 9 1
6 8 0 , 5 9 1
6 8 0 , 5 9 1
117,421
652,417
83,297
619,814
44,168
549,508
53,572
511,558
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
1,949,635
2,014,210
1,805,625
1,714,759
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
1 , 0 3 6 , 3 6 2
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
668,671
816,402
1,485,073
622,689
705,511
1,328,200
571,018
599,994
1,171,012
526,444
586,639
1,113,083
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
-----
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
-----
464,562
106,886
-
357,676
-
686,010
148,915
-
537,095
3,607
634,613
144,705
-
601,676
130,326
(435)
489,908
-
470,915
-
ncome
ncome
(Loss) I
NetNetNetNetNet (Loss) I
(Loss) I
ncome
(Loss) Income
ncome
(Loss) I
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
$357,676
$540,702
$489,908
$470,915
ommon SSSSS tock
tock
tock
ommon
pplicable to CCCCCommon
ommon
pplicable to
ncome AAAAApplicable to
pplicable to
ncome
ncome
(Loss) I
Net Net Net Net Net (Loss) I
(Loss) I
tock
(Loss) Income
tock
ommon
pplicable to
ncome
(Loss) I
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
$345,763
$528,789
$477,995
$460,996
Basic EPS Before Cumulative Effect of Accounting Change*
Basic EPS Before Cumulative Effect of Accounting Change*
Basic EPS Before Cumulative Effect of Accounting Change*
Basic EPS Before Cumulative Effect of Accounting Change*
Basic EPS Before Cumulative Effect of Accounting Change*
Diluted EPS Before Cumulative Effect of Accounting Change*
Diluted EPS Before Cumulative Effect of Accounting Change*
Diluted EPS Before Cumulative Effect of Accounting Change*
Diluted EPS Before Cumulative Effect of Accounting Change*
Diluted EPS Before Cumulative Effect of Accounting Change*
Basic EPS After Cumulative Effect of Accounting Change*
Basic EPS After Cumulative Effect of Accounting Change*
Basic EPS After Cumulative Effect of Accounting Change*
Basic EPS After Cumulative Effect of Accounting Change*
Basic EPS After Cumulative Effect of Accounting Change*
EPS After Cumulative Effect of Accounting Change*
EPS After Cumulative Effect of Accounting Change*
Diluted
Diluted
EPS After Cumulative Effect of Accounting Change*
Diluted EPS After Cumulative Effect of Accounting Change*
EPS After Cumulative Effect of Accounting Change*
Diluted
Diluted
ommon S S S S Shareharehareharehare
ommon
eclared per CCCCCommon
ommon
eclared per
ividends DDDDDeclared per
eclared per
ividends
DDDDDividends
ividends
ommon
eclared per
ividends
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
$ 0 . 6 4
$ 0 . 6 4
$ 0 . 6 4
$ 0 . 6 4
$ 0 . 6 4
$1.24
$1.24
$1.24
$1.24
$0.64
$1.97
$1.96
$1.98
$1.97
$0.64
$1.79
$1.79
$1.79
$1.79
$0.62
$1.74
$1.74
$1.74
$1.74
$0.51
279,494,150 for 2007;
279,494,150 for 2007;
per common share were
per common share were
(losses)
(losses)
earnings
earnings
basic
basic
*The average common shares used in the computation of
*The average common shares used in the computation of
279,494,150 for 2007;
per common share were 279,494,150 for 2007;
(losses) per common share were
earnings (losses)
basic earnings
*The average common shares used in the computation of basic
279,494,150 for 2007;
per common share were
(losses)
earnings
basic
*The average common shares used in the computation of
*The average common shares used in the computation of
278,468,552 for 2006; 267,334,606 for 2005; 266,302,105 for 2004 and 265,481,840 for 2003. The average common shares
278,468,552 for 2006; 267,334,606 for 2005; 266,302,105 for 2004 and 265,481,840 for 2003. The average common shares
278,468,552 for 2006; 267,334,606 for 2005; 266,302,105 for 2004 and 265,481,840 for 2003. The average common shares
278,468,552 for 2006; 267,334,606 for 2005; 266,302,105 for 2004 and 265,481,840 for 2003. The average common shares
278,468,552 for 2006; 267,334,606 for 2005; 266,302,105 for 2004 and 265,481,840 for 2003. The average common shares
used in the computation of diluted earnings (losses) per common share were 279,494,150 for 2007; 278,703,924 for 2006;
used in the computation of diluted earnings (losses) per common share were 279,494,150 for 2007; 278,703,924 for 2006;
used in the computation of diluted earnings (losses) per common share were 279,494,150 for 2007; 278,703,924 for 2006;
used in the computation of diluted earnings (losses) per common share were 279,494,150 for 2007; 278,703,924 for 2006;
used in the computation of diluted earnings (losses) per common share were 279,494,150 for 2007; 278,703,924 for 2006;
267,839,018 for 2005; 266,674,856 for 2004 and 265,595,832 for 2003.
267,839,018 for 2005; 266,674,856 for 2004 and 265,595,832 for 2003.
267,839,018 for 2005; 266,674,856 for 2004 and 265,595,832 for 2003.
267,839,018 for 2005; 266,674,856 for 2004 and 265,595,832 for 2003.
267,839,018 for 2005; 266,674,856 for 2004 and 265,595,832 for 2003.
A v e r a g e
A v e r a g e
A v e r a g e
A v e r a g e
A v e r a g e
B a l a n c e
B a l a n c e
B a l a n c e
B a l a n c e
B a l a n c e
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
I n t e r e s t
I n t e r e s t
I n t e r e s t
I n t e r e s t
I n t e r e s t
A v e r a g e
A v e r a g e
A v e r a g e
A v e r a g e
A v e r a g e
Rate
Rate
Rate
Rate
Rate
Average
Balance
2006
Interest
Average
Rate
$ 5 1 3 , 7 0 4
$ 5 1 3 , 7 0 4
$ 5 1 3 , 7 0 4
$ 5 1 3 , 7 0 4
$ 5 1 3 , 7 0 4
4 9 8 , 2 3 2
4 9 8 , 2 3 2
4 9 8 , 2 3 2
4 9 8 , 2 3 2
4 9 8 , 2 3 2
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
$ 2 6 , 5 6 5
2 1 , 1 6 4
2 1 , 1 6 4
2 1 , 1 6 4
2 1 , 1 6 4
2 1 , 1 6 4
5 . 1 7 %
5 . 1 7 %
5 . 1 7 %
5 . 1 7 %
5 . 1 7 %
4 . 2 5
4 . 2 5
4 . 2 5
4 . 2 5
4 . 2 5
$564,423
521,917
$31,382
22,930
5.56%
4.39
70
Statistical Summary 2003-2007
Average Balance Sheet and
Summary of Net Interest Income
On a Taxable Equivalent Basis*
(Dollars in thousands)
Assets
Assets
Assets
Assets
Assets
Interest earning assets:
Money market investments
U.S. Treasury securities
Obligations of U.S. Government
entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations and
mortgage-backed securities
Other
Total investment securities
6 , 2 9 4 , 4 8 9
6 , 2 9 4 , 4 8 9
6 , 2 9 4 , 4 8 9
6 , 2 9 4 , 4 8 9
6 , 2 9 4 , 4 8 9
3 1 0 , 6 3 2
3 1 0 , 6 3 2
3 1 0 , 6 3 2
3 1 0 , 6 3 2
3 1 0 , 6 3 2
1 8 5 , 0 3 5
1 8 5 , 0 3 5
1 8 5 , 0 3 5
1 8 5 , 0 3 5
1 8 5 , 0 3 5
1 2 , 5 4 6
1 2 , 5 4 6
1 2 , 5 4 6
1 2 , 5 4 6
1 2 , 5 4 6
2 , 5 7 5 , 9 4 1
2 , 5 7 5 , 9 4 1
2 , 5 7 5 , 9 4 1
2 , 5 7 5 , 9 4 1
2 , 5 7 5 , 9 4 1
2 9 9 , 8 9 4
2 9 9 , 8 9 4
2 9 9 , 8 9 4
2 9 9 , 8 9 4
2 9 9 , 8 9 4
9 , 8 5 3 , 5 9 1
9 , 8 5 3 , 5 9 1
9 , 8 5 3 , 5 9 1
9 , 8 5 3 , 5 9 1
9 , 8 5 3 , 5 9 1
1 4 8 , 6 2 0
1 4 8 , 6 2 0
1 4 8 , 6 2 0
1 4 8 , 6 2 0
1 4 8 , 6 2 0
1 8 , 2 4 6
1 8 , 2 4 6
1 8 , 2 4 6
1 8 , 2 4 6
1 8 , 2 4 6
5 1 1 , 2 0 8
5 1 1 , 2 0 8
5 1 1 , 2 0 8
5 1 1 , 2 0 8
5 1 1 , 2 0 8
Trading account securities
6 7 2 , 4 0 5
6 7 2 , 4 0 5
6 7 2 , 4 0 5
6 7 2 , 4 0 5
6 7 2 , 4 0 5
4 3 , 3 0 7
4 3 , 3 0 7
4 3 , 3 0 7
4 3 , 3 0 7
4 3 , 3 0 7
Loans (net of unearned income)
Total interest earning assets/
Interest income
3 2 , 7 4 9 , 9 9 3
3 2 , 7 4 9 , 9 9 3
3 2 , 7 4 9 , 9 9 3
3 2 , 7 4 9 , 9 9 3
3 2 , 7 4 9 , 9 9 3
2 , 6 3 6 , 9 5 4
2 , 6 3 6 , 9 5 4
2 , 6 3 6 , 9 5 4
2 , 6 3 6 , 9 5 4
2 , 6 3 6 , 9 5 4
$3,218,034
$3,218,034
4 3 , 7 8 9 , 6 9 3
4 3 , 7 8 9 , 6 9 3
$3,218,034
4 3 , 7 8 9 , 6 9 3 $3,218,034
$3,218,034
4 3 , 7 8 9 , 6 9 3
4 3 , 7 8 9 , 6 9 3
7 . 3 5 %
7 . 3 5 %
7 . 3 5 %
7 . 3 5 %
7 . 3 5 %
Total non-interest earning assets
3 , 3 1 5 , 2 4 2
3 , 3 1 5 , 2 4 2
3 , 3 1 5 , 2 4 2
3 , 3 1 5 , 2 4 2
3 , 3 1 5 , 2 4 2
Total assets
tockholders’ ’ ’ ’ ’ EEEEEquity
quity
quity
tockholders
Liabilities and SSSSStockholders
tockholders
Liabilities and
Liabilities and
quity
Liabilities and
quity
tockholders
Liabilities and
Interest bearing liabilities:
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
Savings, NOW, money market and other
interest bearing demand accounts
Time deposits
Short-term borrowings
Notes payable
Subordinated notes
Preferred beneficial interest in junior
subordinated deferrable interest
debentures guaranteed by the Corporation
$ 1 0 , 1 2 6 , 9 5 6
$ 1 0 , 1 2 6 , 9 5 6
$ 1 0 , 1 2 6 , 9 5 6
$ 1 0 , 1 2 6 , 9 5 6
$ 1 0 , 1 2 6 , 9 5 6
1 1 , 3 9 8 , 7 1 5
1 1 , 3 9 8 , 7 1 5
1 1 , 3 9 8 , 7 1 5
1 1 , 3 9 8 , 7 1 5
1 1 , 3 9 8 , 7 1 5
8 , 6 8 5 , 6 6 3
8 , 6 8 5 , 6 6 3
8 , 6 8 5 , 6 6 3
8 , 6 8 5 , 6 6 3
8 , 6 8 5 , 6 6 3
8 , 1 8 1 , 0 8 9
8 , 1 8 1 , 0 8 9
8 , 1 8 1 , 0 8 9
8 , 1 8 1 , 0 8 9
8 , 1 8 1 , 0 8 9
4 . 9 3
4 . 9 3
4 . 9 3
4 . 9 3
4 . 9 3
6 . 7 8
6 . 7 8
6 . 7 8
6 . 7 8
6 . 7 8
5 . 7 7
5 . 7 7
5 . 7 7
5 . 7 7
5 . 7 7
6 . 0 8
6 . 0 8
6 . 0 8
6 . 0 8
6 . 0 8
5 . 1 9
5 . 1 9
5 . 1 9
5 . 1 9
5 . 1 9
6 . 4 4
6 . 4 4
6 . 4 4
6 . 4 4
6 . 4 4
8 . 0 5
8 . 0 5
8 . 0 5
8 . 0 5
8 . 0 5
7,527,841
368,738
4.90
188,690
13,249
7.02
3,063,097
472,746
11,774,291
177,206
23,465
605,588
512,960
34,004
32,078,716
2,508,870
5.79
4.96
5.14
6.63
7.82
$3,179,844
7.08%
44,930,390
3,364,176
$48,294,566
$ 2 2 6 , 9 2 4
$ 2 2 6 , 9 2 4
$ 2 2 6 , 9 2 4
$ 2 2 6 , 9 2 4
$ 2 2 6 , 9 2 4
5 3 8 , 8 6 9
5 3 8 , 8 6 9
5 3 8 , 8 6 9
5 3 8 , 8 6 9
5 3 8 , 8 6 9
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
2 . 2 4 %
2 . 2 4 %
2 . 2 4 %
2 . 2 4 %
2 . 2 4 %
4 . 7 3
4 . 7 3
4 . 7 3
4 . 7 3
4 . 7 3
5 . 1 6
5 . 1 6
5 . 1 6
5 . 1 6
5 . 1 6
5 . 6 8
5 . 6 8
5 . 6 8
5 . 6 8
5 . 6 8
$9,317,779
9,976,613
10,677,161
9,868,385
$157,431
422,663
518,960
537,477
1.69%
4.24
4.86
5.45
Total interest bearing liabilities/
Interest expense
3 8 , 3 9 2 , 4 2 3
3 8 , 3 9 2 , 4 2 3
3 8 , 3 9 2 , 4 2 3
3 8 , 3 9 2 , 4 2 3
3 8 , 3 9 2 , 4 2 3
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
4 . 3 7
4 . 3 7
4 . 3 7
4 . 3 7
4 . 3 7
39,839,938
1,636,531
4.11
Total non-interest bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income on a taxable
4 , 8 5 1 , 0 8 6
4 , 8 5 1 , 0 8 6
4 , 8 5 1 , 0 8 6
4 , 8 5 1 , 0 8 6
4 , 8 5 1 , 0 8 6
4 3 , 2 4 3 , 5 0 9
4 3 , 2 4 3 , 5 0 9
4 3 , 2 4 3 , 5 0 9
4 3 , 2 4 3 , 5 0 9
4 3 , 2 4 3 , 5 0 9
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
3 , 8 6 1 , 4 2 6
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
$ 4 7 , 1 0 4 , 9 3 5
equivalent basis
Cost of funding earning assets
Net interest margin
$ 1 , 5 3 9 , 2 5 3
$ 1 , 5 3 9 , 2 5 3
$ 1 , 5 3 9 , 2 5 3
$ 1 , 5 3 9 , 2 5 3
$ 1 , 5 3 9 , 2 5 3
3 . 8 3 %
3 . 8 3 %
3 . 8 3 %
3 . 8 3 %
3 . 8 3 %
3 . 5 2 %
3 . 5 2 %
3 . 5 2 %
3 . 5 2 %
3 . 5 2 %
Effect of the taxable equivalent adjustment
Net interest income per books
8 9 , 8 6 3
8 9 , 8 6 3
8 9 , 8 6 3
8 9 , 8 6 3
8 9 , 8 6 3
$ 1 , 4 4 9 , 3 9 0
$ 1 , 4 4 9 , 3 9 0
$ 1 , 4 4 9 , 3 9 0
$ 1 , 4 4 9 , 3 9 0
$ 1 , 4 4 9 , 3 9 0
4,713,355
44,553,293
3,741,273
$48,294,566
$1,543,313
115,403
$1,427,910
3.64%
3.44%
*Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates.
*Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates.
*Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates.
*Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates.
*Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates.
The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is
The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is
The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is
The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is
The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is
shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.
shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.
shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.
shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.
shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.
Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in
Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in
Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in
Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in
Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in
accordance with the Corporation’s policy.
accordance with the Corporation’s policy.
accordance with the Corporation’s policy.
accordance with the Corporation’s policy.
accordance with the Corporation’s policy.
2007 Annual Report 71
2007
2007
Popular, Inc. 2007
2007
Average
Balance
2005
Interest
Average
Rate
Average
Balance
2004
Interest
Average
Rate
Average
Balance
2003
Interest
Average
Rate
$797,166
551,328
$33,319
25,613
4.18%
4.65
$835,139
550,997
$25,660
26,600
3.07%
4.83
$833,237
472,114
$25,881
24,615
3.11%
5.21
7,574,297
364,081
247,220
14,954
3,338,925
518,516
12,230,286
487,319
163,853
22,588
591,089
32,427
29,730,913
2,135,511
4.81
6.05
4.91
4.36
4.83
6.65
7.18
6,720,329
322,854
255,244
13,504
3,233,378
402,112
11,162,060
480,890
128,421
15,406
506,785
27,387
25,143,559
1,765,290
4.80
5.29
3.97
3.83
4.54
5.70
7.02
6,451,157
356,008
201,505
13,570
3,062,564
407,105
10,594,445
623,632
118,097
16,267
528,557
37,887
20,730,041
1,562,083
5.52
6.73
3.86
4.00
4.99
6.08
7.54
$2,792,346
43,245,684
3,116,645
$46,362,329
6.46% 37,621,648
2,277,127
$39,898,775
$2,325,122
6.18%
32,781,355
1,893,406
$34,674,761
$2,154,408
6.57%
$9,408,358
8,776,314
10,327,417
9,644,925
119,178
$125,585
305,228
349,203
453,489
8,147
1.33% $8,373,541
7,117,062
3.48
8,782,042
3.38
8,047,867
4.70
125,000
6.84
$92,026
238,325
165,425
336,415
8,563
1.10%
3.35
1.88
4.18
6.85
$7,741,007
6,521,861
8,390,874
5,124,604
125,000
$102,293
240,598
147,456
234,776
8,539
194,959
15,888
38,276,192
1,241,652
3.24
32,445,512
840,754
2.59
28,098,305
749,550
4,811,329
43,087,521
3,274,808
$46,362,329
4,550,126
36,995,638
2,903,137
$39,898,775
4,031,343
32,129,648
2,545,113
$34,674,761
$1,550,694
$1,484,368
$1,404,858
2.87%
3.59%
2.23%
3.95%
126,487
$1,424,207
108,857
$1,375,511
120,170
$1,284,688
1.32%
3.69
1.76
4.58
6.83
8.15
2.67
2.29%
4.28%
72
Statistical Summary 2006-2007
Quarterly Financial Data
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
F o u r t h
F o u r t h
F o u r t h
F o u r t h
F o u r t h
Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r
Third
Third
Third
Third
Third
Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r
S e c o n d
S e c o n d
First
First
S e c o n d
First
First
S e c o n d
S e c o n d
First
Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r Q u a r t e r
Q u a r t e r
Q u a r t e r
Q u a r t e r
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$779,439
$779,439
$779,439
$779,439
$779,439
416,564
416,564
416,564
416,564
416,564
362,875
362,875
362,875
362,875
362,875
203,044
203,044
203,044
203,044
203,044
$790,226
$790,226
$790,226
$790,226
$790,226
430,110
430,110
430,110
430,110
430,110
360,116
360,116
360,116
360,116
360,116
148,093
148,093
148,093
148,093
148,093
$773,595
$773,595
$784,911
$784,911
$784,911 $773,595
$773,595
$784,911
$773,595
$784,911
418,613
418,613
413,494
413,494
418,613
413,494
418,613
413,494
418,613
413,494
354,982
354,982
371,417
371,417
354,982
371,417
354,982
371,417
354,982
371,417
96,346
96,346
115,167
115,167
96,346
115,167
96,346
96,346
115,167
115,167
$778,863
418,534
360,329
108,272
$781,331
439,293
342,038
63,445
$762,037
396,258
365,779
67,096
$742,210
382,446
359,764
48,947
(24,698)
(24,698)
(24,698)
(24,698)
(24,698)
96,458
96,458
96,458
96,458
96,458
621,197
621,197
621,197
621,197
621,197
(3,089)
(3,089)
(3,089)
(3,089)
(3,089)
170,094
170,094
170,094
170,094
170,094
346,973
346,973
346,973
346,973
346,973
1 , 1 7 5
1 , 1 7 5
1 , 1 7 5
1 , 1 7 5
1 , 1 7 5
202,200
202,200
202,200
202,200
202,200
361,053
361,053
361,053
361,053
361,053
81,771
81,771
81,771
81,771
81,771
170,405
170,405
170,405
170,405
170,405
375,328
375,328
375,328
375,328
375,328
(389,606)
(389,606)
(389,606)
(389,606)
(389,606)
(95,513)
(95,513)
(95,513)
(95,513)
(95,513)
($294,093)
($294,093)
($294,093)
($294,093)
($294,093)
32,055
32,055
32,055
32,055
32,055
(3,948)
(3,948)
(3,948)
(3,948)
(3,948)
$36,003
$36,003
$36,003
$36,003
$36,003
98,572
98,572
135,484
135,484
98,572
135,484
98,572
98,572
135,484
135,484
23,622
23,622
16,837
16,837
23,622
16,837
16,837
23,622
23,622
16,837
$118,647
$118,647
$74,950
$74,950
$118,647
$74,950 $118,647
$118,647
$74,950
$74,950
(680)
205,997
378,916
78,458
18,826
$59,632
7,123
184,226
359,923
110,019
27,859
$82,160
(14,424)
198,410
362,980
12,340
216,493
383,254
119,689
22,308
$97,381
156,396
37,893
$118,503
(In thousands, except per
common share information)
Summary of Operations
Summary of Operations
Summary of Operations
Summary of Operations
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Net (loss) gain on sale and
valuation adjustment of
investment securities
Other non-interest income
Operating expenses
(Loss) income before
income tax
Income tax (benefit) expense
Net (loss) income
Net (loss) income applicable
to common stock
($297,071)
($297,071)
($297,071)
($297,071)
($297,071)
$33,024
$33,024
$33,024
$33,024
$33,024
$115,669
$115,669
$71,972
$71,972
$115,669
$71,972 $115,669
$115,669
$71,972
$71,972
$56,654
$79,181
$94,403
$115,525
Net (loss) income per common share:
(basic and diluted)
($1.06)
($1.06)
($1.06)
($1.06)
($1.06)
$ 0 . 1 2
$ 0 . 1 2
$ 0 . 1 2
$ 0 . 1 2
$ 0 . 1 2
$ 0 . 2 6
$ 0 . 2 6
$ 0 . 2 6
$ 0 . 2 6
$ 0 . 2 6
$ 0 . 4 1
$ 0 . 4 1
$ 0 . 4 1
$ 0 . 4 1
$ 0 . 4 1
$0.20
$0.28
$0.34
$0.42
Selected Average Balances
Selected Average Balances
Selected Average Balances
Selected Average Balances
Selected Average Balances
(In millions)
Total assets
Loans
Interest earning assets
Deposits
Interest bearing liabilities
Selected Ratios
Selected Ratios
Selected Ratios
Selected Ratios
Selected Ratios
Return on assets
Return on equity
$46,918
$46,918
$46,918
$46,918
$46,918
32,700
32,700
32,700
32,700
32,700
43,630
43,630
43,630
43,630
43,630
27,339
27,339
27,339
27,339
27,339
38,099
38,099
38,099
38,099
38,099
(2.49%)
(2.49%)
(2.49%)
(2.49%)
(2.49%)
(32.32)
(32.32)
(32.32)
(32.32)
(32.32)
$47,057
$47,057
$47,057
$47,057
$47,057
32,875
32,875
32,875
32,875
32,875
43,728
43,728
43,728
43,728
43,728
25,646
25,646
25,646
25,646
25,646
38,391
38,391
38,391
38,391
38,391
$47,140
$47,140
$47,140
$47,140
$47,140
32,766
32,766
32,766
32,766
32,766
43,828
43,828
43,828
43,828
43,828
24,924
24,924
24,924
24,924
24,924
38,422
38,422
38,422
38,422
38,422
$47,310
$47,310
$47,310
$47,310
$47,310
32,658
32,658
32,658
32,658
32,658
43,978
43,978
43,978
43,978
43,978
24,333
24,333
24,333
24,333
24,333
38,663
38,663
38,663
38,663
38,663
$47,299
32,171
43,992
24,204
38,732
$48,376
32,273
44,948
23,217
39,841
$48,565
31,941
45,196
22,976
40,094
$48,957
31,924
45,604
22,644
40,714
0 . 3 0 %
0 . 3 0 %
0 . 3 0 %
0 . 3 0 %
0 . 3 0 %
3 . 5 2
3 . 5 2
3 . 5 2
3 . 5 2
3 . 5 2
0 . 6 4 %
0 . 6 4 %
0 . 6 4 %
0 . 6 4 %
0 . 6 4 %
7 . 8 0
7 . 8 0
7 . 8 0
7 . 8 0
7 . 8 0
1 . 0 2 %
1 . 0 2 %
1 . 0 2 %
1 . 0 2 %
1 . 0 2 %
1 2 . 9 1
1 2 . 9 1
1 2 . 9 1
1 2 . 9 1
1 2 . 9 1
0.50%
6.20
0.67%
8.75
0.80%
10.72
1.02%
14.04
Management's Report to
Stockholders
2007 Annual Report 73
2007
2007
Popular, Inc. 2007
2007
To Our Stockholders:
s Assessment of Internal Control Over Financial Reporting
s Assessment of Internal Control Over Financial Reporting
Management
Management
s Assessment of Internal Control Over Financial Reporting
Management’s Assessment of Internal Control Over Financial Reporting
s Assessment of Internal Control Over Financial Reporting
Management
Management
The management of Popular, Inc. (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 and for our assessment
of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process 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, and includes controls over the
preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding
Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA). The Corporation’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Corporation;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the
Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as of
December 31, 2007. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting
as of December 31, 2007 based on the criteria referred to above.
The Corporation’s independent registered public accounting firm, PricewaterhouseCoopers, LLP, has audited the effectiveness of the
Corporation’s internal control over financial reporting as of December 31, 2007, as stated in their report dated February 29, 2008
which appears herein.
Richard L. Carrión
Chairman of the Board,
President and Chief Executive Officer
Jorge A. Junquera
Senior Executive Vice President
and Chief Financial Officer
74
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and
Stockholders of Popular, Inc.
In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position
of Popular, Inc. and its subsidiaries at 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. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial
reporting 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 (COSO). The Corporation’s management is responsible for these
financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report to Stockholders. Our responsibility
is to express opinions on these financial statements and on the Corporation’s internal control over financial reporting based on our
integrated 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained
in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Corporation changed the manner in which it accounts for
defined benefit pension and other postretirement pension plans in 2006.
A company’s internal control over financial reporting is a process designed 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. Management’s assessment and our audit of Popular, Inc.’s internal control over financial reporting also
included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial
Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
2007 Annual Report 75
2007
2007
Popular, Inc. 2007
2007
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
February 29, 2008
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires December 1, 2010
Stamp 2287568 of the P.R.
Society of Certified Public
Accountants has been affixed
to the file copy of this report.
76
Consolidated Statements of
Condition
(In thousands, except share information)
A s s e t s
A s s e t s
A s s e t s
A s s e t s
A s s e t s
Cash and due from banks
Money market investments:
Federal funds sold
Securities purchased under agreements to resell
Time deposits with other banks
Trading securities, at fair value:
Pledged securities with creditors’ right to repledge
Other trading securities
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$818,825
$818,825
$818,825
$818,825
$818,825
737,815
737,815
737,815
737,815
737,815
145,871
145,871
145,871
145,871
145,871
123,026
123,026
123,026
123,026
123,026
1,006,712
1,006,712
1,006,712
1,006,712
1,006,712
673,958
673,958
673,958
673,958
673,958
93,997
93,997
93,997
93,997
93,997
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge
Other securities available-for-sale
4,249,295
4,249,295
4,249,295
4,249,295
4,249,295
4,265,840
4,265,840
4,265,840
4,265,840
4,265,840
484,466
484,466
484,466
Investment securities held-to-maturity, at amortized cost (market value 2007 - $486,139; 2006 - $92,764) 484,466
484,466
Other investment securities, at lower of cost or realizable value (fair value 2007 - $216,819;
216,584
216,584
216,584
216,584
216,584
1,889,546
1,889,546
1,889,546
1,889,546
1,889,546
149,610
149,610
149,610
149,610
149,610
28,053,956
28,053,956
28,053,956
28,053,956
28,053,956
182,110
182,110
182,110
182,110
182,110
548,832
548,832
548,832
548,832
548,832
27,472,624
27,472,624
27,472,624
27,472,624
27,472,624
588,163
588,163
588,163
588,163
588,163
81,410
81,410
81,410
81,410
81,410
216,114
216,114
216,114
216,114
216,114
196,645
196,645
196,645
196,645
196,645
1,456,994
1,456,994
1,456,994
1,456,994
1,456,994
630,761
630,761
630,761
630,761
630,761
69,503
69,503
69,503
69,503
69,503
$44,411,437
$44,411,437
$44,411,437
$44,411,437
$44,411,437
$4,510,789
$4,510,789
$4,510,789
$4,510,789
$4,510,789
23,823,689
23,823,689
23,823,689
23,823,689
23,823,689
28,334,478
28,334,478
28,334,478
28,334,478
28,334,478
5,437,265
5,437,265
5,437,265
5,437,265
5,437,265
1,501,979
1,501,979
1,501,979
1,501,979
1,501,979
4,621,352
4,621,352
4,621,352
4,621,352
4,621,352
934,372
934,372
934,372
934,372
934,372
40,829,446
40,829,446
40,829,446
40,829,446
40,829,446
2006 - $412,593)
Loans held-for-sale, at lower of cost or market value
Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge
Other loans held-in-portfolio
Less - Unearned income
Allowance for loan losses
Premises and equipment, net
Other real estate
Accrued income receivable
Servicing assets (2007 - $191,624 at fair value)
Other assets
Goodwill
Other intangible assets
Equity
Equity
Liabilities and Stockholders
Liabilities and Stockholders
Equity
Liabilities and Stockholders’’’’’ Equity
Equity
Liabilities and Stockholders
Liabilities and Stockholders
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and assets sold under agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities
Commitments and contingencies (See Notes 26, 28, 30, 33, 34)
Minority interest in consolidated subsidiaries
Stockholders’ Equity:
Preferred stock, $25 liquidation value; 30,000,000 shares authorized;
7,475,000 issued and outstanding in both periods presented
Common stock, $6 par value; 470,000,000 shares authorized in both periods
presented; 293,651,398 shares issued (2006 - 292,190,924) and 280,029,215
shares outstanding (2006 - 278,741,547)
Surplus
Retained earnings
Treasury stock-at cost, 13,622,183 shares (2006 - 13,449,377)
Accumulated other comprehensive loss,
net of tax of ($15,438) (2006 - ($84,143))
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
December 31,
2006
$950,158
84,350
202,181
15,177
301,708
193,619
188,706
3,743,924
6,106,938
91,340
297,394
719,922
306,320
32,019,044
308,347
522,232
31,494,785
595,140
84,816
248,240
164,999
1,446,891
667,853
107,554
$47,403,987
$4,222,133
20,216,198
24,438,331
5,762,445
4,034,125
8,737,246
811,424
43,783,571
1 0 91 0 91 0 91 0 91 0 9
110
186,875
186,875
186,875
186,875
186,875
186,875
1,761,908
1,761,908
1,761,908
1,761,908
1,761,908
568,184
568,184
568,184
568,184
568,184
1,319,467
1,319,467
1,319,467
1,319,467
1,319,467
(207,740)
(207,740)
(207,740)
(207,740)
(207,740)
(46,812)
(46,812)
(46,812)
(46,812)
(46,812)
3,581,882
3,581,882
3,581,882
3,581,882
3,581,882
$44,411,437
$44,411,437
$44,411,437
$44,411,437
$44,411,437
1,753,146
526,856
1,594,144
(206,987)
(233,728)
3,620,306
$47,403,987
2007 Annual Report 77
2007
2007
Popular, Inc. 2007
2007
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
Year ended December 31,
2006
2005
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
$ 2 , 6 1 5 , 3 1 4
2 5 , 1 9 0
2 5 , 1 9 0
2 5 , 1 9 0
2 5 , 1 9 0
2 5 , 1 9 0
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 4 5 , 7 6 9
4 1 , 8 9 8
4 1 , 8 9 8
4 1 , 8 9 8
4 1 , 8 9 8
4 1 , 8 9 8
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
3 , 1 2 8 , 1 7 1
$2,486,453
29,626
516,237
32,125
3,064,441
$2,116,299
30,736
488,814
30,010
2,665,859
Consolidated Statements of
Operations
(In thousands, except per share information)
Interest Income:
Interest Income:
Interest Income:
Interest Income:
Interest Income:
Loans
Money market investments
Investment securities
Trading securities
Interest Expense:
Interest Expense:
Interest Expense:
Interest Expense:
Interest Expense:
Deposits
Short-term borrowings
Long-term debt
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Service charges on deposit accounts
Other service fees (Note 35)
Net gain on sale and valuation adjustment of investment securities
Trading account (loss) profit
(Loss) gain on sale of loans and valuation adjustments
on loans held-for-sale
Other operating income
Operating Expenses:
Operating Expenses:
Operating Expenses:
Operating Expenses:
Operating Expenses:
Personnel costs:
Salaries
Pension, profit sharing and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Impairment losses on long-lived assets
Other operating expenses
Impact of change in fiscal period at certain subsidiaries
Goodwill and trademark impairment losses
Amortization of intangibles
(Loss) income before income tax and cumulative effect
of accounting change
Income tax (benefit) expense
(Loss) income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
N e t ( L o s s ) I n c o m e
N e t ( L o s s ) I n c o m e
N e t ( L o s s ) I n c o m e
N e t ( L o s s ) I n c o m e
N e t ( L o s s ) I n c o m e
Net (Loss) Income Applicable to Common Stock
Net (Loss) Income Applicable to Common Stock
Net (Loss) Income Applicable to Common Stock
Net (Loss) Income Applicable to Common Stock
Net (Loss) Income Applicable to Common Stock
B a s i c ( L o s s ) E a r n i n g s p e r C o m m o n S h a r e ( E P S )
B a s i c ( L o s s ) E a r n i n g s p e r C o m m o n S h a r e ( E P S )
B a s i c ( L o s s ) E a r n i n g s p e r C o m m o n S h a r e ( E P S )
B a s i c ( L o s s ) E a r n i n g s p e r C o m m o n S h a r e ( E P S )
B a s i c ( L o s s ) E a r n i n g s p e r C o m m o n S h a r e ( E P S )
B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S B e f o r e C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B a s i c E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B a s i c E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B a s i c E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B a s i c E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
B a s i c E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
D i l u t e d E P S A f t e r C u m u l a t i v e E f f e c t o f A c c o u n t i n g C h a n g e
7 6 5 , 7 9 3
7 6 5 , 7 9 3
7 6 5 , 7 9 3
7 6 5 , 7 9 3
7 6 5 , 7 9 3
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 4 8 , 1 7 2
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
4 6 4 , 8 1 6
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 6 7 8 , 7 8 1
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
1 , 4 4 9 , 3 9 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
8 8 6 , 7 4 0
8 8 6 , 7 4 0
8 8 6 , 7 4 0
8 8 6 , 7 4 0
8 8 6 , 7 4 0
1 9 6 , 0 7 2
1 9 6 , 0 7 2
1 9 6 , 0 7 2
1 9 6 , 0 7 2
1 9 6 , 0 7 2
3 6 3 , 2 5 7
3 6 3 , 2 5 7
3 6 3 , 2 5 7
3 6 3 , 2 5 7
3 6 3 , 2 5 7
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
5 5 , 1 5 9
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 2 , 4 6 4 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
( 3 8 , 9 7 0 )
1 2 1 , 2 6 2
1 2 1 , 2 6 2
1 2 1 , 2 6 2
1 2 1 , 2 6 2
1 2 1 , 2 6 2
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
1 , 5 8 1 , 0 5 6
5 1 9 , 5 2 3
5 1 9 , 5 2 3
5 1 9 , 5 2 3
5 1 9 , 5 2 3
5 1 9 , 5 2 3
1 4 8 , 6 6 6
1 4 8 , 6 6 6
1 4 8 , 6 6 6
1 4 8 , 6 6 6
1 4 8 , 6 6 6
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
6 6 8 , 1 8 9
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 3 , 6 2 1
1 2 7 , 4 7 2
1 2 7 , 4 7 2
1 2 7 , 4 7 2
1 2 7 , 4 7 2
1 2 7 , 4 7 2
5 0 , 1 1 1
5 0 , 1 1 1
5 0 , 1 1 1
5 0 , 1 1 1
5 0 , 1 1 1
1 4 9 , 8 5 4
1 4 9 , 8 5 4
1 4 9 , 8 5 4
1 4 9 , 8 5 4
1 4 9 , 8 5 4
6 6 , 8 7 7
6 6 , 8 7 7
6 6 , 8 7 7
6 6 , 8 7 7
6 6 , 8 7 7
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 1 5 , 3 8 8
1 7 , 4 3 8
1 7 , 4 3 8
1 7 , 4 3 8
1 7 , 4 3 8
1 7 , 4 3 8
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 5 1 , 0 6 2
1 5 1 , 0 6 2
1 5 1 , 0 6 2
1 5 1 , 0 6 2
1 5 1 , 0 6 2
-----
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
1 , 7 0 4 , 5 5 1
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 1 2 3 , 4 9 5 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 5 9 , 0 0 2 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
-----
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 7 6 , 4 0 6 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
( $ 0 . 2 7 )
D i v i d e n d s D e c l a r e d p e r C o m m o n S h a r e
D i v i d e n d s D e c l a r e d p e r C o m m o n S h a r e
D i v i d e n d s D e c l a r e d p e r C o m m o n S h a r e
D i v i d e n d s D e c l a r e d p e r C o m m o n S h a r e
D i v i d e n d s D e c l a r e d p e r C o m m o n S h a r e
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
$ 0 . 6 4
$ 0 . 6 4
$ 0 . 6 4
$ 0 . 6 4
$ 0 . 6 4
580,094
518,960
537,477
1,636,531
1,427,910
287,760
1,140,150
190,079
320,875
4,359
35,288
117,421
141,463
1,949,635
517,178
151,493
668,671
116,742
135,877
44,543
141,534
68,283
129,965
17,741
7,232
118,128
9,741
14,239
12,377
1,485,073
464,562
106,886
357,676
-
$357,676
$345,763
$1.24
$1.24
$1.24
$1.24
$0.64
430,813
349,203
461,636
1,241,652
1,424,207
195,272
1,228,935
181,749
331,501
52,113
30,051
83,297
106,564
2,014,210
474,636
148,053
622,689
108,386
124,276
39,197
119,281
63,395
100,434
18,378
-
122,585
-
-
9,579
1,328,200
686,010
148,915
537,095
3,607
$540,702
$528,789
$1.97
$1.96
$1.98
$1.97
$0.64
78
Consolidated Statements of Cash
Flows
(In thousands)
Cash Flows from Operating Activities:
Cash Flows from Operating Activities:
Cash Flows from Operating Activities:
Cash Flows from Operating Activities:
Cash Flows from Operating Activities:
Net (loss) income
Less: Cumulative effect of accounting change, net of tax
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
Net (loss) income before cumulative effect of accounting change and change in
fiscal period
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment
Provision for loan losses
Goodwill and trademark impairment losses
Impairment losses on long-lived assets
Amortization of intangibles
Amortization and fair value adjustment of servicing assets
Net gain on sale and valuation adjustment of investment securities
Net gain on disposition of premises and equipment
Loss (gain) on sale of loans and valuation adjustments on loans held-for-sale
Net amortization of premiums and accretion of discounts
on investments
Net amortization of premiums on loans and deferred loan origination fees and costs
Earnings from investments under the equity method
Stock options expense
Net disbursements on loans held-for-sale
Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net decrease in trading securities
Net decrease (increase) in accrued income receivable
Net (increase) decrease in other assets
Net increase in interest payable
Deferred income taxes
Net increase in postretirement benefit obligation
Net increase (decrease) in other liabilities
Total adjustments
Net cash provided by operating activities
Cash Flows from Investing Activities:
Cash Flows from Investing Activities:
Cash Flows from Investing Activities:
Cash Flows from Investing Activities:
Cash Flows from Investing Activities:
Net (increase) decrease in money market investments
Purchases of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from calls, paydowns, maturities and redemptions
of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from sales of investment securities available-for-sale
Proceeds from sale of other investment securities
Net disbursements on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Net liabilities assumed (assets acquired), net of cash
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
Cash Flows from Financing Activities:
Cash Flows from Financing Activities:
Cash Flows from Financing Activities:
Cash Flows from Financing Activities:
Net increase in deposits
Net (decrease) increase in federal funds purchased and
assets sold under agreements to repurchase
Net (decrease) increase in other short-term borrowings
Payments of notes payable
Proceeds from issuance of notes payable
Dividends paid
Proceeds from issuance of common stock
Treasury stock acquired
Net cash (used in) provided by financing activities
Cash effect of change in fiscal period and change in accounting principle
Net (decrease) increase in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Year ended December 31,
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
-----
-----
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
7 8 , 5 6 3
7 8 , 5 6 3
7 8 , 5 6 3
7 8 , 5 6 3
7 8 , 5 6 3
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
5 6 2 , 6 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
2 1 1 , 7 5 0
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 2 , 3 4 4
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
1 0 , 4 4 5
6 1 , 1 1 0
6 1 , 1 1 0
6 1 , 1 1 0
6 1 , 1 1 0
6 1 , 1 1 0
( 5 5 , 1 5 9 )
( 5 5 , 1 5 9 )
( 5 5 , 1 5 9 )
( 5 5 , 1 5 9 )
( 5 5 , 1 5 9 )
( 1 2 , 2 9 6 )
( 1 2 , 2 9 6 )
( 1 2 , 2 9 6 )
( 1 2 , 2 9 6 )
( 1 2 , 2 9 6 )
3 8 , 9 7 0
3 8 , 9 7 0
3 8 , 9 7 0
3 8 , 9 7 0
3 8 , 9 7 0
2 0 , 2 3 8
2 0 , 2 3 8
2 0 , 2 3 8
2 0 , 2 3 8
2 0 , 2 3 8
9 0 , 5 1 1
9 0 , 5 1 1
9 0 , 5 1 1
9 0 , 5 1 1
9 0 , 5 1 1
( 2 1 , 3 4 7 )
( 2 1 , 3 4 7 )
( 2 1 , 3 4 7 )
( 2 1 , 3 4 7 )
( 2 1 , 3 4 7 )
1 , 7 6 3
1 , 7 6 3
1 , 7 6 3
1 , 7 6 3
1 , 7 6 3
( 4 , 8 0 3 , 9 2 7 )
( 4 , 8 0 3 , 9 2 7 )
( 4 , 8 0 3 , 9 2 7 )
( 4 , 8 0 3 , 9 2 7 )
( 4 , 8 0 3 , 9 2 7 )
( 5 5 0 , 3 9 2 )
( 5 5 0 , 3 9 2 )
( 5 5 0 , 3 9 2 )
( 5 5 0 , 3 9 2 )
( 5 5 0 , 3 9 2 )
4 , 1 2 7 , 7 9 4
4 , 1 2 7 , 7 9 4
4 , 1 2 7 , 7 9 4
4 , 1 2 7 , 7 9 4
4 , 1 2 7 , 7 9 4
1 , 2 2 2 , 5 8 5
1 , 2 2 2 , 5 8 5
1 , 2 2 2 , 5 8 5
1 , 2 2 2 , 5 8 5
1 , 2 2 2 , 5 8 5
1 1 , 8 3 2
1 1 , 8 3 2
1 1 , 8 3 2
1 1 , 8 3 2
1 1 , 8 3 2
( 9 4 , 2 1 5 )
( 9 4 , 2 1 5 )
( 9 4 , 2 1 5 )
( 9 4 , 2 1 5 )
( 9 4 , 2 1 5 )
5 , 0 1 3
5 , 0 1 3
5 , 0 1 3
5 , 0 1 3
5 , 0 1 3
( 2 2 3 , 7 4 0 )
( 2 2 3 , 7 4 0 )
( 2 2 3 , 7 4 0 )
( 2 2 3 , 7 4 0 )
( 2 2 3 , 7 4 0 )
2 , 3 8 8
2 , 3 8 8
2 , 3 8 8
2 , 3 8 8
2 , 3 8 8
7 1 , 5 7 5
7 1 , 5 7 5
7 1 , 5 7 5
7 1 , 5 7 5
7 1 , 5 7 5
7 6 8 , 4 5 5
7 6 8 , 4 5 5
7 6 8 , 4 5 5
7 6 8 , 4 5 5
7 6 8 , 4 5 5
7 0 3 , 9 6 2
7 0 3 , 9 6 2
7 0 3 , 9 6 2
7 0 3 , 9 6 2
7 0 3 , 9 6 2
$357,676
-
(6,129)
363,805
84,388
287,760
14,239
7,232
12,377
62,819
(4,359)
(25,929)
(117,421)
23,918
130,091
(12,270)
3,006
(6,580,246)
(1,503,017)
6,782,081
1,368,975
(4,209)
49,708
32,477
(26,208)
4,112
(83,544)
505,980
869,785
$540,702
3,607
-
537,095
81,947
195,272
-
-
9,579
25,766
(52,113)
(29,079)
(83,297)
35,288
127,235
(10,982)
5,226
(4,321,658)
(733,536)
4,127,381
1,160,980
(30,808)
(172,879)
35,218
(3,679)
5,451
20,431
391,743
928,838
( 6 3 8 , 5 6 8 )
( 6 3 8 , 5 6 8 )
( 6 3 8 , 5 6 8 )
( 6 3 8 , 5 6 8 )
( 6 3 8 , 5 6 8 )
381,421
160,061
( 1 6 0 , 7 1 2 )
( 1 6 0 , 7 1 2 )
( 1 6 0 , 7 1 2 )
( 1 6 0 , 7 1 2 )
( 1 6 0 , 7 1 2 )
( 2 9 , 3 2 0 , 2 8 6 )
( 2 9 , 3 2 0 , 2 8 6 )
( 2 9 , 3 2 0 , 2 8 6 )
( 2 9 , 3 2 0 , 2 8 6 )
( 2 9 , 3 2 0 , 2 8 6 )
( 1 1 2 , 1 0 8 )
( 1 1 2 , 1 0 8 )
( 1 1 2 , 1 0 8 )
( 1 1 2 , 1 0 8 )
( 1 1 2 , 1 0 8 )
(254,930)
(20,863,367)
(66,026)
(4,243,162)
(33,579,802)
(77,716)
1 , 6 0 8 , 6 7 7
1 , 6 0 8 , 6 7 7
1 , 6 0 8 , 6 7 7
1 , 6 0 8 , 6 7 7
1 , 6 0 8 , 6 7 7
2 8 , 9 3 5 , 5 6 1
2 8 , 9 3 5 , 5 6 1
2 8 , 9 3 5 , 5 6 1
2 8 , 9 3 5 , 5 6 1
2 8 , 9 3 5 , 5 6 1
4 4 , 1 8 5
4 4 , 1 8 5
4 4 , 1 8 5
4 4 , 1 8 5
4 4 , 1 8 5
5 8 , 1 6 7
5 8 , 1 6 7
5 8 , 1 6 7
5 8 , 1 6 7
5 8 , 1 6 7
2 4 6 , 3 5 2
2 4 6 , 3 5 2
2 4 6 , 3 5 2
2 4 6 , 3 5 2
2 4 6 , 3 5 2
( 1 , 4 5 7 , 9 2 5 )
( 1 , 4 5 7 , 9 2 5 )
( 1 , 4 5 7 , 9 2 5 )
( 1 , 4 5 7 , 9 2 5 )
( 1 , 4 5 7 , 9 2 5 )
4 1 5 , 2 5 6
4 1 5 , 2 5 6
4 1 5 , 2 5 6
4 1 5 , 2 5 6
4 1 5 , 2 5 6
( 2 2 , 3 1 2 )
( 2 2 , 3 1 2 )
( 2 2 , 3 1 2 )
( 2 2 , 3 1 2 )
( 2 2 , 3 1 2 )
7 1 9 , 6 0 4
7 1 9 , 6 0 4
7 1 9 , 6 0 4
7 1 9 , 6 0 4
7 1 9 , 6 0 4
( 2 6 , 5 0 7 )
( 2 6 , 5 0 7 )
( 2 6 , 5 0 7 )
( 2 6 , 5 0 7 )
( 2 6 , 5 0 7 )
( 1 0 4 , 8 6 6 )
( 1 0 4 , 8 6 6 )
( 1 0 4 , 8 6 6 )
( 1 0 4 , 8 6 6 )
( 1 0 4 , 8 6 6 )
6 3 , 4 5 5
6 3 , 4 5 5
6 3 , 4 5 5
6 3 , 4 5 5
6 3 , 4 5 5
1 7 5 , 9 7 4
1 7 5 , 9 7 4
1 7 5 , 9 7 4
1 7 5 , 9 7 4
1 7 5 , 9 7 4
4 2 3 , 9 4 7
4 2 3 , 9 4 7
4 2 3 , 9 4 7
4 2 3 , 9 4 7
4 2 3 , 9 4 7
1,876,458
20,925,847
88,314
208,802
-
(1,587,326)
938,862
(448,708)
(3,034)
(23,769)
(104,593)
87,913
138,703
1,294,567
3,317,198
33,787,268
61,053
388,596
-
(343,093)
297,805
(2,650,540)
(411,782)
(5,039)
(159,166)
71,053
117,159
(3,270,107)
2 , 8 8 9 , 5 2 4
2 , 8 8 9 , 5 2 4
2 , 8 8 9 , 5 2 4
2 , 8 8 9 , 5 2 4
2 , 8 8 9 , 5 2 4
1,789,662
1,371,668
( 3 2 5 , 1 8 0 )
( 3 2 5 , 1 8 0 )
( 3 2 5 , 1 8 0 )
( 3 2 5 , 1 8 0 )
( 3 2 5 , 1 8 0 )
( 2 , 6 1 2 , 8 0 1 )
( 2 , 6 1 2 , 8 0 1 )
( 2 , 6 1 2 , 8 0 1 )
( 2 , 6 1 2 , 8 0 1 )
( 2 , 6 1 2 , 8 0 1 )
( 2 , 4 6 3 , 2 7 7 )
( 2 , 4 6 3 , 2 7 7 )
( 2 , 4 6 3 , 2 7 7 )
( 2 , 4 6 3 , 2 7 7 )
( 2 , 4 6 3 , 2 7 7 )
1 , 4 2 5 , 2 2 0
1 , 4 2 5 , 2 2 0
1 , 4 2 5 , 2 2 0
1 , 4 2 5 , 2 2 0
1 , 4 2 5 , 2 2 0
( 1 9 0 , 6 1 7 )
( 1 9 0 , 6 1 7 )
( 1 9 0 , 6 1 7 )
( 1 9 0 , 6 1 7 )
( 1 9 0 , 6 1 7 )
2 0 , 4 1 4
2 0 , 4 1 4
2 0 , 4 1 4
2 0 , 4 1 4
2 0 , 4 1 4
( 2 , 5 2 5 )
( 2 , 5 2 5 )
( 2 , 5 2 5 )
( 2 , 5 2 5 )
( 2 , 5 2 5 )
( 1 , 2 5 9 , 2 4 2 )
( 1 , 2 5 9 , 2 4 2 )
( 1 , 2 5 9 , 2 4 2 )
( 1 , 2 5 9 , 2 4 2 )
( 1 , 2 5 9 , 2 4 2 )
-----
( 1 3 1 , 3 3 3 )
( 1 3 1 , 3 3 3 )
( 1 3 1 , 3 3 3 )
( 1 3 1 , 3 3 3 )
( 1 3 1 , 3 3 3 )
9 5 0 , 1 5 8
9 5 0 , 1 5 8
9 5 0 , 1 5 8
9 5 0 , 1 5 8
9 5 0 , 1 5 8
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
$ 8 1 8 , 8 2 5
(3,053,167)
1,226,973
(3,469,429)
1,506,298
(188,321)
55,846
(367)
(2,132,505)
11,914
43,761
906,397
$950,158
2,227,888
(766,277)
(2,650,972)
2,341,011
(182,751)
193,679
(1,467)
2,532,779
(1,572)
189,938
716,459
$906,397
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
2007 Annual Report 79
2007
2007
Popular, Inc. 2007
2007
Year ended December 31,
Consolidated Statements of
Changes in Stockholders’’’’’ Equity
(In thousands, except share information)
Preferred Stock:
Preferred Stock:
Preferred Stock:
Preferred Stock:
Preferred Stock:
Balance at beginning and end of year
C o m m o n S t o c k :
C o m m o n S t o c k :
C o m m o n S t o c k :
C o m m o n S t o c k :
C o m m o n S t o c k :
Balance at beginning of year
Common stock issued under
Dividend Reinvestment Plan
Issuance of common stock
Options exercised
Balance at end of year
S u r p l u s :
S u r p l u s :
S u r p l u s :
S u r p l u s :
S u r p l u s :
Balance at beginning of year
Common stock issued under
Dividend Reinvestment Plan
Issuance of common stock
Issuance cost of common stock
Stock options expense on unexercised options,
net of forfeitures
Options exercised
Transfer from retained earnings
Balance at end of year
Retained Earnings:
Retained Earnings:
Retained Earnings:
Retained Earnings:
Retained Earnings:
Balance at beginning of year
Net (loss) income
Cumulative effect of accounting change
(adoption of SFAS No. 156 and EITF 06-5)
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Transfer to surplus
Balance at end of year
Treasury Stock - At Cost:
Treasury Stock - At Cost:
Treasury Stock - At Cost:
Treasury Stock - At Cost:
Treasury Stock - At Cost:
Balance at beginning of year
Purchase of common stock
Reissuance of common stock
Balance at end of year
Accumulated Other Comprehensive
Accumulated Other Comprehensive
Accumulated Other Comprehensive
Accumulated Other Comprehensive
Accumulated Other Comprehensive
L o s s :
L o s s :
L o s s :
L o s s :
L o s s :
Balance at beginning of year
Other comprehensive income (loss), net of tax
Adoption of SFAS No. 158
Balance at end of year
Total stockholders’ equity
Total stockholders’ equity
Total stockholders’ equity
Total stockholders’ equity
Total stockholders’ equity
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
$ 1 8 6 , 8 7 5
$ 1 8 6 , 8 7 5
$ 1 8 6 , 8 7 5
$ 1 8 6 , 8 7 5
$ 1 8 6 , 8 7 5
1 , 7 5 3 , 1 4 6
1 , 7 5 3 , 1 4 6
1 , 7 5 3 , 1 4 6
1 , 7 5 3 , 1 4 6
1 , 7 5 3 , 1 4 6
8 , 7 0 2
8 , 7 0 2
8 , 7 0 2
8 , 7 0 2
8 , 7 0 2
-----
6 06 06 06 06 0
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
1 , 7 6 1 , 9 0 8
5 2 6 , 8 5 6
5 2 6 , 8 5 6
5 2 6 , 8 5 6
5 2 6 , 8 5 6
5 2 6 , 8 5 6
1 1 , 4 6 6
1 1 , 4 6 6
1 1 , 4 6 6
1 1 , 4 6 6
1 1 , 4 6 6
-----
-----
1 , 7 1 3
1 , 7 1 3
1 , 7 1 3
1 , 7 1 3
1 , 7 1 3
1 4 91 4 91 4 91 4 91 4 9
2 8 , 0 0 0
2 8 , 0 0 0
2 8 , 0 0 0
2 8 , 0 0 0
2 8 , 0 0 0
5 6 8 , 1 8 4
5 6 8 , 1 8 4
5 6 8 , 1 8 4
5 6 8 , 1 8 4
5 6 8 , 1 8 4
1 , 5 9 4 , 1 4 4
1 , 5 9 4 , 1 4 4
1 , 5 9 4 , 1 4 4
1 , 5 9 4 , 1 4 4
1 , 5 9 4 , 1 4 4
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
( 6 4 , 4 9 3 )
8 , 6 6 7
8 , 6 6 7
8 , 6 6 7
8 , 6 6 7
8 , 6 6 7
( 1 7 8 , 9 3 8 )
( 1 7 8 , 9 3 8 )
( 1 7 8 , 9 3 8 )
( 1 7 8 , 9 3 8 )
( 1 7 8 , 9 3 8 )
( 1 1 , 9 1 3 )
( 1 1 , 9 1 3 )
( 1 1 , 9 1 3 )
( 1 1 , 9 1 3 )
( 1 1 , 9 1 3 )
( 2 8 , 0 0 0 )
( 2 8 , 0 0 0 )
( 2 8 , 0 0 0 )
( 2 8 , 0 0 0 )
( 2 8 , 0 0 0 )
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
1 , 3 1 9 , 4 6 7
( 2 0 6 , 9 8 7 )
( 2 0 6 , 9 8 7 )
( 2 0 6 , 9 8 7 )
( 2 0 6 , 9 8 7 )
( 2 0 6 , 9 8 7 )
( 2 , 5 2 5 )
( 2 , 5 2 5 )
( 2 , 5 2 5 )
( 2 , 5 2 5 )
( 2 , 5 2 5 )
1 , 7 7 2
1 , 7 7 2
1 , 7 7 2
1 , 7 7 2
1 , 7 7 2
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
( 2 0 7 , 7 4 0 )
( 2 3 3 , 7 2 8 )
( 2 3 3 , 7 2 8 )
( 2 3 3 , 7 2 8 )
( 2 3 3 , 7 2 8 )
( 2 3 3 , 7 2 8 )
1 8 6 , 9 1 6
1 8 6 , 9 1 6
1 8 6 , 9 1 6
1 8 6 , 9 1 6
1 8 6 , 9 1 6
-----
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
( 4 6 , 8 1 2 )
$ 3 , 5 8 1 , 8 8 2
$ 3 , 5 8 1 , 8 8 2
$ 3 , 5 8 1 , 8 8 2
$ 3 , 5 8 1 , 8 8 2
$ 3 , 5 8 1 , 8 8 2
2006
$186,875
1,736,443
5,154
11,312
237
1,753,146
452,398
11,323
28,281
1,462
2,826
566
30,000
526,856
1,456,612
357,676
-
(178,231)
(11,913)
(30,000)
1,594,144
(207,081)
(367)
461
(206,987)
(176,000)
(17,877)
(39,851)
(233,728)
$3,620,306
Disclosure of changes in number of shares:
Disclosure of changes in number of shares:
Disclosure of changes in number of shares:
Disclosure of changes in number of shares:
Disclosure of changes in number of shares:
Preferred Stock:
Preferred Stock:
Preferred Stock:
Preferred Stock:
Preferred Stock:
Balance at beginning and end of year
Common Stock - Issued:
Common Stock - Issued:
Common Stock - Issued:
Common Stock - Issued:
Common Stock - Issued:
Balance at beginning of year
Issued under the Dividend Reinvestment Plan
Issuance of common stock
Options exercised
Balance at end of year
Treasury stock
Common Stock - Outstanding
Common Stock - Outstanding
Common Stock - Outstanding
Common Stock - Outstanding
Common Stock - Outstanding
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
7 , 4 7 5 , 0 0 0
7 , 4 7 5 , 0 0 0
7 , 4 7 5 , 0 0 0
7 , 4 7 5 , 0 0 0
7 , 4 7 5 , 0 0 0
2 9 2 , 1 9 0 , 9 2 4
2 9 2 , 1 9 0 , 9 2 4
2 9 2 , 1 9 0 , 9 2 4
2 9 2 , 1 9 0 , 9 2 4
2 9 2 , 1 9 0 , 9 2 4
1 , 4 5 0 , 4 1 0
1 , 4 5 0 , 4 1 0
1 , 4 5 0 , 4 1 0
1 , 4 5 0 , 4 1 0
1 , 4 5 0 , 4 1 0
-----
1 0 , 0 6 4
1 0 , 0 6 4
1 0 , 0 6 4
1 0 , 0 6 4
1 0 , 0 6 4
2 9 3 , 6 5 1 , 3 9 8
2 9 3 , 6 5 1 , 3 9 8
2 9 3 , 6 5 1 , 3 9 8
2 9 3 , 6 5 1 , 3 9 8
2 9 3 , 6 5 1 , 3 9 8
( 1 3 , 6 2 2 , 1 8 3 )
( 1 3 , 6 2 2 , 1 8 3 )
( 1 3 , 6 2 2 , 1 8 3 )
( 1 3 , 6 2 2 , 1 8 3 )
( 1 3 , 6 2 2 , 1 8 3 )
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
2 8 0 , 0 2 9 , 2 1 5
Year ended December 31,
2006
7,475,000
289,407,190
858,905
1,885,380
39,449
292,190,924
(13,449,377)
278,741,547
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
2005
$186,875
1,680,096
4,372
51,688
287
1,736,443
278,840
13,263
129,219
(5,636)
5,003
709
31,000
452,398
1,129,793
540,702
-
(170,970)
(11,913)
(31,000)
1,456,612
(206,437)
(1,467)
823
(207,081)
35,454
(211,454)
-
(176,000)
$3,449,247
2005
7,475,000
280,016,007
728,705
8,614,620
47,858
289,407,190
(13,451,799)
275,955,391
80
Consolidated Statements of
Comprehensive Income
(In thousands)
Net (loss) income
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment
Adjustment of pension and postretirement benefit plans
Unrealized holding gains (losses) on securities available-for-sale
arising during the period
Reclassification adjustment for gains included in net income
Unrealized net losses on cash flow hedges
Reclassification adjustment for losses included in net income
Cumulative effect of accounting change
Reclassification adjustment for gains included in net income
Income tax (expense) benefit
Total other comprehensive income (loss), net of tax
Comprehensive income, net of tax
Year ended December 31,
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
2005
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
( $ 6 4 , 4 9 3 )
$357,676
$540,702
2 , 1 1 3
2 , 1 1 3
2 , 1 1 3
2 , 1 1 3
2 , 1 1 3
1 8 , 1 2 1
1 8 , 1 2 1
1 8 , 1 2 1
1 8 , 1 2 1
1 8 , 1 2 1
2 3 9 , 3 9 0
2 3 9 , 3 9 0
2 3 9 , 3 9 0
2 3 9 , 3 9 0
2 3 9 , 3 9 0
( 5 5 )
( 5 5 )
( 5 5 )
( 5 5 )
( 5 5 )
( 4 , 7 8 2 )
( 4 , 7 8 2 )
( 4 , 7 8 2 )
( 4 , 7 8 2 )
( 4 , 7 8 2 )
1 , 0 7 7
1 , 0 7 7
1 , 0 7 7
1 , 0 7 7
1 , 0 7 7
( 2 4 3 )
( 2 4 3 )
( 2 4 3 )
( 2 4 3 )
( 2 4 3 )
-----
2 5 5 , 6 2 1
2 5 5 , 6 2 1
2 5 5 , 6 2 1
2 5 5 , 6 2 1
2 5 5 , 6 2 1
( 6 8 , 7 0 5 )
( 6 8 , 7 0 5 )
( 6 8 , 7 0 5 )
( 6 8 , 7 0 5 )
( 6 8 , 7 0 5 )
1 8 6 , 9 1 6
1 8 6 , 9 1 6
1 8 6 , 9 1 6
1 8 6 , 9 1 6
1 8 6 , 9 1 6
(386)
(1,539)
(12,194)
(4,359)
(1,573)
1,839
-
-
(18,212)
335
(17,877)
(785)
(2,354)
(222,604)
(51,591)
(3,316)
4,247
(103)
(20)
(276,526)
65,072
(211,454)
$ 1 2 2 , 4 2 3
$ 1 2 2 , 4 2 3
$ 1 2 2 , 4 2 3
$ 1 2 2 , 4 2 3
$ 1 2 2 , 4 2 3
$339,799
$329,248
Tax effects allocated to each component of other comprehensive income:
Tax effects allocated to each component of other comprehensive income:
Tax effects allocated to each component of other comprehensive income:
Tax effects allocated to each component of other comprehensive income:
Tax effects allocated to each component of other comprehensive income:
(In thousands)
Underfunding of pension and postretirement benefit plans
Unrealized holding gains (losses) on securities available-for-sale
arising during the period
Reclassification adjustment for gains included in net income
Unrealized net losses on cash flow hedges
Reclassification adjustment for losses included in net income
Income tax (expense) benefit
Year ended December 31,
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2006
( $ 6 , 9 2 6 )
( $ 6 , 9 2 6 )
( $ 6 , 9 2 6 )
( $ 6 , 9 2 6 )
( $ 6 , 9 2 6 )
( 6 3 , 1 0 4 )
( 6 3 , 1 0 4 )
( 6 3 , 1 0 4 )
( 6 3 , 1 0 4 )
( 6 3 , 1 0 4 )
88888
1 , 7 2 3
1 , 7 2 3
1 , 7 2 3
1 , 7 2 3
1 , 7 2 3
( 4 0 6 )
( 4 0 6 )
( 4 0 6 )
( 4 0 6 )
( 4 0 6 )
( $ 6 8 , 7 0 5 )
( $ 6 8 , 7 0 5 )
( $ 6 8 , 7 0 5 )
( $ 6 8 , 7 0 5 )
( $ 6 8 , 7 0 5 )
$600
2,747
(2,898)
630
(744)
$335
2005
$918
62,225
2,270
1,916
(2,257)
$65,072
D i s c l o s u r e o f a c c u m u l a t e d o t h e r c o m p r e h e n s i v e ( l o s s ) i n c o m e :
D i s c l o s u r e o f a c c u m u l a t e d o t h e r c o m p r e h e n s i v e ( l o s s ) i n c o m e :
D i s c l o s u r e o f a c c u m u l a t e d o t h e r c o m p r e h e n s i v e ( l o s s ) i n c o m e :
D i s c l o s u r e o f a c c u m u l a t e d o t h e r c o m p r e h e n s i v e ( l o s s ) i n c o m e :
D i s c l o s u r e o f a c c u m u l a t e d o t h e r c o m p r e h e n s i v e ( l o s s ) i n c o m e :
(In thousands)
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
2 0 0 7
Year ended December 31,
2006
2005
Foreign currency translation adjustment
( $ 3 4 , 5 8 8 )
( $ 3 4 , 5 8 8 )
( $ 3 4 , 5 8 8 )
( $ 3 4 , 5 8 8 )
( $ 3 4 , 5 8 8 )
($36,701)
($36,315)
Minimum pension liability adjustment
Tax effect
Adoption of SFAS No. 158
Tax effect
Net of tax amount
Underfunding of pension and postretirement benefit plans
Tax effect
Net of tax amount
Unrealized gains (losses) on securities available-for-sale
Tax effect
Net of tax amount
Unrealized (losses) gains on cash flow hedges
Tax effect
Net of tax amount
Cumulative effect of accounting change, net of tax
-----
-----
-----
-----
-----
( 5 1 , 1 3 9 )
( 5 1 , 1 3 9 )
( 5 1 , 1 3 9 )
( 5 1 , 1 3 9 )
( 5 1 , 1 3 9 )
2 0 , 1 0 8
2 0 , 1 0 8
2 0 , 1 0 8
2 0 , 1 0 8
2 0 , 1 0 8
( 3 1 , 0 3 1 )
( 3 1 , 0 3 1 )
( 3 1 , 0 3 1 )
( 3 1 , 0 3 1 )
( 3 1 , 0 3 1 )
2 7 , 0 9 2
2 7 , 0 9 2
2 7 , 0 9 2
2 7 , 0 9 2
2 7 , 0 9 2
( 5 , 9 5 0 )
( 5 , 9 5 0 )
( 5 , 9 5 0 )
( 5 , 9 5 0 )
( 5 , 9 5 0 )
2 1 , 1 4 2
2 1 , 1 4 2
2 1 , 1 4 2
2 1 , 1 4 2
2 1 , 1 4 2
( 3 , 6 1 5 )
( 3 , 6 1 5 )
( 3 , 6 1 5 )
( 3 , 6 1 5 )
( 3 , 6 1 5 )
1 , 2 8 0
1 , 2 8 0
1 , 2 8 0
1 , 2 8 0
1 , 2 8 0
( 2 , 3 3 5 )
( 2 , 3 3 5 )
( 2 , 3 3 5 )
( 2 , 3 3 5 )
( 2 , 3 3 5 )
-----
(3,893)
1,518
3,893
(1,518)
-
(69,260)
27,034
(42,226)
(212,243)
57,146
(155,097)
90
(37)
53
243
(2,354)
918
-
-
(1,436)
-
-
-
(195,690)
57,297
(138,393)
(176)
77
(99)
243
Accumulated other comprehensive loss
( $ 4 6 , 8 1 2 )
( $ 4 6 , 8 1 2 )
( $ 4 6 , 8 1 2 )
( $ 4 6 , 8 1 2 )
( $ 4 6 , 8 1 2 )
($233,728)
($176,000)
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial
Statements
2007 Annual Report 81
2007
2007
Popular, Inc. 2007
2007
Note 1 - Nature of operations and summary of significant
accounting policies ............................................... 82
Note 2 - Restructuring plans ................................................ 95
Note 3 - Subsequent events .................................................. 96
Note 4 - Restrictions on cash and due from banks and
highly liquid securities ......................................... 97
Note 5 - Securities purchased under agreements to resell ..... 97
Note 6 - Investment securities available-for-sale ................... 98
Note 7 - Investment securities held-to-maturity ................. 100
Note 8 - Pledged assets ...................................................... 102
Note 9 - Loans and allowance for loan losses ...................... 102
Note 10 - Related party transactions ................................... 103
Note 11 - Premises and equipment ...................................... 104
Note 12 - Goodwill and other intangible assets ................... 104
Note 13 -Deposits ............................................................... 105
Note 14 - Federal funds purchased and assets sold
under agreements to repurchase ............................ 106
Note 15 -Other short-term borrowings ............................... 107
Note 16 - Notes payable ....................................................... 108
Note 17 - Unused lines of credit and other funding sources 108
Note 18 -Trust preferred securities .................................... 109
Note 19 - (Loss) earnings per common share ....................... 110
Note 20 - Stockholders’ equity ............................................ 110
Note 21 - Regulatory capital requirements ........................... 111
Note 22 - Servicing assets ................................................... 112
Note 23 -Retained interests on transfers of financial assets 114
Note 24 - Employee benefits ................................................ 118
Note 25 -Stock-based compensation .................................. 123
Note 26 - Rental expense and commitments ......................... 125
Note 27 - Income tax ........................................................... 125
Note 28 -Off-balance sheet activities and
concentration of credit risk ................................. 127
Note 29 - Disclosures about fair value of financial
instruments .......................................................... 128
Note 30 -Derivative instruments and hedging activities .... 129
Note 31 -Supplemental disclosure on the consolidated
statements of cash flows ...................................... 133
Note 32 - Segment reporting .............................................. 133
Note 33 - Contingent liabilities ......................................... 137
Note 34 - Guarantees .......................................................... 137
Note 35 - Other service fees ............................................... 139
Note 36 - Popular, Inc. (Holding Company only) financial
information ........................................................... 139
Note 37 - Condensed consolidating financial information
of guarantor and issuers of registered guaranteed
securities ............................................................. 141
82
N o t e 1 - N a t u r e o f O p e r a t i o n s a n d S u m m a r y o f
N o t e 1 - N a t u r e o f O p e r a t i o n s a n d S u m m a r y o f
N o t e 1 - N a t u r e o f O p e r a t i o n s a n d S u m m a r y o f
N o t e 1 - N a t u r e o f O p e r a t i o n s a n d S u m m a r y o f
N o t e 1 - N a t u r e o f O p e r a t i o n s a n d S u m m a r y o f
S i g n i f i c a n t A c c o u n t i n g P o l i c i e s :
S i g n i f i c a n t A c c o u n t i n g P o l i c i e s :
S i g n i f i c a n t A c c o u n t i n g P o l i c i e s :
S i g n i f i c a n t A c c o u n t i n g P o l i c i e s :
S i g n i f i c a n t A c c o u n t i n g P o l i c i e s :
The accounting and financial reporting policies of Popular, Inc.
and its subsidiaries (the “Corporation”) conform with accounting
principles generally accepted in the United States of America and
with prevailing practices within the financial services industry.
The following is a description of the most significant of these
policies:
Nature of operations
The Corporation is a diversified, publicly owned financial holding
company subject to the supervision and regulation of the Board
of Governors of the Federal Reserve System. The Corporation is a
full service financial services provider with operations in Puerto
Rico, the United States, the Caribbean and Latin America. As the
leading financial institution in Puerto Rico, the Corporation offers
retail and commercial banking services through its principal
banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as
well as auto and equipment leasing and financing, mortgage loans,
consumer lending, investment banking, broker-dealer and
insurance services through specialized subsidiaries. In the United
States, the Corporation operates Banco Popular North America
(“BPNA”), including its wholly-owned subsidiary E-LOAN, and
Popular Financial Holdings (“PFH”). BPNA is a community bank
providing a broad range of financial services and products to the
communities it serves. BPNA operates branches in New York,
California, Illinois, New Jersey, Florida and Texas. E-LOAN
offers online consumer direct lending and provides an online
platform to raise deposits for BPNA. As described in Note 2 to the
consolidated financial statements, E-LOAN is currently in a
restructuring process of its operations. PFH, after certain
restructuring events discussed in Note 2 to the consolidated
financial statements, is in the process of exiting the loan
origination business, but continues to carry a maturing loan
portfolio and operates a mortgage loan servicing unit. The
Corporation, through its transaction processing company,
EVERTEC, continues to use its expertise in technology as a
competitive advantage in its expansion throughout the United
States, the Caribbean and Latin America, as well as internally
servicing many of its subsidiaries’ system infrastructures and
transactional processing businesses. Note 32 to the consolidated
financial statements presents further information about the
Corporation’s business segments.
Business combinations
During the fourth quarter of 2007, the Corporation acquired
Citibank’s retail banking operations in Puerto Rico, which added
17 branches to BPPR’s retail branch network prior to branch
closings due to synergies, and contributed with approximately
$997,000,000 in deposits and $220,000,000 in loans. The purchase
price paid was approximately $123,540,000. Also, Popular
Securities, a subsidiary within the Banco Popular de Puerto Rico
reportable segment, strengthened its brokerage sales force and
increased its assets under management by acquiring Smith
Barney’s retail brokerage operations in Puerto Rico. This
acquisition added approximately $1,200,000,000 in assets under
its management (thus, are not included in the Corporation’s
consolidated financial statements). As part of these acquisitions,
which were accounted as business combinations, the Corporation
recorded approximately $125,893,000 in goodwill and
$21,325,000 in other intangibles assets. The later consisted
primarily of core deposit intangibles.
Business combinations are accounted for under the purchase
method of accounting. Under the purchase method, assets and
liabilities of the business acquired are recorded at their estimated
fair values as of the date of acquisition with any excess of the cost
of the acquisition over the fair value of the net tangible and
intangible assets acquired recorded as goodwill. Results of
operations of the acquired business are included in the income
statement from the date of acquisition.
Principles of consolidation
The consolidated financial statements include the accounts of
Popular, Inc. and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. In accordance
w i t h F i n a n c i a l A c c o u n t i n g S t a n d a r d s B o a r d ( “ F A S B ” )
Interpretation (“FIN”) No. 46(R), “Consolidation of Variable
Interest Entities (revised December 2003) - an interpretation of
ARB No. 51” (“FIN No. 46(R)”), the Corporation also consolidates
any variable interest entities (“VIEs”) for which it is the primary
beneficiary and therefore will absorb the majority of the entity’s
expected losses, receive a majority of the entity’s expected returns,
or both. Assets held in a fiduciary capacity are not assets of the
Corporation and, accordingly, are not included in the consolidated
statements of condition.
Unconsolidated investments, in which there is at least 20%
ownership, are generally accounted for by the equity method,
with earnings recorded in other operating income; those in which
there is less than 20% ownership, are generally carried under the
cost method of accounting, unless significant influence is
exercised. Under the cost method, the Corporation recognizes
income when dividends are received.
Limited partnerships are accounted for by the equity method
as required by EITF D-46 “Accounting for Limited Partnership
Investments” (“EITF D-46”). EITF D-46 requires that all limited
partnerships are accounted for by the equity method pursuant to
paragraph 8 of AICPA Statement of Position 78-9 “Accounting for
Investments in Real Estate Ventures”, which requires the use of
the equity method unless the investor’s interest is so “minor” that
the limited partner may have virtually no influence over partnership
operating and financial policies.
Statutory business trusts that are wholly-owned by the
Corporation and are issuers of trust preferred securities are not
consolidated in the Corporation’s consolidated financial
statements in accordance with the provisions of FIN No. 46(R).
In the normal course of business, except for the Corporation’s
banks and the parent holding company, the Corporation utilized
a one-month lag in the consolidation of the financial results of its
other subsidiaries (the “non-banking subsidiaries”), mainly to
facilitate timely reporting. In 2005, the Corporation commenced
a two-year plan to change the reporting period of its non-banking
subsidiaries to a December 31st calendar period, primarily as
part of a strategic plan to put in place an integrated corporate-
wide financial system and to facilitate the consolidation process.
The impact of this change in net income was included as a
cumulative effect of accounting change in the Corporation’s
consolidated financial results for the quarter ended March 31,
2005, and corresponds to the financial results for the month of
December 2004 of the non-banking subsidiaries which
implemented the change in the first reporting period of 2005. In
the first quarter of 2006, the Corporation completed the second
phase of the two-year plan, and as such, the financial results for
the month of December 2005 of PFH (excluding E-LOAN which
already had a December 31st year-end closing), Popular FS, Popular
Securities and Popular North America (holding company only)
were included in a separate line within operating expenses (before
tax) in the consolidated statement of operations for the year ended
December 31, 2006. The financial impact amounted to a loss of
$9,741,000 (before tax). After tax, this change resulted in a net
loss of $6,129,000. As of the end of the first quarter of 2006, all
subsidiaries of the Corporation had aligned their year-end closings
to December 31st, similar to the parent holding company. There
are no unadjusted significant intervening events resulting from
the difference in fiscal periods which management believes may
materially affect the financial position or results of operations of
the Corporation for the year ended December 31, 2006.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2007 Annual Report 83
2007
2007
Popular, Inc. 2007
2007
Investment securities
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 amortized cost. The Corporation
may not sell or transfer held-to-maturity securities without
calling into question its intent to hold other debt securities
to maturity, unless a nonrecurring or unusual event that
could not have been reasonably anticipated has occurred.
• Debt and equity securities classified as trading securities
are reported at fair value, with unrealized gains and losses
included in earnings.
• 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 excluded from earnings and reported, net
of taxes, in accumulated other comprehensive income. The
specific identification method is used to determine realized
gains and losses on securities available-for-sale, which are
included in net gain (loss) on sale and valuation adjustment
of investment securities in the consolidated statements of
operations.
• Investments in equity or other securities that do not have
readily available fair values are classified as other investment
securities in the consolidated statements of condition. These
securities are stated at the lower of cost or realizable value.
The source of this value varies according to the nature of
the investment, and is primarily obtained by the
Corporation from valuation analyses prepared by third-
parties or from information derived from financial statements
available for the corresponding venture capital and mutual
funds. Stock that is owned by the Corporation to comply
with regulatory requirements, such as Federal Reserve Bank
and Federal Home Loan Bank (“FHLB”) stock, is included
in this category. Their realizable value equals their cost.
The amortization of premiums is deducted and the accretion
of discounts is added to net interest income based on the interest
method over the outstanding period of the related securities,
except for a small portfolio of mortgage-backed securities for
which the Corporation utilizes a method which approximates the
interest method, but which incorporates factors such as actual
prepayments. The results of the alternative method do not differ
materially from those obtained using the interest method. The
cost of securities sold is determined by specific identification.
Net realized gains or losses on sales of investment securities and
unrealized loss valuation adjustments considered other than
temporary, if any, on securities available-for-sale, held-to-maturity
84
and other investment securities are determined using the specific
identification method and are reported separately in the
consolidated statements of operations. Purchases and sales of
securities are recognized on a trade-date basis.
Derivative financial instruments
The Corporation uses derivative financial instruments as part of
its overall interest rate risk management strategy to minimize
significant unplanned fluctuations in earnings and cash flows
caused by interest rate volatility.
All derivatives are recognized on the statement of condition at
fair value. When the Corporation enters into a derivative contract,
the derivative instrument is designated as either a fair value hedge,
cash flow hedge or as a free-standing derivative instrument. For a
fair value hedge, changes in the fair value of the derivative
instrument and changes in the fair value of the hedged asset or
liability or of an unrecognized firm commitment attributable to
the hedged risk are recorded in current period earnings. For a
cash flow hedge, changes in the fair value of the derivative
instrument, to the extent that it is effective, are recorded net of
taxes in accumulated other comprehensive income and
subsequently reclassified to net income in the same period(s) that
the hedged transaction impacts earnings. The ineffective portions
of cash flow hedges are immediately recognized in current
earnings. For free-standing derivative instruments, changes in
the fair values are reported in current period earnings.
Prior to entering a hedge transaction, the Corporation formally
documents the relationship between hedging instruments and
hedged items, as well as the risk management objective and
strategy for undertaking various hedge transactions. This process
includes linking all derivative instruments that are designated as
fair value or cash flow hedges to specific assets and liabilities on
the statement of condition or to specific forecasted transactions
or firm commitments along with a formal assessment, at both
inception of the hedge and on an ongoing basis, as to the
effectiveness of the derivative instrument in offsetting changes
in fair values or cash flows of the hedged item. If it is determined
that the derivative instrument is not highly effective as a hedge,
hedge accounting is discontinued and the adjustment to fair value
of the derivative instrument is recorded in current period earnings.
In January 2007, the Corporation adopted SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments - an
Amendment of FASB Statements No. 133 and 140.” SFAS No. 155
permits companies to elect, on a transaction-by-transaction basis,
to apply a fair value measurement to hybrid financial instruments
that contain an embedded derivative that would otherwise require
bifurcation under SFAS No. 133. The statement also clarifies
which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133; establishes a requirement
to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative
requiring bifurcation; clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives; and
amends SFAS No. 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. The adoption of SFAS No. 155
did not have a material impact on the Corporation’s consolidated
financial statements during 2007.
Loans
Loans are classified as loans held-in-portfolio when management
has the intent and ability to hold the loan for the foreseeable future,
or until maturity or payoff. The foreseeable future is a management
judgment which is determined based upon the type of loan, business
strategies, current market conditions, balance sheet management
and liquidity needs. Management’s view of the foreseeable future
may change based on changes in these conditions. When a
decision is made to sell or securitize a loan that was not originated
or initially acquired with the intent to sell or securitize, the loan
is reclassified from held-in-portfolio into held-for-sale. Due to
changing market conditions or other strategic initiatives,
management’s intent with respect to the disposition of the loan
may change, and accordingly, loans previously classified as held-
for-sale may be reclassified into held-in-portfolio. Loans transferred
between loans held-for-sale and held-in-portfolio classifications
are recorded at the lower of cost or market at the date of transfer.
Loans held-for-sale include residential mortgages, and to a
lesser extent consumer and commercial loans. Loans held-for-sale
are stated at the lower of cost or market, cost being determined
based on the outstanding loan balance less unearned income, and
fair value determined, generally in the aggregate. Fair value is
measured based on current market prices for similar loans,
outstanding investor commitments, bids received from potential
purchasers, prices of recent sales or securitizations or discounted
cash flow analyses which utilizes inputs and assumptions which
are believed to be consistent with market participants’ views.
The cost basis also includes consideration of deferred origination
fees and costs, which are recognized in earnings at the time of
sale. The amount, by which cost exceeds market value, if any, is
accounted for as a valuation allowance with changes therein
included in the determination of net income (loss) for the period
in which the change occurs. At December 31, 2007, the lower of
cost or market valuation allowance for outstanding loans held-
for-sale amounted to $652,000. As of December 31, 2006, the fair
value of loans held-for-sale substantially exceeded their cost.
Loans held-in-portfolio are reported at their outstanding
principal balances net of any unearned income, charge-offs,
unamortized deferred fees and costs on originated loans, and
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premiums or discounts on purchased loans. Fees collected and
costs incurred in the origination of new loans are deferred and
amortized using the interest method or a method which
approximates the interest method over the term of the loan as an
adjustment to interest yield.
Nonaccrual loans are those loans on which the accrual of
interest is discontinued. When a loan is placed on nonaccrual
status, any interest previously recognized and not collected is
generally reversed from current earnings.
Recognition of interest income on commercial loans,
construction loans, lease financing, conventional mortgage loans
and closed-end consumer loans is discontinued when the loans are
90 days or more in arrears on payments of principal or interest or
when other factors indicate that the collection of principal and
interest is doubtful. Income is generally recognized on open-end
(revolving credit) consumer loans until the loans are charged-off.
Closed–end consumer loans and leases are charged-off when they
are 120 days in arrears. In the case of the Corporation’s non-bank
consumer and mortgage lending subsidiaries, however, closed-
end consumer loans, including second mortgages, are charged-off
when payments are 180 days delinquent. Open-end (revolving
credit) consumer loans are charged-off when 180 days in arrears.
Lease financing
The Corporation leases passenger and commercial vehicles and
equipment to individual and corporate customers. The finance
method of accounting is used to recognize revenue on lease
contracts that meet the criteria specified in SFAS No. 13,
“Accounting for Leases,” as amended. Aggregate rentals due over
the term of the leases less unearned income are included in finance
lease contracts receivable. Unearned income is amortized using a
method which results in approximate level rates of return on the
principal amounts outstanding. Finance lease origination fees
and costs are deferred and amortized over the average life of the
loans as an adjustment to the interest yield.
Revenue for other leases is recognized as it becomes due under
the terms of the agreement.
Allowance for loan losses
The Corporation follows a systematic methodology to establish
and evaluate the adequacy of the allowance for loan losses to provide
for inherent losses in the loan portfolio. This methodology includes
the consideration of factors such as current economic conditions,
portfolio risk characteristics, prior loss experience and results of
periodic credit reviews of individual loans. The provision for
loan losses charged to current operations is based on such
methodology. Loan losses are charged and recoveries are credited
to the allowance for loan losses.
The methodology used to establish the allowance for loan losses
is based on SFAS No. 114 “Accounting by Creditors for
Impairment of a Loan” (as amended by SFAS No. 118) and SFAS
No. 5 “Accounting for Contingencies.” Under SFAS No. 114,
commercial loans over a predefined amount are identified for
impairment evaluation on an individual basis. The Corporation
has defined as impaired loans those commercial loans that amount
to $250,000 or more and with interest and /or principal 90 days or
more past due. Also, specific commercial loans over $500,000
are deemed impaired when, based on current information and
events, management considers that it is probable that the debtor
will be unable to pay all amounts due according to the contractual
terms of the loan agreement. A specific allowance for loan
impairment is recognized to the extent that the carrying value of
an impaired commercial loan exceeds the present value of the
expected future cash flows discounted at the loan’s effective rate;
the observable market price of the loan; or the fair value of the
collateral if the loan is collateral dependent. The allowance for
impaired commercial loans is part of the Corporation’s overall
allowance for loan losses. Meanwhile, SFAS No. 5 provides for the
recognition of a loss allowance for groups of homogeneous loans.
To determine the allowance for loan losses under SFAS No. 5, the
Corporation applies a historic loss and volatility factor to specific
loan balances segregated by loan type and legal entity.
Cash payments received on impaired loans are recorded in
accordance with the contractual terms of the loan. The principal
portion of the payment is used to reduce the principal balance of
the loan, whereas the interest portion is recognized as interest
income. However, when management believes the ultimate
collectibility of principal is in doubt, the interest portion is applied
to principal.
Transfers and servicing of financial assets and extinguishment of
liabilities
The transfer of financial assets in which the Corporation surrenders
control over the assets is accounted for as a sale to the extent that
consideration other than beneficial interests is received in
exchange. SFAS No. 140 “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities - a
Replacement of SFAS No. 125” sets forth the criteria that must be
met for control over transferred assets to be considered to have
been surrendered, which includes, amongst others: (1) the assets
must be isolated from creditors of the transferor, (2) the transferee
must obtain the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the transferor cannot maintain effective
control over the transferred assets through an agreement to
repurchase them before their maturity. When the Corporation
transfers financial assets and the transfer fails any one of the SFAS
No. 140 criteria, the Corporation is prevented from derecognizing
the transferred financial assets and the transaction is accounted
for as a secured borrowing. For federal and Puerto Rico income
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tax purposes, the Corporation treats the transfers of loans which
do not qualify as “true sales” under SFAS No. 140, as sales,
recognizing a deferred tax asset or liability on the transaction.
Upon completion of a transfer of financial assets that satisfies
the conditions to be accounted for as a sale, the Corporation
derecognizes all assets sold; recognizes all assets obtained and
liabilities incurred in consideration as proceeds of the sale,
including servicing assets and servicing liabilities, if applicable;
initially measures at fair value assets obtained and liabilities
incurred in a sale; and recognizes in earnings any gain or loss on
the sale.
SFAS No. 140 requires a true sale analysis of the treatment of
the transfer under state law as if the Corporation was a debtor
under the bankruptcy code. A true sale legal analysis includes
several legally relevant factors, such as the nature and level of
recourse to the transferor, and the nature of retained interests in
the loans sold. The analytical conclusion as to a true sale is never
absolute and unconditional, but contains qualifications based on
the inherent equitable powers of a bankruptcy court, as well as the
unsettled state of the common law. Once the legal isolation test
has been met under SFAS 140, other factors concerning the nature
and extent of the transferor’s control over the transferred assets
are taken into account in order to determine whether derecognition
of assets is warranted, including whether the special purpose
entity (“SPE”) has complied with rules concerning qualifying
special-purpose entities (“QSPEs”).
Paragraphs 35-55 of SFAS No. 140, as interpreted by the FASB
Staff Implementation Guide: A Guide to Implementation of
Statement 140 on Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (“Statement
140 Guide”), provides numerous conditions that must be met for
a transferee to meet the QSPE exception in paragraph 9(b) of
SFAS No. 140. The basic underlying principle in this guidance is
that assets transferred to a securitization trust should be accounted
for as a sale, and recorded off-balance sheet, only when the
transferor has given up control, including decision-making
ability, over those assets. If the servicer maintains effective control
over the transferred financial assets, off-balance sheet accounting
by the transferor is not appropriate. Paragraphs 35(b) and 35(d)
of SFAS No. 140 and the related interpretative guidance in SFAS
No. 140 and the Statement 140 Guide discuss the permitted
activities of a QSPE. The objective is to significantly limit the
permitted activities so that it is clear that the transferor does not
maintain effective control over the transferred financial assets.
The Corporation, through its subsidiary PFH, conducted asset
securitizations that involved the transfer of mortgage loans to
QSPEs, which in turn transferred these assets and their titles to
different trusts, thus isolating those loans from the Corporation’s
assets. These off-balance sheet securitizations completed by PFH
consisted primarily of subprime mortgage loans, which PFH
continues to service. The Corporation’s defines subprime loans
as those loans with a current FICO score of 660 or below. A
uniform industry definition of what constitutes a subprime loan
does not exist.
As part of the initiatives taken by the government and the
mortgage industry, in late 2007, the American Securitization
Forum (“ASF”) issued the “Streamlined Foreclosure and Loss
Avoidance Framework for Securitized Subprime Adjustable Rate
Mortgage Loans” (the “ASF Framework”). This ASF Framework
provides recommended guidance for servicers to streamline
borrower evaluation procedures and to facilitate the effective use
of all forms of foreclosure and loss prevention efforts for securitized
subprime ARMs. Segment 2 includes current loans where the
borrower is unlikely to be able to refinance into any readily
available mortgage industry product. The ASF Framework
indicates that for Segment 2 subprime ARM loans, the servicer
can presume that the borrower would be unable to pay pursuant to
the original terms of the loan after the interest rate reset, and thus,
the loan is “reasonable foreseeable” of default in absence of a
modification.
The PFH off-balance sheet QSPE’s have limitations on
permitted activities. The permitted activities include the ability
of the servicer to modify subprime mortgages when default is
“reasonably foreseeable.” The Corporation adopted the screening
criteria in Segment 2 of the ASF Framework for purposes of
determining the subprime adjustable rate mortgage (“ARM”) loans
where default is “reasonably foreseeable”.
The Corporation sells mortgage loans to the Government
National Mortgage Association (“GNMA”) in the normal course
of business and retains the servicing rights. The GNMA programs
under which the loans are sold allow the Corporation to repurchase
individual delinquent loans that meet certain criteria. At the
Corporation’s option, and without GNMA’s prior authorization,
the Corporation may repurchase the delinquent loan for an amount
equal to 100% of the remaining principal balance of the loan.
Under SFAS No. 140, once the Corporation has the unconditional
ability to repurchase the delinquent loan, the Corporation is
deemed to have regained effective control over the loan and
recognizes the loan on its balance sheet as well as an offsetting
liability, regardless of the Corporation’s intent to repurchase the
loan.
Servicing assets
The Corporation periodically sells or securitizes loans while
retaining the obligation to perform the servicing of such loans. In
addition, the Corporation may purchase or assume the right to
service loans originated by others. Whenever the Corporation
undertakes an obligation to service a loan, management assesses
whether a servicing asset or liability should be recognized. A
servicing asset is recognized whenever the compensation for
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servicing is expected to more than adequately compensate the
servicer for performing the servicing. Likewise, a servicing
liability would be recognized in the event that servicing fees to
be received are not expected to adequately compensate the
Corporation for its expected cost. Servicing assets are separately
presented on the consolidated statement of condition. Upon
adoption of SFAS No. 156 “Accounting for Servicing of Financial
Assets - an Amendment of FASB No. 140” in January 2007, the
Corporation no longer records mortgage servicing rights on
securitizations accounted for as secured borrowings.
Commencing in January 2007, all separately recognized
servicing assets are initially recognized at fair value. For
subsequent measurement of servicing rights, the Corporation
has elected the fair value method for mortgage servicing rights
(“MSRs”) while all other servicing assets, particularly related to
Small Business Administration (“SBA”) commercial loans, follow
the amortization method. Under the fair value measurement method,
MSRs are recorded at fair value each reporting period, and changes
in fair value are reported in other service fees in the consolidated
statement of operations. Under the amortization method, servicing
assets are amortized in proportion to, and over the period of,
estimated servicing income and assessed for impairment based
on fair value at each reporting period. Contractual servicing fees
including ancillary income and late fees, as well as fair value
adjustments, and impairment losses, if any, are reported in other
service fees in the consolidated statement of operations. Loan
servicing fees, which are based on a percentage of the principal
balances of the loans serviced, are credited to income as loan
payments are collected.
The fair value of servicing rights is estimated by using a cash
flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual
and expected loan prepayment rates, discount rates, servicing
costs, and other economic factors, which are determined based
on current market conditions.
For purposes of evaluating and measuring impairment of
capitalized servicing assets that are accounted under the
amortization method, the amount of impairment recognized, if
any, is the amount by which the capitalized servicing assets per
stratum exceed their estimated fair value. Temporary impairment
is recognized through a valuation allowance with changes
included in net income for the period in which the change occurs.
If it is later determined that all or a portion of the temporary
impairment no longer exists for a particular stratum, the valuation
allowance is reduced through a recovery in earnings. Any fair
value in excess of the cost basis of the servicing asset for a given
stratum is not recognized. Servicing rights subsequently
accounted under the amortization method are also reviewed for
other-than-temporary impairment. When the recoverability of an
impaired servicing asset accounted under the amortization method
is determined to be remote, the unrecoverable portion of the
valuation allowance is applied as a direct write-down to the
carrying value of the servicing rights, precluding subsequent
recoveries.
Refer to Note 22 to the consolidated financial statements for
information on the classes of servicing assets defined by the
Corporation and the impact of adopting SFAS No. 156 in January
2007.
Residual interests
The Corporation sells residential mortgage loans to QSPEs, which
in turn issue asset-backed securities to investors. The Corporation
retains an interest in the loans sold in the form of mortgage
servicing rights and residual interests. The residual interest
represents the present value of future excess cash flows resulting
from the difference between the interest received from the obligors
on the loans and the interest paid to the investors on the asset-
backed securities, net of credit losses, servicing fees and other
expenses. The assets and liabilities of the QSPEs are not included
in the Corporation’s consolidated statements of condition, except
for the retained interests previously described. The residual
interests related with securitizations performed prior to 2006 are
classified as available-for-sale securities and are measured at fair
value. The residual interests derived from securitizations performed
in 2006 and thereafter, including those residual interests derived
from the recharacterization transaction that is described in Note
23 to the consolidated financial statements, are accounted as
trading securities and are also measured at fair value. Refer to
Note 23 for additional information on the residual interests
classifications. The classification of the residual interests as
trading securities was driven by accounting considerations as
permitted under SFAS No. 115 and the interpretative guidance. It
is not management’s intention to actively trade these residual
interests.
Fair value estimates of the residual interests are based on the
present value of the expected cash flows of each residual interest.
Factors considered in the valuation model for calculating the fair
value of these subordinated interests include market discount
rates, anticipated prepayment, delinquency and loss rates on the
underlying assets. The residual interests are valued using forward
yield curves for interest rate projections. The valuations are
performed by using a third-party model with assumptions provided
by the Corporation.
The Corporation recognizes the excess of cash flows related
to the residual interests at the acquisition date over the initial
investment (accretable yield) as interest income over the life of
the residual using the effective yield method. The yield accreted
becomes a component of the residuals basis. On a regular basis,
estimated cash flows are updated based on revised fair value
estimates of the residual, and as such accretable yields are
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recalculated to reflect the change in the underlying cash flow.
Adjustments to the yield are accounted for prospectively as a
change in estimate, with the amount of periodic accretion adjusted
over the remaining life of the beneficial interest.
investment less cash received to date less other-than-temporary
impairments recognized to date plus the yield accreted to date.
This is based on the accounting guidance prescribed by EITF
99-20.
On a quarterly basis, management performs a fair value analysis
of the residual interests that are classified as available-for-sale and
evaluates whether any unfavorable change in fair value is other-
than-temporary as required under SFAS No 115 “Accounting for
Certain Investments in Debt and Equity Securities”. The
Corporation follows the accounting guidance in EITF 99-20,
“Recognition of Interest Income and Impairment on Purchased
and Retained Interests in Securitized Financial Assets” to evaluate
when a decline in fair value of a beneficial interest that results
from an adverse change in estimated cash flows should be
considered an other-than-temporary impairment. Whenever the
current fair value of the residual interest classified as available-
for-sale is lower than its current amortized cost, management
evaluates to see if an impairment charge for the deficiency is
required to be taken through earnings. If there has been an adverse
change in estimated cash flows (considering both the timing and
amount of flows), then the residual interest is written-down to fair
value, which becomes the new amortized cost basis. To determine
whether a change is adverse, the present value of the remaining
estimated cash flows as estimated on the last revision are compared
against the present value of the estimated cash flows at the current
reporting date. If the present value of the cash flows estimated at
the last revision is greater than the present value of the current
estimated cash flows, the change is considered other-than-
temporary. During 2006 and 2007, all declines in fair value in
residual interests classified as available-for-sale were considered
other-than-temporary.
For residual interests classified as trading securities, the fair
value determinations are also performed on a quarterly basis. SFAS
No. 115 provides that changes in fair value in those securities are
reflected in earnings as they occur. For residual interests held in
the trading category, there is no need to evaluate them for other-
than-temporary impairments.
The methodology for determining other-than-temporary
impairment is different from the periodic adjustment of accretable
yield because the periodic adjustment of accretable yield is used
to determine the appropriate interest income to be recognized in
the residual interest and the other-than-temporary assessment is
used to determine whether the recorded value of the residual interest
is impaired. For both, the estimate of cash flows is a critical
component. For the adjustment to accretable yield when there is a
favorable or an adverse change in estimated cash flows from the
cash flows previously projected, the amount of accretable yield
should be recalculated as the excess of the estimated cash flows
over a reference amount. The reference amount is the initial
Premises and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on a
straight-line basis over the estimated useful life of each type of
asset. Amortization of leasehold improvements is computed over
the terms of the respective leases or the estimated useful lives of
the improvements, whichever is shorter. Costs of maintenance
and repairs which do not improve or extend the life of the respective
assets are expensed as incurred. Costs of renewals and betterments
are capitalized. When assets are disposed of, their cost and related
accumulated depreciation are removed from the accounts and any
gain or loss is reflected in earnings as realized or incurred,
respectively.
The Corporation capitalizes interest cost incurred in the
construction of significant real estate projects, which consist
primarily of facilities for its own use or intended for lease. The
amount of interest cost capitalized is to be an allocation of the
interest cost incurred during the period required to substantially
complete the asset. The interest rate for capitalization purposes
is to be based on a weighted average rate on the Corporation’s
outstanding borrowings, unless there is a specific new borrowing
associated with the asset. Interest cost capitalized for the years
ended December 31, 2007, 2006 and 2005 was not significant.
The Corporation has operating lease arrangements primarily
associated with the rental of premises to support the branch
network or for general office space. Certain of these arrangements
are non-cancelable and provide for rent escalations and renewal
options. Rent expense on non-cancelable operating leases with
scheduled rent increases are recognized on a straight-line basis
over the lease term.
Impairment on long-lived assets
The Corporation evaluates for impairment its long-lived assets to
be held and used, and long-lived assets to be disposed of, whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable under the provision of
SFAS No. 144 “Accounting for the Impairment of Disposal of
Long-Lived Assets”. In the event of an asset retirement, the
Corporation recognizes a liability for an asset retirement
obligation in the period in which it is incurred if a reasonable
estimate of fair value of such liability can be made. The associated
asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset.
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this intangible; the after-tax royalty savings derived from the
ownership of the intangible; and the discount rate to apply to the
projected benefits to arrive at the present value of this
intangible.Since estimates are an integral part of this trademark
impairment analysis, changes in these estimates could have a
significant impact on the calculated fair value. Trademark
impairment losses are recorded as part of operating expenses in
the consolidated statements of operations.
Other identifiable intangible assets with a finite useful life,
mainly core deposits, are amortized using various methods over
the periods benefited, which range from 3 to 11 years. These
intangibles are evaluated periodically for impairment when events
or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairments on intangible assets with a
finite useful life are evaluated as long-lived assets under the
guidance of SFAS No. 144 and are included as part of “impairments
on long-lived assets” in the category of operating expenses in the
consolidated statements of operations.
For further disclosures required by SFAS No. 142, refer to
Note 12 to the consolidated financial statements.
Bank-Owned Life Insurance
Bank-owned life insurance represents life insurance on the lives of
certain employees who have provided positive consent allowing
the Corporation to be the beneficiary of the policy. Bank-owned
life insurance policies are carried at their cash surrender value.
The Corporation recognizes income from the periodic increases
in the cash surrender value of the policy, as well as insurance
proceeds received, which are recorded as other operating income,
and are not subject to income taxes.
The cash surrender value and any additional amounts provided
by the contractual terms of the bank-owned insurance policy that
are realizable at the balance sheet date are considered in determining
the amount that could be realized, and any amounts that are not
immediately payable to the policyholder in cash are discounted to
their present value. In determining “the amount that could be
realized,” it is assumed that policies will be surrendered on an
individual-by-individual basis. This accounting policy follows
the guidance in EITF Issue No. 06-5 “Accounting for Purchases
of Life Insurance – Determining the Amount That Could Be Realized
in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance” (“EITF 06-5”), which
became effective in 2007. The Corporation adopted the EITF 06-
5 guidance in the first quarter of 2007 and as a result recorded a
$907,000 cumulative effect adjustment to beginning retained
earnings (reduction of capital) for the existing bank-owned life
insurance arrangement.
Other real estate
Other real estate, received in satisfaction of debt, is recorded at
the lower of cost (carrying value of the loan) or the appraised 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 arising from periodic reevaluations
of the properties, and any gains or losses on the sale of these
properties are credited or charged to expense in the period incurred
and are included as a component of other operating expenses. The
cost of maintaining and operating such properties is expensed as
incurred.
Goodwill and other intangible assets
The Corporation accounts for goodwill and identifiable intangible
assets under the provisions of SFAS No. 142, “Goodwill and Other
Intangible Assets.” Goodwill is recognized when the purchase
price is higher than the fair value of net assets acquired in business
combinations under the purchase method of accounting. Goodwill
is not amortized, but is tested for impairment at least annually or
more frequently if events or circumstances indicate possible
impairment using a two-step process at each reporting unit level.
The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the fair value of
a reporting unit exceeds its carrying amount, the goodwill of the
reporting unit is not considered impaired and the second step of
the impairment test is unnecessary. If needed, the second step
consists of comparing the implied fair value of the reporting unit
goodwill with the carrying amount of that goodwill. In determining
the fair value of a reporting unit, the Corporation generally uses a
combination of methods, which include market price multiples of
comparable companies and the discounted cash flow analysis.
Goodwill impairment losses are recorded as part of operating
expenses in the consolidated statement of operations.
Other intangible assets deemed to have an indefinite life are
not amortized, but are tested for impairment using a one-step
process which compares the fair value with the carrying amount
of the asset. In determining that an intangible asset has an
indefinite life, the Corporation considers expected cash inflows
and legal, regulatory, contractual, competitive, economic and
other factors, which could limit the intangible asset’s useful life.
The evaluation of E-LOAN’s trademark, an indefinite life
intangible asset, was performed using a valuation approach called
the “relief-from-royalty” method. The basis of the “relief-from-
royalty” method is that, by virtue of having ownership of the
trademark, the Corporation is relieved from having to pay a royalty,
usually expressed as a percentage of revenue, for the use of the
trademark. The main estimates involved in the valuation of this
intangible asset included the determination of an appropriate
royalty rate; the revenue projections that benefit from the use of
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Assets sold/purchased under agreements to repurchase/resell
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 as specified in
the respective agreements.
It is the Corporation’s policy to take possession of securities
purchased under resell agreements. However, the counterparties
to such agreements maintain effective control over such securities,
and accordingly those are not reflected in the Corporation’s
consolidated statements of condition. The Corporation monitors
the market value of the underlying securities as compared to the
related receivable, including accrued interest, and requests
additional collateral if deemed appropriate.
It is the Corporation’s policy to maintain effective control
over assets sold under agreements to repurchase; accordingly,
such securities continue to be carried on the consolidated
statements of condition.
Guarantees, including indirect guarantees of indebtedness of
others
The Corporation, as a guarantor, recognizes at the inception of a
guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. Refer to Note 34 to the consolidated
financial statements for further disclosures.
Treasury stock
Treasury stock is recorded at cost and is carried as a reduction of
stockholders’ equity in the consolidated statements of condition.
At the date of retirement or subsequent reissue, the treasury stock
account is reduced by the cost of such stock. The difference
between the consideration received upon issuance and the specific
cost is charged or credited to surplus.
Income and expense recognition – Processing business
Revenue from information processing and other services is
recognized at the time services are rendered. Rental and
maintenance service revenue is recognized ratably over the
corresponding contractual periods. Revenue from software and
hardware sales and related costs is recognized at the time software
and equipment is installed or delivered depending on the
contractual terms. Revenue from contracts to create data
processing centers and the related cost is recognized as project
phases are completed and accepted. Operating expenses are
recognized as incurred. Project expenses are deferred and
recognized when the related income is earned. The Corporation
applies Statement of Position (SOP) 81-1 “Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts” as the guidance to determine what project expenses
must be deferred until the related income is earned on certain
long-term projects that involve the outsourcing of technological
services.
Income Recognition – Insurance agency business
Commissions and fees are recognized when related policies are
effective. Additional premiums and rate adjustments are recorded
as they occur. Contingent commissions are recorded on the accrual
basis when the amount to be received is notified by the insurance
company. Commission income from advance business is deferred.
An allowance is created for expected adjustments to commissions
earned relating to policy cancellations.
Income Recognition – Investment banking revenues
Investment banking revenue is recorded as follows: underwriting
fees at the time the underwriting is completed and income is
reasonably determinable; corporate finance advisory fees as earned,
according to the terms of the specific contracts and sales
commissions on a trade-date basis.
Foreign exchange
Assets and liabilities denominated in foreign currencies are
translated to U.S. dollars using prevailing rates of exchange at the
end of the period. Revenues, expenses, gains and losses are
translated using weighted average rates for the period. The
resulting foreign currency translation adjustment from operations
for which the functional currency is other than the U.S. dollar is
reported in accumulated other comprehensive income (loss),
except for highly inflationary environments in which the effects
are included in other operating income.
The Corporation conducts business in certain Latin American
markets through several of its processing and information
technology services and products subsidiaries. Also, it holds
interests in Consorcio de Tarjetas Dominicanas, S.A.
(“CONTADO”) and Centro Financiero BHD, S.A. (“BHD”) in the
Dominican Republic. Although not significant, some of these
businesses are conducted in the country’s foreign currency.
The Corporation monitors the inflation levels in the foreign
countries where it operates to evaluate whether they meet the
“highly inflationary economy” test prescribed by SFAS No. 52,
“Foreign Currency Translation.” Such statement defines highly
inflationary as a “cumulative inflation of approximately 100 percent
or more over a 3-year period.” In accordance with the provisions
of SFAS No. 52, the financial statements of a foreign entity in a
highly inflationary economy are remeasured as if the functional
currency were the reporting currency.
During 2007, the foreign currency translation adjustment from
operations in the Dominican Republic were reported in accumulated
other comprehensive income (loss). Since June 2004 through
December 31, 2006, the Corporation’s interests in the Dominican
Republic were remeasured into the U.S. dollar because the economy
was considered highly inflationary under the test prescribed by
SFAS No. 52. During the year ended December 31, 2006,
approximately $765,000 in net remeasurement gains on the
investments held by the Corporation in the Dominican Republic
were reflected in other operating income instead of accumulated
other comprehensive (loss) income (2005 - $568,000). These net
gains relate to improvement in the Dominican peso’s exchange
rate to the U.S. dollar from $45.50 at June 30, 2004, when the
economy reached the “highly inflationary” threshold, to $33.35
at the end of 2006. The unfavorable cumulative translation
adjustment associated with these interests at the reporting date
in which the economy became highly inflationary approximated
$31,787,000.
Refer to the disclosure of accumulated comprehensive income
included in the accompanying consolidated statements of
comprehensive income (loss) for the outstanding balances of
unfavorable foreign currency translation adjustments at December
31, 2007, 2006 and 2005.
Income taxes
The Corporation recognizes 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. A deferred tax valuation
allowance is established if it is considered more likely than not
that all or a portion of the deferred tax assets will not be realized.
Positions taken in the Corporation’s tax returns may be subject
to challenge by the taxing authorities upon examination.
Uncertain tax positions are initially recognized in the financial
statements when it is more likely than not the position will be
sustained upon examination by the tax authorities. Such tax
positions are both initially and subsequently measured as the
largest amount of tax benefit that is greater than 50% likely of
being realized upon settlement with the tax authority, assuming
full knowledge of the position and all relevant facts. Interest on
income tax uncertainties is classified within income tax expense
in the statement of operations; while the penalties, if any, are
accounted for as other operating expenses.
The Corporation accounts for the taxes collected from
customers and remitted to governmental authorities on a net basis
(excluded from revenues).
During the first quarter of 2007, the Corporation adopted FASB
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement 109” (“FIN 48”).
FIN 48 prescribes a recognition threshold and measurement
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attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
Based on management’s assessment, there was no impact on
retained earnings as of January 1, 2007 due to the initial application
of the provisions of FIN 48. Also, as a result of the implementation,
the Corporation did not recognize any change in the liability for
unrecognized tax benefits. Refer to Note 27 to the consolidated
financial statements for further information on the impact of FIN
48.
Employees’ retirement and other postretirement benefit plans
Pension costs are computed on the basis of accepted actuarial
methods and are charged to current operations. Net pension costs
are based on various actuarial assumptions regarding future
experience under the plan, which include costs for services
rendered during the period, interest costs and return on plan assets,
as well as deferral and amortization of certain items such as
actuarial gains or losses. The funding policy is to contribute to
the plan as necessary to provide for services to date and for those
expected to be earned in the future. To the extent that these
requirements are fully covered by assets in the plan, a contribution
may not be made in a particular year.
The cost of postretirement benefits, which is determined based
on actuarial assumptions and estimates of the costs of providing
these benefits in the future, is accrued during the years that the
employee renders the required service.
SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans” requires the recognition
of the funded status of each defined pension benefit plan, retiree
health care and other postretirement benefit plans on the statement
of condition. The Corporation adopted SFAS No. 158 as of
December 31, 2006. See Note 24 for disclosures on the impact of
this accounting pronouncement.
Stock-based compensation
In 2002, the Corporation opted to use the fair value method of
recording stock-based compensation as described in SFAS No.
123 “Accounting for Stock Based Compensation”. The
Corporation adopted SFAS No. 123-R “Share-Based Payment” on
January 1, 2006 using the modified prospective transition method.
Comprehensive income
Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other
events and circumstances, except those resulting from investments
by owners and distributions to owners. The presentation of
comprehensive income is included in separate consolidated
statements of comprehensive income (loss).
92
Earnings (losses) per common share
Basic earnings (losses) per common share are computed by
dividing net income, reduced by dividends on preferred stock,
by the weighted average number of common shares of the
Corporation outstanding during the year. Diluted earnings per
common share take into consideration the weighted average
common shares adjusted for the effect of stock options and
restricted stock, using the treasury stock method.
Statement of cash flows
For purposes of reporting cash flows, cash includes cash on hand
and amounts due from banks.
Reclassifications
Certain reclassifications have been made to the 2006 and 2005
consolidated financial statements to conform with the 2007
presentation.
Recently issued accounting pronouncements and
interpretations
SFAS No. 157 “Fair Value Measurements”
SFAS No. 157, issued in September 2006, defines fair value,
establishes a framework of measuring fair value and requires
enhanced disclosures about fair value measurements. SFAS No.
157 requires companies to disclose the fair value of its financial
instruments according to a fair value hierarchy. The fair value
hierarchy ranks the quality and reliability of the information used
to determine fair values. Financial assets carried at fair value will
be classified and disclosed in one of the three categories in
accordance with the hierarchy. The three levels of the fair value
hierarchy are (1) quoted market prices for identical assets or
liabilities in active markets, (2) observable market-based inputs
or unobservable inputs that are corroborated by market data, and
(3) unobservable inputs that are not corroborated by market data.
SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the FASB decided to
issue a final staff position that defers for one year the effective date
for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value on a nonrecurring basis. The
staff position also amends SFAS No. 157 to exclude SFAS No. 13
“Accounting for Leases” and its related interpretive accounting
pronouncements that address leasing transactions. The
Corporation adopted the provisions of SFAS No. 157 that were
not deferred, commencing in the first quarter of 2008. The
provisions of SFAS 157 are to be applied prospectively. The
Corporation is currently assessing the impact of SFAS No. 157
on its consolidated financial statements, including disclosures.
SFAS No. 159 “The Fair Value Option for Financial Assets and
Liabilities - Including an Amendment of FASB Statement No. 115”
In February 2007, the FASB issued SFAS No. 159, which provides
companies with an option to report selected financial assets and
liabilities at fair value. The election to measure a financial asset
or liability at fair value can be made on an instrument-by-instrument
basis and is irrevocable. The difference between the carrying
amount and the fair value at the election date is recorded as a
transition adjustment to opening retained earnings. Subsequent
changes in fair value are recognized in earnings. The statement
also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities.
It also requires entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value on
the face of the balance sheet. The new statement does not eliminate
disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value
measurements included in SFAS No. 157, “Fair Value
Measurements,” and SFAS No. 107, “Disclosures about Fair Value
of Financial Instruments.” The Corporation adopted the
provisions of SFAS No. 159 in January 2008.
Management adopted the fair value option for approximately
$287 million of loans and $287 million of bond certificates
associated to PFH’s on-balance sheet securitizations that were
outstanding at December 31, 2007 (transactions excluded from
the recharacterization transaction described in Note 23 to the
consolidated financial statements). These loans serve as collateral
for the bond certificates. Due to accounting constraints, the
Corporation is unable to recharacterize these loan securitizations
as sales. Additionally, the Corporation plans to elect the fair value
option for approximately $1.2 billion of whole loans held-in-
portfolio by PFH. These whole loans consist principally of
mortgage loans and second-liens that were originated through
the exited business of PFH and home equity lines of credit that
had been originated by E-LOAN prior to the 2007 U.S.
Reorganization, which is described in Note 2 to the consolidated
financial statements. Due to their subprime characteristics and
current market disruptions, these loans are being held-in-portfolio
as potential buyers have withdrawn from the market, given
heightened concerns over credit quality of borrowers and continued
deterioration in the housing markets. Management understands
that accounting for these loans at fair value provides a more relevant
and transparent measurement of the realizable value of the assets
and differentiates the PFH portfolio from that loan portfolio that
the Corporation will continue to originate through other channels
outside PFH. The measurement of the bond certificates at fair
value reflects the actual liability of the Corporation, after
considering the credit risk to be borne by the certificateholders
on the on-balance sheet securitization. Management understands
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that the adoption of the fair value option for the financial assets
and liabilities selected better reflects the inherent risks of these
instruments and reflects the intention of the Corporation to
discontinue most of the businesses previously conducted at PFH.
The Corporation expects to recognize a negative pre-tax
adjustment that could range between $280 million and $300 million
($158 million and $169 million after tax) due to the transitional
adjustment for electing the fair value option on the previously
described financial instruments. That amount represents the
difference between the fair value and the carrying value of the
loans at date of adoption. This negative adjustment would not
impact earnings but instead be reflected as a reduction of
beginning retained earnings as of January 1, 2008. Subsequent
increases or decreases in the fair value of the assets and liabilities
accounted under SFAS No. 159 provisions will be recorded as
valuation adjustments through earnings in the consolidated
statement of income. The fair value adjustments from the adoption
of SFAS No. 159 disclosed here are only estimates as management
is in the process of validating the methodologies used to value
the assets and liabilities and the results of such valuations. Also,
management continues to evaluate the impact that SFAS No. 159
will have on the consolidated financial statements, including
disclosures.
FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”
In April 2007, the FASB issued Staff Position FSP FIN No. 39-1,
which defines “right of setoff” and specifies what conditions must
be met for a derivative contract to qualify for this right of setoff.
It also addresses the applicability of a right of setoff to derivative
instruments and clarifies the circumstances in which it is
appropriate to offset amounts recognized for those instruments in
the statement of financial position. In addition, this FSP permits
the offsetting of fair value amounts recognized for multiple
derivative instruments executed with the same counterparty under
a master netting arrangement and fair value amounts recognized
for the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable) arising from the
same master netting arrangement as the derivative instruments.
This interpretation is effective for fiscal years beginning after
November 15, 2007, with early application permitted. The
adoption of FSP FIN No. 39-1 in 2008 did not have a material
impact on the Corporation’s consolidated financial statements
and disclosures.
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 07-1 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.
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.
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
94
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 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.
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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.
The PFH Restructuring Plan resulted in charges between the
fourth quarter of 2006 and the year ended December 31, 2007 as
follows:
Note 2 - Restructuring plans:
Note 2 - Restructuring plans:
Note 2 - Restructuring plans:
Note 2 - Restructuring plans:
Note 2 - Restructuring plans:
PFH Restructuring Plan
In January 2007, the Corporation announced the adoption of a
Restructuring and Integration Plan for PFH, including PFH’s
Internet financial services subsidiary E-LOAN (the “PFH
Restructuring Plan”). Based on a comprehensive strategic and
financial assessment of all the PFH operations by Popular’s
management, the Plan called for PFH to exit the wholesale nonprime
mortgage origination business, focus on existing profitable
businesses at the time, and consolidate support functions with
its sister U.S. banking entity BPNA, creating a single integrated
North American financial services unit. The PFH Restructuring
Plan for 2007 included among the principal milestones:
• Exiting the wholesale nonprime mortgage origination
business at PFH during early first quarter 2007 and shutting
down the wholesale broker, retail and call center business
divisions;
• Consolidating support activities at PFH (Finance, Credit
Risk, Compliance, Human Resources, Facilities) within
BPNA;
• Integrating PFH’s existing commercial lending businesses
into BPNA’s business lending groups;
• Focusing on the core Equity One (subsidiary of PFH)
network of consumer finance branches;
• Growing the third party mortgage servicing business
operated by Popular Mortgage Servicing Inc., a subsidiary
of PFH (“PMSI”); and
• Leveraging the E-LOAN brand, technology and Internet
financial services platform over the next several years to
complement BPNA’s community banking growth strategy.
Refer to the PFH Branch Network Restructuring Plan section
presented in this Note 2 to the consolidated financial statements
for information on additional actions at PFH in January 2008.
SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities,” requires that a liability for a cost
associated with an exit or disposal activity shall be recognized
and measured initially at its fair value in the period in which the
liability is incurred, except for a liability for one-time termination
benefits that is incurred over time.
(In millions)
Personnel costs
Net occupancy expenses
Equipment expenses
Professional fees
Other operating expenses
Total restructuring charges
Impairment of long-lived assets
Impairment of goodwill
Total
December 31, December 31,
2007
$7.8 (a)
4.5 (b)
0.3
1.8 (c)
0.3
$14.7
-
-
$14.7
2006
-
-
-
-
-
-
$7.2 (d)
14.2 (e)
$21.4
(a) Severance, stay bonuses, related taxes, and other employee benefits
(b) Lease terminations
(c) Outplacement and professional services contract terminations
(d) Consists mostly of software and leasehold improvements
(e) Attributable to businesses exited at PFH
Of the above restructuring costs, approximately $3.2 million
was recognized as a liability as of December 31, 2007.
The Corporation does not expect to incur additional
significant restructuring costs related to the PFH Restructuring
Plan.
As part of the PFH Restructuring Plan, during early 2007, the
Corporation actively worked in an internal corporate
reorganization of its U.S. subsidiaries (the “Reorganization”).
After notifying the Board of Governors of the Federal Reserve
System and obtaining approval of the Corporation’s Board of
Directors in January 2007, E-LOAN, as well as all of its direct
and indirect subsidiaries, with the exception of E-LOAN
Insurance Services, Inc. and E-LOAN International, Inc., became
operating subsidiaries of BPNA. Prior to the consummation of
this U.S. Reorganization, E-LOAN was a direct wholly-owned
subsidiary of PFH.
E-LOAN Restructuring Plan
In November 2007, the Board of Directors of the Corporation
adopted a restructuring plan for its Internet financial services
subsidiary E-LOAN (the “E-LOAN Restructuring Plan”).
Considering E-LOAN’s operating losses in light of current market
conditions and other factors, the Board of Directors approved a
substantial reduction of marketing and personnel costs at E-LOAN
and changes in E-LOAN’s business model to align it with revenue
expectations. The changes include concentrating marketing
investment toward the Internet and the origination of first mortgage
loans that qualify for sale to government sponsored entities
(“GSEs”). Also, as a result of escalating credit costs in the current
economic environment and lower liquidity in the secondary
markets for mortgage related products, the Corporation
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determined to hold back the origination by E-LOAN of home
equity lines of credit, closed-end second lien mortgage loans and
auto loans. The E-LOAN Restructuring Plan continues to promote
the Internet deposit gathering initiative with BPNA. As part of
the E-LOAN Restructuring Plan, the Corporation evaluated the
value of E-LOAN’s recorded goodwill and trademark by
considering the changes in E-LOAN’s business model and the
unprecedented conditions in the mortgage loan business.
The E-LOAN Restructuring Plan costs were as follows:
functions. The individuals whose jobs will be eliminated will
receive from Equity One a transitional severance package,
professional counseling, outplacement and support during this
process.
This strategic initiative resulted in the adoption of an additional
restructuring plan at PFH (the “PFH Branch Network Restructuring
Plan”) during the first quarter of 2008. It is anticipated that this
restructuring plan (the “PFH Branch Network Restructuring Plan”)
will result in estimated combined charges for the Corporation
broken down as follows:
(In millions)
Personnel costs
Net occupancy expenses
Equipment expenses
Professional fees
Total restructuring charges
Impairment of long-lived assets
Impairment of goodwill and trademark
Total
Year ended
December 31,
2007
$4.6 (a)
4.2 (b)
0.4 (c)
0.4 (c)
$9.6
10.5 (d)
211.8 (e)
$231.9
(a) Severance, stay bonuses, related taxes, and other employee benefits
(b) Lease terminations
(c) Service contract terminations
(d) Consists mostly of leasehold improvements, equipment and intangible assets with definitive
lives
(e) Goodwill impairment of $164.4 million and trademark impairment of $47.4 million
The above restructuring costs were recognized as a liability
as of December 31, 2007.
PFH Branch Network Restructuring Plan
Given the unforeseen disruption in the capital markets since the
summer of 2007 and its impact on funding, management of the
Corporation concluded during the fourth quarter of 2007 that it
would be difficult to generate an adequate return on the capital
invested at Equity One’s consumer service branches.
In January 2008, the Corporation announced the signing of
an Asset Purchase Agreement (the “Agreement”) to sell certain
assets of Equity One to American General Finance, Inc., a member
of American International Group. The closing of the Agreement
with effective date of March 1, 2008 resulted in the sale of a
significant portion of Equity One’s mortgage loan and consumer
loan portfolio approximating $1.4 billion. This portfolio was
reclassified by the Corporation from loans held-in-portfolio to
loans held-for-sale in December 2007. American General Finance,
Inc. will hire certain Equity One’s consumer services employees
and will retain certain branch locations. Equity One will close all
remaining consumer branches not purchased by American General.
Workforce reductions at Equity One will result in the loss of
employment for those employees at the consumer services branches
not hired by American General, as well as for other related support
(In millions)
Personnel costs
Net occupancy expenses
Other
Total restructuring charges
Impairment of long-lived assets
Other costs
Total combined estimated costs
Fourth
Quarter
2007
-
-
-
-
$1.9
-
$1.9
Total
$8.1 (a)
5.6 (b)
2.1 (c)
15.8
1.9 (d)
1.8 (e)
$19.5
2008
$8.1
5.6
2.1
15.8
-
1.8
$17.6
(a) Severance, retention bonuses and other benefits
(b) Lease terminations
(c) Contract cancellations and branch closing costs
(d) Leasehold improvements, furniture and equipment
(e) Bonuses and other benefits for retained employees
These estimates are preliminary and may vary as Popular’s
management implements the PFH Branch Network Restructuring
Plan. The estimates do not incorporate the final outcome of the
number of employees and branches retained by American General
under the final agreement.
Note 3 - Subsequent events:
Note 3 - Subsequent events:
Note 3 - Subsequent events:
Note 3 - Subsequent events:
Note 3 - Subsequent events:
In January 2008, the Corporation signed the Agreement to sell
certain assets of Equity One to American General Finance, Inc.
Refer to Note 2 to the consolidated financial statements for
additional information.
On January 10, 2008, the Corporation completed the sale of
six Houston branches of BPNA to Prosperity Bank. Prosperity
Bank paid a premium of 10.10% for approximately $125,340,000
in deposits, as well as purchased certain loans and other assets
attributable to the branches. The purchase price approximated
$104,287,000. Prosperity retained all branch-based employees.
BPNA will continue to operate its mortgage business based in
Houston, as well as its franchise and small business lending
activities in Texas. BPNA will also continue to maintain a retail
branch in Arlington, Texas.
2007 Annual Report 97
2007
2007
Popular, Inc. 2007
2007
N o t e 5 - S e c u r i t i e s p u r c h a s e d u n d e r a g r e e m e n t s
N o t e 5 - S e c u r i t i e s p u r c h a s e d u n d e r a g r e e m e n t s
N o t e 5 - S e c u r i t i e s p u r c h a s e d u n d e r a g r e e m e n t s
N o t e 5 - S e c u r i t i e s p u r c h a s e d u n d e r a g r e e m e n t s
N o t e 5 - S e c u r i t i e s p u r c h a s e d u n d e r a g r e e m e n t s
to resell:
to resell:
to resell:
to resell:
to resell:
The securities purchased underlying the agreements to resell were
delivered to, and are held by, the Corporation. The counterparties
to such agreements maintain effective control over such securities.
The Corporation is permitted by contract to repledge the
securities, and has agreed to resell to the counterparties the same
or substantially similar securities at the maturity of the agreements.
The fair value of the collateral securities held by the Corporation
on these transactions at December 31, was as follows:
(In thousands)
Repledged
Not repledged
Total
2007
2006
$146,712
14,193
$160,905
$179,303
103,124
$282,427
The repledged securities were used as underlying securities
for repurchase agreement transactions.
Note 4 - Restrictions on cash and due from banks
Note 4 - Restrictions on cash and due from banks
Note 4 - Restrictions on cash and due from banks
Note 4 - Restrictions on cash and due from banks
Note 4 - Restrictions on cash and due from banks
and highly liquid securities:
and highly liquid securities:
and highly liquid securities:
and highly liquid securities:
and highly liquid securities:
The Corporation’s subsidiary banks are required by federal and
state regulatory agencies to maintain average reserve balances
with the Federal Reserve Bank or with a correspondent bank.
Those required average reserve balances were approximately
$678,473,000 at December 31, 2007 (2006 - $621,387,000).
Cash and due from banks, as well as other short-term, highly
liquid securities, are used to cover the required average reserve
balances.
In compliance with rules and regulations of the Securities and
Exchange Commission, at December 31, 2007, the Corporation
had securities with a market value of $273,000 (2006 - $445,000)
segregated in a special reserve bank account for the benefit of
brokerage customers of its broker-dealer subsidiary. These
securities are classified in the consolidated statement of condition
within the other trading securities category.
As required by the Puerto Rico International Banking Center
Law, at December 31, 2007 and 2006, the Corporation maintained
separately for its two international banking entities (“IBEs”),
$600,000 in time deposits, equally split for the two IBEs, which
were considered restricted assets.
As part of a line of credit facility with a financial institution,
at December 31, 2007 and 2006, the Corporation maintained
restricted cash of $1,860,000 as collateral for the line of credit.
The cash is being held in certificates of deposit, which mature in
less than 90 days. The line of credit is used to support letters of
credit.
At December 31, 2007, the Corporation had restricted cash of
$3,500,000 to support a letter of credit related to a service
settlement agreement.
98
Note 6 - Investment securities available-for-sale:
Note 6 - Investment securities available-for-sale:
Note 6 - Investment securities available-for-sale:
Note 6 - Investment securities available-for-sale:
Note 6 - Investment securities available-for-sale:
The amortized cost, gross unrealized gains and losses,
approximate market value (or fair value for certain investment
securities where no market quotations are available), weighted
average yield and contractual maturities of investment securities
available-for-sale at December 31, 2007 and 2006 (2005 - only
market value is presented) were as follows:
U.S. Treasury securities
Within 1 year
After 5 to 10 years
Obligations of
U.S. government
sponsored entities
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Obligations of Puerto Rico,
States and political
subdivisions
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Collateralized mortgage
obligations
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Mortgage-backed
securities
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Equity securities
(without contractual
maturity)
Other
After 1 to 5 years
After 5 to 10 years
After 10 years
Amortized
cost
2007
Gross
unrealized
gains
(Dollars in thousands)
Gross
unrealized
losses
Weighted
average
yield
Market
value
$9,993
466,111
476,104
$3
-
3
-
$5,011
5,011
$9,996
461,100
471,096
3.57%
3.83
3.82
1,315,128
3,593,239
470,357
71,304
5,450,028
113
49,022
2,669
1,167
52,971
12,429
7,889
23,947
58,941
103,206
190
7,491
127,490
1,268,121
1,403,292
27,318
94,119
69,223
826,642
56
96
255
63
470
-
3
370
3,381
3,754
1
104
206
4,379
4,642
487
756
-
5,885
54
25
88
2,017
2,184
-
34
609
9,863
1,310,599
3,641,774
472,270
72,471
5,497,114
12,431
7,960
24,114
56,987
101,492
190
7,460
127,251
1,261,639
10,506
1,396,540
203
872
523
10,266
27,116
93,351
68,906
820,755
3.75
4.45
4.24
5.96
4.28
4.94
5.69
4.44
4.98
4.90
6.06
5.25
5.00
5.15
5.14
2.97
3.94
4.60
5.33
1,017,302
4,690
11,864
1,010,128
5.08
33,299
690
36
33,953
4.53
23
68
4,721
4,812
-
-
-
-
-
-
-
-
23
68
4,721
4,812
13.27
$8,488,043
$62,578
$35,486
$8,515,135
4.51%
2006
Gross
Gross
Amortized unrealized unrealized Market
value
(Dollars in thousands)
losses
gains
cost
Weighted
average
yield
-
$271
29,547
-
29,818
-
$29,072
445,763
-
474,835
-
3.99%
3.82
-
3.83
2005
M a r k e t
value
$14,792
29,108
-
460,425
504,325
U.S. Treasury securities
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Obligations of
U.S. government
sponsored entities
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
-
$29,343
475,310
-
504,653
902,898
2,234,285
3,393,190
72,879
6,603,252
Obligations of Puerto Rico,
States and political
subdivisions
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
6,695
19,688
18,227
73,604
118,214
-
-
-
-
-
-
$57
-
-
57
18
105
20
122
265
10,040
134,487
1,513,086
1,657,613
150,884
74,668
836,298
1,061,850
-
343
4,561
4,904
54
46
1,358
1,458
Collateralized mortgage
obligations
After 1 to 5 years
After 5 to 10 years
After 10 years
Mortgage-backed
securities
After 1 to 5 years
After 5 to 10 years
After 10 years
Equity securities
(without contractual
maturity)
Other
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
5,711
897,187
43,896 2,190,446
96,794 3,296,396
71,756
1,123
147,524 6,455,785
3.63
4.03
4.45
5.93
4.21
1,194,359
2,929,326
3,513,737
73,254
7,710,676
10
179
164
3,184
3,537
6,703
19,614
18,083
70,542
114,942
105
1,890
15,196
17,191
9,935
132,940
1,502,451
1,645,326
5.44
5.32
5.10
5.04
5.12
5.75
5.01
5.34
5.32
147,277
3,661
72,426
2,288
20,543
817,113
26,492 1,036,816
4.37
4.43
5.35
5.15
451
26,971
12,793
66,439
106,654
12,707
41,236
1,794,820
1,848,763
209,991
109,688
1,054,063
1,373,742
70,954
6,692
3,901
73,745
1.85
82,534
-
121
307
45,898
46,326
-
27
329
2,731
3,087
-
-
-
-
-
-
148
636
48,629
49,413 14.06
6,655
11,892
1,265
70,080
89,892
$10,062,862
$16,463 $228,463 $9,850,862
4.51% $11,716,586
The weighted average yield on investment securities available-
for-sale is based on amortized cost; therefore, it does not give
effect to changes in fair value.
Securities not due on a single contractual maturity date, such
as mortgage-backed securities and collateralized mortgage
obligations, are classified in the period of final contractual
maturity. The expected maturities of collateralized mortgage
obligations, mortgage-backed securities and certain other
securities may differ from their contractual maturities because
they may be subject to prepayments or may be called by the issuer.
The “other” category is composed substantially of residual
interests derived from off-balance sheet mortgage loan
securitizations by PFH.
The aggregate amortized cost and approximate market value
of investment securities available-for-sale at December 31, 2007,
by contractual maturity, are shown below:
(In thousands)
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total
Equity securities
Total investment securities
available-for-sale
Amortized cost
Market value
$1,365,058
3,702,761
1,157,196
2,229,729
$8,454,744
33,299
$1,360,332
3,750,568
1,153,709
2,216,573
$8,481,182
33,953
$8,488,043
$8,515,135
Proceeds from the sale of investment securities available-for-
sale during 2007 were $58,167,000 (2006 - $208,802,000; 2005
- $388,596,000). Gross realized gains and losses on securities
available-for-sale during 2007 were $8,036,000 and $4,299,000,
respectively (2006 - $22,924,000 and $691,000; 2005 -
$68,946,000 and $1,529,000).
The following table shows the Corporation’s gross unrealized
losses and fair value of investment securities available-for-sale,
aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss
position, at December 31, 2007 and 2006:
December 31, 2007
(In thousands)
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
(In thousands)
U.S. Treasury securities
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
Less than 12 months
Amortized Unrealized Market
Value
Losses
Cost
$67,107
$185
$66,922
2,600
349,084
99,328
28
2
2,453
667
10
2,598
346,631
98,661
18
$518,147
$3,317
$514,830
12 months or more
Amortized Unrealized Market
Value
Losses
Cost
$466,111
$5,011
$461,100
1,807,457
5,700
1,801,757
65,642
430,034
656,879
300
2,182
8,053
11,197
26
63,460
421,981
645,682
274
$3,426,423
$32,169
$3,394,254
2007 Annual Report 99
2007
2007
Popular, Inc. 2007
2007
Total
(In thousands)
U.S. Treasury securities
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
Amortized Unrealized Market
Value
Losses
Cost
$466,111
$5,011
$461,100
1,874,564
5,885
1,868,679
68,242
779,118
756,207
328
2,184
10,506
11,864
36
66,058
768,612
744,343
292
$3,944,570
$35,486
$3,909,084
December 31, 2006
(In thousands)
U.S. Treasury securities
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
(In thousands)
U.S. Treasury securities
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
Less than 12 months
Amortized Unrealized Market
Value
Losses
Cost
$19,421
$134
$19,287
425,076
4,345
420,731
21,426
501,705
28,958
11,180
259
4,299
484
3,699
21,167
497,406
28,474
7,481
$1,007,766
$13,220
$994,546
12 months or more
Amortized Unrealized Market
Value
Losses
Cost
$485,232
$29,684
$455,548
6,097,274
143,179
5,954,095
55,238
564,217
954,293
300
3,278
12,892
26,008
202
51,960
551,325
928,285
98
$8,156,554
$215,243
$7,941,311
Total
(In thousands)
U.S. Treasury securities
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
Amortized Unrealized Market
Value
Losses
Cost
$504,653
$29,818
$474,835
6,522,350
147,524
6,374,826
76,664
1,065,922
983,251
11,480
3,537
17,191
26,492
3,901
73,127
1,048,731
956,759
7,579
$9,164,320
$228,463
$8,935,857
At December 31, 2007, “Obligations of Puerto Rico, States
and political subdivisions” include approximately $55 million
in Commonwealth of Puerto Rico Appropriation Bonds
(“Appropriation Bonds”). The rating on these bonds by Moody’s
Investors Service (“Moody’s”) is Ba1, one notch below investment
grade, while Standard & Poor's (“S&P”) rates them as investment
grade. As of December 31, 2007, the Appropriation Bonds
indicated above represented approximately $1.8 million in
Investment securities held-to-maturity:
Investment securities held-to-maturity:
Note 7 -
Note 7 -
Investment securities held-to-maturity:
Note 7 - Investment securities held-to-maturity:
Investment securities held-to-maturity:
Note 7 -
Note 7 -
The amortized cost, gross unrealized gains and losses,
approximate market value (or fair value for certain investment
securities where no market quotations are available), weighted
average yield and contractual maturities of investment securities
held-to-maturity at December 31, 2007 and 2006 (2005 - only
amortized cost is presented) were as follows:
2007
Amortized unrealized
cost
gains
Gross
Gross
unrealized
losses
(Dollars in thousands)
Market
value
Weighted
average
yield
Obligations of
U.S. goverment
sponsored entities
Within 1 year
$395,974
$15
$1,497
$394,492
4.11%
Obligations of Puerto Rico,
States and political
subdivisions
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
1,785
11,745
12,754
50,180
76,464
2
197
690
2,219
3,108
1
-
25
-
26
1,786
11,942
13,419
52,399
79,546
5.59
4.84
5.92
6.00
5.80
Collateralized
mortgage obliga-
tions
After 10 years
Other
Within 1 year
After 1 to 5 years
310
-
17
293
5.45
6,228
5,490
11,718
$484,466
25
69
94
$3,217
2
2
4
$1,544
6,251
5,557
11,808
$486,139
6.47
5.71
6.12
4.43%
100
unrealized losses in the Corporation’s available-for-sale investment
securities portfolio. The Corporation is closely monitoring the
political and economic situation of the Island and evaluates its
available-for-sale portfolio for any declines in value that
management may consider being other-than-temporary.
Management has the intent and ability to hold these investments
for a reasonable period of time for a forecasted recovery of fair
value up to (or beyond) the cost of these investments.
During the year ended December 31, 2007, the Corporation
recognized through earnings approximately $65,169,000 in losses
in the investment securities available-for-sale portfolio that
management considered to be other-than-temporarily impaired.
These realized losses were associated with interest-only strips
and equity securities.
The unrealized loss positions of available-for-sale securities at
December 31, 2007 are primarily associated with U.S. agency-
issued collateralized mortgage obligations, mortgage-backed
securities, and to a lesser extent, U.S. Government-sponsored
entities and Treasury obligations. The vast majority of these
securities are rated the equivalent of AAA by the major rating
agencies. The investment portfolio is structured primarily with
highly liquid securities, which possess a large and efficient
secondary market. Valuations are performed at least on a quarterly
basis using third party providers and dealer quotes. Management
believes that the unrealized losses in the available-for-sale portfolio
at December 31, 2007 are temporary and are substantially related
to market interest rate fluctuations and not to deterioration in the
creditworthiness of the issuers. Also, management has the intent
and ability to hold these investments for a reasonable period of
time for a forecasted recovery of fair value up to (or beyond) the
cost of these investments.
The following table states the name of issuers, and the aggregate
amortized cost and market value of the securities of such issuer
(includes available-for-sale and held-to-maturity securities), when
the aggregate amortized cost of such securities exceeds 10% of
stockholders’ equity. This information excludes securities of the
U.S. Government agencies and corporations. Investments in
obligations issued by a state of the U.S. and its political
subdivisions and agencies, which are payable and secured by the
same source of revenue or taxing authority, other than the U.S.
Government, are considered securities of a single issuer.
(In thousands)
FNMA
FHLB
Freddie Mac
2007
2006
Amortized Market
Value
cost
Amortized Market
Value
cost
$1,132,834
5,649,729
918,976
$1,128,544
5,693,170
913,609
$1,539,651
6,230,841
1,149,185
$1,517,525
6,086,885
1,134,853
Gross
2006
Gross
2005
Weighted
Amortized unrealized unrealized Market average Amortized
cost
gains
losses
value
(Dollars in thousands)
yield
cost
2007 Annual Report 101
2007
2007
Popular, Inc. 2007
2007
The following table shows the Corporation’s gross unrealized
losses and fair value of investment securities held-to-maturity,
aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss
position, at December 31, 2007 and 2006:
$3,017
-
-
$3,017
5.19% $42,011
December 31, 2007
Obligations of
U.S. goverment
sponsored entities
Within 1 year
Obligations of Puerto Rico,
States and political
subdivisions
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
1,360
7,002
10,515
53,275
Collateralized
mortgage obliga-
tions
After 10 years
Other
Within 1 year
After 1 to 5 years
After 5 to 10 years
72,152
381
6,570
9,220
-
15,790
-
$28
213
1,318
1,559
-
16
44
-
60
-
$53
3
105
161
21
-
13
-
13
(In thousands)
1,360
6,977
10,725
54,488
73,550
4.94
5.47
5.93
6.06
5.96
5,270
6,918
9,870
56,190
78,248
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Other
360
5.45
497
6,586
9,251
-
15,837
5.52
5.65
-
5.59
29,928
1,420
1,000
32,348
(In thousands)
Collateralized mortgage obligations
Other
Less than 12 months
Amortized Unrealized Market
Value
Losses
Cost
$196,129
$1,497
$194,632
1,883
1,250
$199,262
26
1
$1,524
1,857
1,249
$197,738
12 months or more
Amortized Unrealized Market
Value
Losses
Cost
$293
1,247
$1,540
$310
1,250
$1,560
$17
3
$20
Total
Amortized Unrealized Market
Value
Losses
Cost
$196,129
$1,497
$194,632
1,883
310
2,500
$200,822
26
17
4
$1,544
1,857
293
2,496
$199,278
(In thousands)
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Other
December 31, 2006
(In thousands)
Obligations of Puerto Rico, States and
political subdivisions
Collaterized mortgage obligations
Other
12 months or more and Total
Amortized Unrealized Market
Value
Losses
Cost
$26,623
381
1,250
$28,254
$161
21
13
$195
$26,462
360
1,237
$28,059
Management believes that the unrealized losses in the held-to-
maturity portfolio at December 31, 2007 are temporary and are
substantially related to market interest rate fluctuations and not
to deterioration in the creditworthiness of the issuers. Also,
management has the intent and ability to hold these investments
until maturity.
$91,340
$1,619
$195
$92,764
5.87% $153,104
Securities not due on a single contractual maturity date, such
as collateralized mortgage obligations, are classified in the period
of final contractual maturity. The expected maturities of
collateralized mortgage obligations and certain other securities
may differ from their contractual maturities because they may be
subjet to prepayments or may be called by the issuer.
The aggregate amortized cost and approximate market value
of investment securities held-to-maturity at December 31, 2007,
by contractual maturity, are shown below:
(In thousands)
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Total investment securities
held-to-maturity
Amortized cost Market value
$402,529
17,499
13,419
52,692
$403,987
17,235
12,754
50,490
$484,466
$486,139
102
Note 8 - Pledged assets:
Note 8 - Pledged assets:
Note 8 - Pledged assets:
Note 8 - Pledged assets:
Note 8 - Pledged assets:
At December 31, 2007 and 2006, certain securities and loans were
pledged to secure public and trust deposits, assets sold under
agreements to repurchase, other borrowings and credit facilities
available. The classification and carrying amount of pledged
assets, which the secured parties are not permitted to sell or
repledge the collateral, at December 31, were as follows:
2007 include $49,090,000 (2006 - $48,074,000; 2005 -
$39,316,000) in consumer loans.
The commercial loans that were considered impaired at
December 31, and the related disclosures follow:
(In thousands)
Impaired loans with a related allowance
Impaired loans that do not require allowance
December 31,
2007
$174,029
147,653
$321,682
2006
$125,728
82,462
$208,190
$53,959
$36,998
$288,374
$156,951
$9,484
$3,858
(In thousands)
Investment securities available-for-sale
Investment securities held-to-maturity
Loans held-for-sale
Loans held-in-portfolio
2007
2006
Total impaired loans
$2,944,643
339
42,428
8,489,814
$11,477,224
$2,644,027
658
332,058
10,260,198
$13,236,941
Allowance for impaired loans
Average balance of impaired
loans during the year
Interest income recognized on
impaired loans during the year
Pledged securities and loans that the creditor has the right by
custom or contract to repledge are presented separately on the
consolidated statements of condition.
Note 9 - Loans and allowance for loan losses:
Note 9 - Loans and allowance for loan losses:
Note 9 - Loans and allowance for loan losses:
Note 9 - Loans and allowance for loan losses:
Note 9 - Loans and allowance for loan losses:
The composition of loans held-in-portfolio at December 31, was
as follows:
(In thousands)
Loans secured by real estate:
Insured or guaranteed by the U.S.
Government or its agencies
Guaranteed by the Commonwealth
of Puerto Rico
Commercial loans secured by real estate
Residential conventional mortgages
Construction and land development
Consumer loans secured by real estate
Depository institutions
Commercial, industrial and agricultural
Lease financing
Consumer for household, credit cards
and other consumer expenditures
3,820,457
Obligations of states and political subdivisions 582,310
447,073
Other
$28,203,566
2007
2006
$134,116
$94,125
138,823
7,497,731
5,731,809
2,301,254
1,426,800
17,230,533
10,209
4,842,500
1,270,484
125,600
7,185,965
10,739,777
1,664,592
701,934
20,511,993
11,267
4,741,862
1,410,728
4,636,398
510,844
502,272
$32,325,364
As of December 31, 2007, loans on which the accrual of interest
income had been discontinued amounted to $770,672,000 (2006
- $717,588,000; 2005 - $547,509,000). If these loans had been
accruing interest, the additional interest income realized would
have been approximately $71,037,000 (2006 - $58,223,000;
2005 - $46,198,000). Non-accruing loans as of December 31,
Note 1 to the consolidated financial statements, under the
heading of “Allowance for Loan Losses,” describes the
characteristics of those loans that the Corporation considers
impaired loans for evaluation under the SFAS No. 114 accounting
framework. As prescribed by SFAS No. 114, when a loan is
impaired, the measurement of the impairment may be based on (1)
the present value of the expected future cash flows of the impaired
loan discounted at the loan’s original effective interest rate, (2)
the observable market price of the impaired loan, or (3) the fair
value of the collateral if the loan is collateral dependent. A loan is
collateral dependent if the repayment of the loan is expected to be
provided solely by the underlying collateral. The loans classified
as “Impaired loans that do not require an allowance” in the previous
table were collateral dependent commercial loans. The Corporation
performed a detailed analysis based on the fair value of the
individual loans’ collateral less estimated costs to sell and
determined it to be adequate to cover any losses. Management
monitors on a quarterly basis if there have been any significant
changes (increases or decreases) in the fair value of the collateral
of a collateral dependent impaired loan and adjusts their specific
credit reserves to the extent necessary.
The changes in the allowance for loan losses for the year ended
December 31, were as follows:
(In thousands)
Balance at beginning of year
Net allowances acquired
Provision for loan losses
Impact of change in
reporting period
Recoveries
Charge-offs
Write-downs related to loans
2007
$522,232
7,290
562,650
-
65,976
(489,073)
2006
$461,707
-
287,760
2,510
59,775
(289,520)
2005
$437,081
6,291
195,272
1,586
62,926
(241,449)
transferred to loans held-for-sale
Balance at end of year
(120,243)
$548,832
-
$522,232
-
$461,707
2007 Annual Report 103
2007
2007
Popular, Inc. 2007
2007
From time to time, the Corporation, in the ordinary course of
business, obtains services from related parties or makes
contributions to non-profit organizations that have some
association with the Corporation. Management believes the terms
of such arrangements are consistent with arrangements entered
into with independent third parties.
During 2007, the Corporation engaged, in the ordinary course
of business, the legal services of certain law firms in Puerto Rico,
in which the Secretary of the Board of Directors of Popular, Inc.
and immediate family members of an executive officer of the
Corporation acted as Senior Counsel or as partners. The fees paid
to these law firms for fiscal year 2007 amounted to approximately
$2,004,000 (2006 - $1,622,000). These fees included $507,000
(2006 - $93,000) paid by the Corporation’s clients in connection
with commercial loan transactions and $50,000 (2006 - $23,000)
paid by mutual funds managed by the Bank. In addition, one of
these law firms leases office space in the Corporation’s
headquarters building, which is owned by BPPR. During 2007,
this law firm made lease payments of approximately $889,000. It
also engages BPPR as trustee of its retirement plan and paid
approximately $50,000 for these services.
During 2006, the Corporation paid to an insurance broker,
who was considered a related party, approximately $1,642,000 in
commissions for the institutional insurance business of the
Corporation and its subsidiaries.
During 2006, the Corporation made payments of approximately
$1,163,000 under construction contracts granted to a special
partnership whose officer and partner is considered a related party.
These contracts were granted on the basis of competitive bids or
approved by the Audit Committee, as required by the Corporation’s
policy.
For the year ended December 31, 2007, the Corporation made
contributions of approximately $2,097,000 to non-profit
organizations, principally Banco Popular Foundations dedicated
to philanthropic work (2006 - $2,508,000).
The components of the net financing leases receivable at
December 31, were:
(In thousands)
Total minimum lease payments
Estimated residual value of leased property
Deferred origination costs, net of fees
Less - Unearned financing income
Net minimum lease payments
Less - Allowance for loan losses
2007
$1,050,011
211,473
9,000
172,680
1,097,804
25,648
$1,072,156
2006
$1,168,685
237,235
4,808
184,238
1,226,490
24,842
$1,201,648
At December 31, 2007, future minimum lease payments are
expected to be received as follows:
(In thousands)
2008
2009
2010
2011
2012 and thereafter
$334,803
277,753
217,003
136,983
83,469
$1,050,011
Note 10 - Related party transactions:
Note 10 - Related party transactions:
Note 10 - Related party transactions:
Note 10 - Related party transactions:
Note 10 - Related party transactions:
The Corporation grants loans to its directors, executive officers
and certain related individuals or organizations in the ordinary
course of business. The movement and balance of these loans were
as follows:
(In thousands)
Balance at December 31, 2005
New loans
Payments
Other changes
Balance at December 31, 2006
New loans
Payments
Other changes
Balance at December 31, 2007
Executive
Officers Directors
$5,263
2,084
(1,535)
(1,851)
$3,961
2,781
(2,199)
54
$4,597
$29,439
26,705
(23,903)
(7,138)
$25,103
34,897
(25,886)
(1,295)
$32,819
Total
$34,702
28,789
(25,438)
(8,989)
$29,064
37,678
(28,085)
(1,241)
$37,416
The amounts reported as “other changes” include changes in
the status of those who are considered related parties.
Management believes these loans have been consummated on
terms no less favorable to the Corporation than those that would
have been obtained if the transactions had been with unrelated
parties and do not involve more than the normal risk of collection.
At December 31, 2007, the Corporation’s banking subsidiaries
held deposits from related parties amounting to $38,149,000
(2006 - $32,760,000).
104
Note 11 - Premises and equipment:
Note 11 - Premises and equipment:
Note 11 - Premises and equipment:
Note 11 - Premises and equipment:
Note 11 - Premises and equipment:
Premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
Useful life
in years
2007
2006
(In thousands)
Land
Buildings
Equipment
Leasehold improvements
10-50
3-10
2-10
Less - Accumulated depreciation
and amortization
Construction in progress
$80,254
400,808
579,842
107,497
1,088,147
624,959
463,188
44,721
$588,163
$84,753
397,863
586,001
111,794
1,095,658
610,267
485,391
24,996
$595,140
Depreciation and amortization of premises and equipment for
the year 2007 was $78,563,000 (2006 - $84,388,000; 2005 -
$81,947,000), of which $26,913,000 (2006 - $26,398,000; 2005
- $23,979,000) was charged to occupancy expense and
$51,650,000 (2006 - $57,990,000; 2005 - $57,968,000) was
charged to equipment, communications and other operating
expenses. Occupancy expense is net of rental income of
$29,521,000 (2006 - $28,374,000; 2005 - $23,100,000).
Note 12 - Goodwill and other intangible assets:
Note 12 - Goodwill and other intangible assets:
Note 12 - Goodwill and other intangible assets:
Note 12 - Goodwill and other intangible assets:
Note 12 - Goodwill and other intangible assets:
The changes in the carrying amount of goodwill for the years
ended December 31, 2007 and 2006, allocated by reportable
segment, and in the case of Banco Popular de Puerto Rico, as an
additional disclosure, by business area, were as follows (refer to
Note 32 for a discussion of the Corporation’s reportable segments):
2007
Balance at
January 1, Goodwill
acquired
2007
Purchase
accounting
adjustments Other
Balance at
December 31,
2007
(In thousands)
Banco Popular de Puerto Rico:
Commercial Banking
Consumer and Retail Banking
Other Financial Services
Banco Popular North America:
Banco Popular North America
E-LOAN
Popular Financial Holdings
EVERTEC
$14,674
34,999
4,391
404,237
164,410
-
45,142
$20,697
101,408
3,788
-
-
$442
-
-
-
$35,371
136,407
8,621
-
-
-
- - ($164,410) -
-
-
46,125
-
(183)
-
329
404,237
837
Total Popular, Inc.
$667,853
$126,730 $771
($164,593)
$630,761
2006
Balance at
January 1, Goodwill
Purchase
accounting
acquired adjustments
Balance at
December 31,
2006
Other
(In thousands)
Banco Popular de Puerto Rico:
2006
Commercial Banking
Consumer and Retail Banking
Other Financial Services
Banco Popular North America:
$14,674
34,999
4,110
-
-
-
Banco Popular North America 404,447
138,387
E-LOAN
14,236
43,131
Popular Financial Holdings
EVERTEC
-
-
-
$1,511
-
-
$281
-
26,023
3
500
-
-
-
($210)
-
(14,239)
-
$14,674
34,999
4,391
404,237
164,410
-
45,142
Total Popular, Inc.
$653,984
$1,511
$26,807 ($14,449) $667,853
In 2007, the goodwill acquired was related to the acquisitions
of Citibank’s retail branch network in Puerto Rico and Smith
Barney’s retail brokerage operations in Puerto Rico. These
acquisitions were described in Note 1 to the consolidated financial
statements. The amount included in the “other” category was
related mostly to goodwill impairment losses of $164,410,000 in
the Banco Popular North America reportable segment that were
associated with the write-off of E-LOAN’s goodwill as a result of
E-LOAN’s Restructuring Plan described in Note 2 to the
consolidated financial statements. In determining the fair value of
a reporting unit, the Corporation generally uses a combination of
methods, including market price multiples of comparable
companies and the discounted cash flow analysis. The valuation
technique used to evaluate E-LOAN at the time of the goodwill
impairment determination considered both of these approaches.
Refer to Note 1 to the consolidated financial statements for the
Corporation’s accounting policy with respect to goodwill and
other intangible assets.
In 2006, the amount included in the “other” category was
mainly related to goodwill impairment losses of $14,239,000 in
the Popular Financial Holdings reportable segment. These losses
were associated with the updated goodwill impairment evaluation
during the fourth quarter of 2006 due to the exited operations of
PFH as part of the PFH Restructuring Plan. Refer to Note 2 to the
consolidated financial statements for information on this plan.
The Banco Popular North America reportable segment also included
an amount in the “other” category related to the sale of the
remaining retail outlets of Popular Cash Express (“PCE”) to PLS
Financial during the first quarter of 2006.
Purchase accounting adjustments consist of adjustments to
the value of the assets acquired and liabilities assumed resulting
from the completion of appraisals or other valuations, adjustments
to initial estimates recorded for transaction costs, if any, and
contingent consideration paid during a contractual contingency
period. The purchase accounting adjustments for 2006 at the
Banco Popular North America reportable segment were mostly
related to E-LOAN’s acquisition.
2007 Annual Report 105
2007
2007
Popular, Inc. 2007
2007
At December 31, 2007, other than goodwill, the Corporation
had $17,270,000 of identifiable intangibles with indefinite useful
lives, mostly associated with E-LOAN’s trademark (2006 -
$64,555,000; 2005 - $58,919,000). During the fourth quarter of
2007, the Corporation recognized impairment losses of
$47,341,000 related to E-LOAN’s trademark, as a result of the E-
LOAN’s Restructuring Plan described in Note 2 to the consolidated
financial statements. There were no impairment losses recognized
in 2006 and 2005 related to other intangible assets with
indefinitive lives.
The valuation of the E-LOAN trademark was performed using
a valuation approach called the “relief-from-royalty” method. The
basis of the “relief-from-royalty” method is that, by virtue of having
ownership of the trademark, the Corporation is relieved from
having to pay a royalty, usually expressed as a percentage of
revenue, for the use of trademark. The main attributes involved in
the valuation of this intangible asset include the royalty rate,
revenue projections that benefit from the use of this intangible,
after-tax royalty savings derived from the ownership of the
intangible, and the discount rate to apply to the projected benefits
to arrive at the present value of this intangible.
The following table reflects the components of other intangible
assets subject to amortization at December 31:
(In thousands)
Core deposits
Other customer
relationships
Other intangibles
2007
2006
Gross Accumulated Gross Accumulated
Amount Amortization Amount Amortization
$66,381
$23,171
$76,708
$48,367
10,375
8,164
4,131
5,385
11,156
9,099
2,171
3,426
Total
$84,920
$32,687
$96,963
$53,964
During the year ended December 31, 2007, the Corporation
recognized $10,445,000 in amortization expense related to other
intangible assets with definite lives (2006 - $12,377,000; 2005 -
$9,579,000). During the fourth quater of 2007, core deposits
intangibles with a gross amount of $21,068,000 were acquired as
a result of the acquisition of the retail branches of Citibank in
Puerto Rico based on a preliminary estimate prepared by
management. On the other hand, certain core deposits with a
gross amount of $31,395,000 became fully amortized during 2007
and, as such, their gross amount and accumulated amortization
were eliminated from the tabular disclosure presented above. Also
in December 2007, the Corporation recorded impairment losses
of $846,000 and $725,000 associated with the write-off of a
customer relationship and other intangibles, respectively, as a
result of the E-LOAN Restructuring Plan. The other intangibles
were principally related to lease contracts and proprietary
technology intangibles that were recorded when E-LOAN was
acquired in 2005. This amount is included in the caption of
impairment losses on long-lived assets on the consolidated
statement of operations. In December 2006, the Corporation
recorded an impairment loss of $654,000 associated with the
write-off of a customer relationship intangible asset due to the
exited operations at PFH, also included in the caption of
impairment losses on long-lived assets.
The following table presents the estimated aggregate
amortization expense of the intangible assets with definite lives
that the Corporation has at December 31, 2007, for each of the
next five years:
(In thousands)
2008
2009
2010
2011
2012
$9,728
8,370
7,518
6,163
5,154
Note 13 - Deposits:
Note 13 - Deposits:
Note 13 - Deposits:
Note 13 - Deposits:
Note 13 - Deposits:
Total interest bearing deposits at December 31, consisted of:
(In thousands)
Savings accounts
NOW, money market and
other interest bearing demand
Certificates of deposit:
Under $100,000
$100,000 and over
2007
2006
$5,638,862
$5,811,192
4,770,829
10,409,691
8,136,308
5,277,690
4,078,255
9,889,447
5,774,438
4,552,313
13,413,998
10,326,751
$23,823,689
$20,216,198
A summary of certificates of deposit by maturity at December
31, 2007, follows:
(In thousands)
2008
2009
2010
2011
2012
2013 and thereafter
$9,911,475
1,645,847
887,574
359,820
494,256
115,026
$13,413,998
At December 31, 2007, the Corporation had brokered
certificates of deposit amounting to $3,116,274,000 (2006 -
$865,685,000). Brokered certificates of deposit amounting to
$2,992,897,000 acquired in denominations of $1,000 under a
106
master certificate of deposit have been classified in the “under
$100,000” category at December 31, 2007 (2006 - $740,746,000).
The aggregate amount of overdrafts in demand deposit accounts
that were reclassified to loans was $144,000,000 as of December
31, 2007 (2006 - $135,764,000).
Note 14 - Federal funds purchased and assets sold
Note 14 - Federal funds purchased and assets sold
Note 14 - Federal funds purchased and assets sold
Note 14 - Federal funds purchased and assets sold
Note 14 - Federal funds purchased and assets sold
under agreements to repurchase:
under agreements to repurchase:
under agreements to repurchase:
under agreements to repurchase:
under agreements to repurchase:
The following table summarizes certain information on federal
funds purchased and assets sold under agreements to repurchase
at December 31:
(Dollars in thousands)
2007
2006
2005
Federal funds purchased
Assets sold under
agreements to repurchase
Total amount outstanding
Maximum aggregate balance
outstanding at any month-end
Average monthly aggregate
balance outstanding
Weighted average interest rate:
For the year
At December 31
$303,492
$1,276,818
$1,500,575
5,133,773
$5,437,265
4,485,627
$5,762,445
7,201,886
$8,702,461
$6,942,722
$8,963,244
$8,883,733
$5,644,863
$7,290,853
$7,430,174
5.24%
4.40
5.03%
5.12
3.61%
4.22
The following table presents the liability associated with the
repurchase transactions (including accrued interest), their
maturities and weighted average interest rates. Also, it includes
the carrying value and approximate market value of the collateral
(including accrued interest) as of December 31, 2007 and 2006.
The information excludes repurchase agreement transactions
which were collateralized with securities or other assets held-for-
trading purposes or which have been obtained under agreements
to resell:
2007
Repurchase
liability
Carrying value
of collateral
Market value
of collateral
(Dollars in thousands)
Weighted
average
interest rate
$173,924
173,924
$173,826
173,826
$173,826
173,826
4.31%
4.31
79
844,189
716,972
632,460
558
866,577
736,239
717,494
558
866,577
736,239
717,494
2,193,700
2,320,868
2,320,868
17,257
51,225
60,069
538,440
666,991
57,747
611,385
304,416
175,099
15,568
54,844
43,442
523,265
637,119
61,080
641,017
305,086
200,535
15,568
54,844
43,442
523,265
637,119
61,080
641,017
305,086
200,535
1,148,647
1,207,718
1,207,718
216,311
216,311
331,131
331,131
331,131
331,131
3.84
4.69
4.58
4.34
4.55
3.84
4.97
2.75
4.19
4.11
3.84
4.99
5.33
4.37
4.93
5.54
5.54
$4,399,573
$4,670,662
$4,670,662
4.62%
U.S. Treasury
securities
After 30 to 90 days
Obligations of
U.S. government
sponsored entities
Overnight
Within 30 days
After 30 to 90 days
After 90 days
Mortgage-backed
securities
Overnight
Within 30 days
After 30 to 90 days
After 90 days
Collateralized mortgage
obligations
Overnight
Within 30 days
After 30 to 90 days
After 90 days
Loans
Within 30 days
2006
Repurchase
liability
Carrying value
of collateral
Market value
of collateral
(Dollars in thousands)
$182,721 $179,717 $179,717
239,623
239,623
245,169
419,340
419,340
427,890
310,970
824,313
704,362
383,639
316,302
834,329
715,041
421,510
316,302
834,329
715,041
421,510
2,223,284
2,287,182
2,287,182
45,319
31,903
50,045
465,447
592,714
53,201
281,146
232,083
566,430
110,087
147,513
257,600
51,601
34,449
44,699
435,756
566,505
61,755
288,715
244,418
594,888
183,038
150,724
333,762
51,601
34,449
44,699
435,756
566,505
61,755
288,715
244,418
594,888
183,038
150,724
333,762
U.S. Treasury
securities
Within 30 days
After 30 to 90 days
Obligations of
U.S. government
sponsored entities
Overnight
Within 30 days
After 30 to 90 days
After 90 days
Mortgage-backed
securities
Overnight
Within 30 days
After 30 to 90 days
After 90 days
Collateralized mortgage
obligations
Overnight
Within 30 days
After 90 days
Loans
Overnight
Within 30 days
Weighted
average
interest rate
5.21%
5.22
5.21
5.28
5.30
5.26
4.50
5.15
3.16
5.32
2.32
4.22
4.03
3.16
5.33
4.66
4.85
5.90
5.80
5.84
$4,067,918
$4,201,677
$4,201,677
4.99%
2007 Annual Report 107
2007
2007
Popular, Inc. 2007
2007
Note 15 - Other short-term borrowings:
Note 15 - Other short-term borrowings:
Note 15 - Other short-term borrowings:
Note 15 - Other short-term borrowings:
Note 15 - Other short-term borrowings:
Other short-term borrowings as of December 31, consisted of:
2007 2006
(Dollars in thousands)
Advances with FHLB paying interest monthly
at a fixed rate of 4.63% (2006 - 5.39% to 5.40%)
Advances with FHLB paying interest at maturity
at fixed rates ranging from 4.38% to 4.58%
Advances under credit facilities with other
institutions at:
- fixed rates ranging from 4.59% to 5.50%
(2006 - 5.38% to 5.65%)
- floating rates ranging from 0.45% to 0.75% over
the 1-month LIBOR rate (1-month LIBOR rate at
December 31, 2006 was 5.32%)
- a floating rate of 0.20% over
the 3-month LIBOR rate (3-month LIBOR rate at
December 31, 2006 was 5.36%)
Commercial paper at rates ranging from 4.25% to 5.00%
(2006 - 4.80% to 5.44%)
Term funds purchased at:
- fixed rates of 4.92% (2006 - 5.30% to 5.38%)
- floating rates ranging from 0.06% to 0.08% over the fed funds rate
(Fed funds rate at December 31, 2006 was 5.38%)
Others
$72,000
$230,000
570,000
-
487,000
386,000
-
-
481,062
10,000
7,329
193,383
280,000
2,140,900
-
85,650
500,000
92,780
$1,501,979
$4,034,125
The weighted average interest rate of other short-term
borrowings at December 31, 2007 was 4.74% (2006 - 5.36%;
2005 - 4.31%). The maximum aggregate balance outstanding at
any month-end was approximately $3,797,270,000 (2006 -
$4,034,125,000; 2005 - $3,370,943,000). The average
aggregate balance outstanding during the year was approximately
$3,040,801,000 (2006-$3,386,308,000;2005-$2,897,243,000).
The weighted average interest rate during the year was 5.00%
(2006 - 4.50%; 2005 - 2.89%).
Note 17 presents additional information with respect to
available credit facilities.
108
Note 16 - Notes payable:
Note 16 - Notes payable:
Note 16 - Notes payable:
Note 16 - Notes payable:
Note 16 - Notes payable:
Notes payable outstanding at December 31, consisted of the
following:
The aggregate amounts of maturities of notes payable at
December 31, 2007 were as follows:
2007
2006
Year
(In thousands)
(Dollars in thousands)
Advances with FHLB:
- with maturities ranging from 2008 through 2018 paying
interest at fixed rates ranging from 2.51% to 6.98%
(2006 - 2.44% to 6.98%)
- maturing in 2007 paying interest quarterly at the
3-month LIBOR rate less 0.04%
(3-month LIBOR rate at December 31, 2006 was 5.36%)
- maturing in 2007 paying interest monthly at the
1-month LIBOR rate plus 0.02%
(1-month LIBOR rate at December 31, 2006 was 5.32%)
- maturing in 2008 paying interest monthly at a floating rate
of 0.0075% over the 1-month LIBOR rate (1-month LIBOR
rate at December 31, 2007 was 4.60%; 2006 - 5.32%)
Advances under revolving lines of credit maturing in 2007
paying interest monthly at a floating rate of 0.90%
over the 1-month LIBOR rate (1-month LIBOR rate at
December 31, 2006 was 5.32%)
Advances under revolving lines of credit with maturities
ranging form 2008 through 2009 paying interest quarterly at
florating rates ranging from of 0.20% to 0.35% (0.35% -
December 31, 2006) over the 3-month LIBOR rate (3-month
LIBOR rate at December 31, 2007 was 4.70%; 2006 - 5.36%)
Term notes with maturities ranging from 2008
through 2012 paying interest semiannually at
fixed rates ranging from 3.60% to 6.85%
(2006 - 3.25% to 5.65%)
Term notes maturing in 2030 paying interest monthly
$813,958
$289,881
-
-
6,000
5,000
250,000
250,000
-
426,687
110,000
69,994
2,038,259
2,014,928
at fixed rates ranging from 3.00% to 6.00%
3,100
3,100
Term notes with maturities ranging from 2008 through
2013 paying interest monthly at floating rates of 3.00%
over the 10-year U.S. treasury notes rate (10-year
U.S. treasury notes rate at December 31, 2007
was 4.03%; 2006 - 4.70%)
Term notes with maturities until 2009 paying
interest quarterly at a floating rate of 0.40%
(2006 - 0.35% to 0.40%) over the 3-month
LIBOR rate (3-month LIBOR rate at December 31, 2007
was 4.70%; 2006 - 5.36%)
Secured borrowings with maturities ranging from 2009
through 2032 paying interest monthly at fixed rates
ranging from 6.04% to 7.04% (2006 - 3.52% to 7.12%)
Secured borrowings with maturities ranging from 2008
through 2046 paying interest monthly at rates ranging
from 0.32% to 3.12% (2006 - 0.10% to 3.50%) over the
1-month LIBOR rate(1-month LIBOR rate at
December 31, 2007 was 4.60%; 2006 - 5.32%)
Notes linked to the S&P 500 Index maturing in 2008
Junior subordinated deferrable interest debentures
with maturities ranging from 2027 through 2034 with
fixed interest rates ranging from 6.13% to 8.33%
(Refer to Note 18)
Other
6,805
10,428
199,706
349,295
59,241
2,695,916
227,743
36,498
1,708,650
36,112
849,672
26,370
849,672
21,583
$4,621,352
$8,737,246
2008
2009
2010
2011
2012
Later years
Total
Notes
Payable
$1,490,227
1,037,361
264,748
154,197
500,249
1,174,570
$4,621,352
Note 17 - Unused lines of credit and other funding
Note 17 - Unused lines of credit and other funding
Note 17 - Unused lines of credit and other funding
Note 17 - Unused lines of credit and other funding
Note 17 - Unused lines of credit and other funding
s o u r c e s :
s o u r c e s :
s o u r c e s :
s o u r c e s :
s o u r c e s :
At December 31, 2007, the Corporation had borrowing facilities
available with the Federal Home Loan Banks (FHLB) whereby the
Corporation could borrow up to approximately $2,569,498,000
based on the assets pledged with the FHLB at that date (2006 -
$897,269,000). Refer to Notes 15 and 16 for the amounts of FHLB
advances outstanding under these facilities at December 31, 2007
and 2006.
The FHLB advances are collateralized with investment
securities and mortgage loans, do not have restrictive covenants
and do not have callable features. The maximum borrowing
potential with the FHLB is dependent on certain restrictive
computations determined by the FHLB and which are dependent
on the amount and type of assets available for collateral, among
the principal factors. The available lines of credit with the FHLB
included in this note are based on the assets pledged as collateral
with the FHLB as of the end of the years presented. At December
31, 2007 and 2006, the FHLB advances had no callable features.
Also, at December 31, 2007, there were $35,000,000 in putable
advances with fixed rates ranging from 5.34% to 6.55% and
maturities extending up to 2010 (2006 - $35,000,000). The FHLB
has the option to convert the putable advances before maturity on
any given conversion date to an adjustable rate advance of
predetermined index for the remaining term to maturity, at the
FHLB’s discretion.
At December 31, 2007, the Corporation maintained a
committed line of credit with an unaffiliated bank under formal
agreement that provides for financing of consumer loans. The
maximum committed amount under this credit facility amounted
to $86,500,000 at December 31, 2007. The full amount was drawn
under the credit facility at December 31, 2007 and is included in
Note 14 to the consolidated financial statements in the category
of repurchase agreements. The interest rate charged on these
borrowings is based on LIBOR plus a spread. This credit facility
requires compliance with certain financial and non-financial
2007 Annual Report 109
2007
2007
Popular, Inc. 2007
2007
commercial paper program. As of December 31, 2007, this short-
term credit facility had been terminated.
Note 18 – Trust preferred securities:
Note 18 – Trust preferred securities:
Note 18 – Trust preferred securities:
Note 18 – Trust preferred securities:
Note 18 – Trust preferred securities:
At December 31, 2007 and 2006, the Corporation had established
four trusts for the purpose of issuing trust preferred securities
(the “capital securities”) to the public. The proceeds from such
issuances, together with the proceeds of the related issuances of
common securities of the trusts (the “common securities”), were
used by the trusts to purchase junior subordinated deferrable interest
debentures (the “junior subordinated debentures”) issued by the
Corporation. The sole assets of the trusts consisted of the junior
subordinated debentures of the Corporation and the related accrued
interest receivable. These trusts are not consolidated by the
Corporation under FIN No. 46 (R).
The junior subordinated debentures are included by the
Corporation as notes payable in the consolidated statements of
condition. The Corporation also recorded in the caption of other
investment securities in the consolidated statements of condition,
the common securities issued by the issuer trusts. The common
securities of each trust are wholly-owned, or indirectly wholly-
owned, by the Corporation.
covenants. As of December 31, 2007, the Corporation was in
breach of a tangible net worth covenant, but received a written
waiver for the covenant violation. This collateralized credit facility
was paid in full in early 2008.
In 2007, the Corporation entered into a master repurchase
agreement to finance the loan portfolio of PFH. This agreement
provides a maximum committed amount of $500,000,000 as of
December 31, 2007. The full amount, subject to collateralization
requirements under the credit line, was available for use as of such
date. The Corporation paid a commitment fee of $5,000,000
during 2007, which is being amortized to interest expense during
the term of the agreement. This agreement has a termination date
in November 2008. The interest rate charged is based on LIBOR
plus a spread. This credit facility requires compliance with certain
financial and non-financial covenants. As of December 31, 2007,
the Corporation was in compliance with all financial covenants.
Popular, Inc. and Popular North America holding companies serve
as guarantors under the agreement.
As of December 31, 2006, the Corporation maintained
committed lines of credit under formal agreements for the financing
of auto, mortgage and consumer loans. As of such date, the
maximum committed amount available under these lines of credit
approximated $1,810,000,000, of which $1,022,847,000 was
outstanding. At December 31, 2006, the amount outstanding was
distributed in the statement of condition within the categories of
repurchase agreements (Note 14), advances under credit facilities
with other institutions (Note 15) and advances under revolving
lines of credit (Note 16). Borrowings under these facilities are
collateralized by the related mortgage, consumer or auto loans
being financed or their security interests. These committed lines
of credit expired or had renewal dates in 2007.
The Corporation has established a borrowing facility at the
discount window of the Federal Reserve Bank of New York. At
December 31, 2007, the borrowing capacity at the discount
window approximated $3,004,752,000, which remained unused
at December 31, 2007 (2006 - $2,935,472,000). The facility is a
collateralized source of credit that is highly reliable even under
difficult market conditions. The amount available under this line
is dependent upon the balance of loans and securities pledged as
collateral.
At December 31, 2006, the Corporation and its subsidiary
Popular North America had obtained a committed credit facility
from a syndicate of institutions (the lenders). Under this credit
facility, which required the payment of facility and utilization
fees, the Corporation could have requested the lenders to extend
credit in the form of revolving loans, in an aggregate principal
amount at any time outstanding not in excess of $555,000,000.
This facility could had been used for general corporate purposes
and also served as a backup facility to the Corporation’s
110
Financial data pertaining to the trusts follows:
(Dollars in thousands, including reference notes)
BanPonce
Trust I
Popular North
Popular Capital America Capital Popular Capital
Trust I Trust I Trust II
February 1997 October 2003
$300,000
6.700%
$9,279
$144,000
8.327%
$4,640
September 2004 November 2004
$130,000
6.125%
$4,021
$250,000
6.564%
$7,732
Issuer
Issuance date
Capital securities
Distribution rate
Common securities
Junior subordinated
debentures aggregate
liquidation amount
$148,640
$309,279
$257,732
$134,021
Stated maturity
date
February 2027 November 2033 September 2034 December 2034
Reference notes (a),(c),(e),(f),(g) (b),(d),(f) (a),(c),(f) (b),(d),(f)
(a) Statutory business trust that is wholly-owned by Popular North America (PNA)
and indirectly wholly-owned by the Corporation.
(b) Statutory business trust that is wholly-owned by the Corporation.
(c) The obligations of PNA under the junior subordinated debentures and its
guarantees of the capital securities under the trust are fully and unconditionally
guaranteed on a subordinated basis by the Corporation to the extent set forth in the
applicable guarantee agreement.
(d) These capital securities are fully and unconditionally guaranteed on a
subordinated basis by the Corporation to the extent set forth in the applicable
guarantee agreement.
(e) The original issuance was for $150,000. The Corporation had reacquired $6,000 of
the 8.327% capital securities.
(f) The Corporation has the right, subject to any required prior approval from the
Federal Reserve, to redeem after certain dates or upon the occurrence of certain
events mentioned below, the junior subordinated debentures at a redemption price
equal to 100% of the principal amount, plus accrued and unpaid interest to the date
of redemption. The maturity of the junior subordinated debentures may be
shortened at the option of the Corporation prior to their stated maturity dates (i) on
or after the stated optional redemption dates stipulated in the agreements, in whole
at any time or in part from time to time, or (ii) in whole, but not in part, at any time
within 90 days following the occurrence and during the continuation of a tax event,
an investment company event or a capital treatment event as set forth in the indentures
relating to the capital securities, in each case subject to regulatory approval. A capital
treatment event would include a change in the regulatory capital treatment of the
capital securities as a result of the recent accounting changes affecting the criteria for
consolidation of variable interest entities such as the trust under FIN 46(R).
(g) Same as (f) above, except that the investment company event does not apply for
early redemption.
_______________________________________________________________________
The Capital Securities of Popular Capital Trust I and Popular
Capital Trust II are traded on the NASDAQ under the symbols
“BPOPN” and “BPOPM”, respectively.
Note 19 - (Loss) earnings per common share:
Note 19 - (Loss) earnings per common share:
Note 19 - (Loss) earnings per common share:
Note 19 - (Loss) earnings per common share:
Note 19 - (Loss) earnings per common share:
The following table sets forth the computation of (loss) earnings
per common share (“EPS”), basic and diluted, for the years ended
December 31:
(In thousands, except share information)
Net (loss) income
Less: Preferred stock dividends
2007
($64,493)
11,913
2006
$357,676
11,913
2005
$540,702
11,913
Net (loss) income applicable to common stock
after cumulative effect of accounting change
Net (loss) income applicable to common stock
($76,406)
$345,763
$528,789
before cumulative effect of accounting change ($76,406)
$345,763
$525,182
Average common shares outstanding
Average potential common shares
Average common shares outstanding -
assuming dilution
Basic EPS before cumulative effect of
accounting change
Diluted EPS before cumulative effect of
accounting change
Basic EPS after cumulative effect of
accounting change
Diluted EPS after cumulative effect of
accounting change
279,494,150
-
278,468,552
235,372
267,334,606
504,412
279,494,150
278,703,924
267,839,018
($0.27)
($0.27)
($0.27)
($0.27)
$1.24
$1.24
$1.24
$1.24
$1.97
$1.96
$1.98
$1.97
Potential common shares consist of common stock issuable
under the assumed exercise of stock options and under restricted
stock awards, using the treasury stock method. This method
assumes that the potential common shares are issued and the
proceeds from exercise, in addition to the amount of compensation
cost attributed to future services, are used to purchase common
stock at the exercise date. The difference between the number of
potential shares issued and the shares purchased is added as
incremental shares to the actual number of shares outstanding to
compute diluted earnings per share. Stock options that result in
lower potential shares issued than shares purchased under the
treasury stock method are not included in the computation of
dilutive earnings per share since their inclusion would have an
antidilutive effect in earnings per share.
For year 2007, there were 2,431,830 weighted average
antidilutive stock options outstanding (2006 - 1,896,057; 2005
- 1,511,877).
Note 20 - Stockholders’’’’’ equity:
equity:
equity:
Note 20 - Stockholders
Note 20 - Stockholders
equity:
Note 20 - Stockholders
equity:
Note 20 - Stockholders
During the fourth quarter of 2005, existing shareholders of record
of the Corporation's common stock at November 7, 2005 fully
subscribed to an offering of 10,500,000 newly issued shares of
Popular, Inc.’s common stock at a price of $21.00 per share under
a subscription rights offering. This offering resulted in
$216,326,000 in additional capital, of which $175,271,000
impacted stockholders’ equity at December 31, 2005 and the
remainder impacted the Corporation’s financial condition in the
2007 Annual Report 111
2007
2007
Popular, Inc. 2007
2007
Note 21 - Regulatory capital requirements:
Note 21 - Regulatory capital requirements:
Note 21 - Regulatory capital requirements:
Note 21 - Regulatory capital requirements:
Note 21 - Regulatory capital requirements:
The Corporation and its banking subsidiaries are subject to
various regulatory capital requirements imposed 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 Federal
Reserve Bank and the other bank regulators have adopted
quantitative measures which assign risk weightings to assets
and off-balance sheet items and also define and set minimum
regulatory capital requirements. The regulations define well-
capitalized levels of Tier I, total capital and Tier I leverage of 6%,
10% and 5%, respectively. Management has determined that as of
December 31, 2007 and 2006, the Corporation exceeded all capital
adequacy requirements to which it is subject.
At December 31, 2007 and 2006, BPPR, BPNA and Banco
Popular, National Association (BP, N.A.) were well-capitalized
under the regulatory framework for prompt corrective action, and
there are no conditions or events since December 31, 2007 that
management believes have changed the institutions’ category.
The adjustment to capital as a result of the adoption of SFAS
No. 158 on December 31, 2006 did not impact the regulatory
capital ratios of the Corporation or any of its banking subsidiaries.
In December 2006, regulatory agencies announced an interim
decision that SFAS No. 158 would not affect regulatory capital of
banking organizations. This is the position taken by the
Corporation until the agencies issue the final rules.
The Corporation has been designated by the Federal Reserve
Board as a Financial Holding Company (“FHC”) and is eligible
to engage in certain financial activities permitted under the
Gramm-Leach-Bliley Act of 1999. FHC status is subject to certain
requirements including maintenance of the Corporation’s banking
subsidiaries’ status as being well-capitalized and well managed
and maintaining satisfactory CRA (“Community Reinvestment
Act”) ratings. There are no conditions or events since December
31, 2006 that management believes have changed the Corporation’s
FHC status.
first quarter of 2006. As of December 31, 2005, this subscription
rights offering resulted in 8,614,620 newly issued shares of
common stock; the remaining 1,885,380 were issued during the
first quarter of 2006.
The Corporation has a dividend reinvestment and stock
purchase plan under which stockholders may reinvest their
quarterly dividends in shares of common stock at a 5% discount
from the average market price at the time of issuance, as well as
purchase shares of common stock directly from the Corporation
by making optional cash payments at prevailing market prices.
The Corporation’s authorized preferred stock may be issued
in one or more series, and the shares of each series shall have such
rights and preferences as shall be fixed by the Board of Directors
when authorizing the issuance of that particular series. The
Corporation’s only outstanding class of preferred stock is its
6.375% noncumulative monthly income preferred stock, 2003
Series A. These shares of preferred stock are perpetual,
nonconvertible and are redeemable solely at the option of the
Corporation beginning on March 31, 2008. The redemption price
per share is $25.50 from March 31, 2008 through March 30,
2009, $25.25 from March 31, 2009 through March 30, 2010 and
$25.00 from March 31, 2010 and thereafter.
During the year 2007, cash dividends of $0.64 (2006 - $0.64;
2005 - $0.64) per common share outstanding amounting to
$178,938,000 (2006 - $178,231,000; 2005 - $170,970,000) were
declared. In addition, dividends declared on preferred stock
amounted to $11,913,000 (2006 - $11,913,000; 2005 -
$11,913,000). Dividends payable to shareholders of common stock
at December 31, 2007 was $44,849,000 (2006 - $44,614,000;
2005 - $42,791,000).
The Banking Act of the Commonwealth of Puerto Rico requires
that a minimum of 10% of BPPR’s net income for the year be
transferred to a statutory reserve account until such statutory
reserve equals the total of paid-in capital on common and preferred
stock. Any losses incurred by a bank must first be charged to
retained earnings and then to the reserve fund. Amounts credited
to the reserve fund may not be used to pay dividends without the
prior consent of the Puerto Rico Commissioner of Financial
Institutions. The failure to maintain sufficient statutory reserves
would preclude BPPR from paying dividends. BPPR’s statutory
reserve fund totaled $374,192,000 at December 31, 2007 (2006 -
$346,192,000; 2005 - $316,192,000). During 2007, $28,000,000
(2006 - $30,000,000; 2005 - $31,000,000) was transferred to the
statutory reserve account. At December 31, 2007, 2006 and 2005,
BPPR was in compliance with the statutory reserve requirement.
112
The Corporation’s risk-based capital and leverage ratios at
December 31, were as follows:
The following table also presents the minimum amounts and
ratios for the Corporation’s banks to be categorized as well-
capitalized under prompt corrective action:
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
2007
Actual
Capital adequacy minimum
requirement
Total Capital
(to Risk-Weighted Assets):
Corporation
BPPR
BPNA
Tier I Capital
(to Risk-Weighted Assets):
Corporation
BPPR
BPNA
Tier I Capital
(to Average Assets):
Corporation
BPPR
BPNA
$3,778,264
2,173,648
1,103,117
11.38%
11.15
10.32
$2,656,781
1,559,039
855,338
$3,361,132
1,498,030
976,878
10.12%
7.69
9.14
$1,328,391
779,519
427,669
$3,361,132
7.33%
1,498,030
5.82
976,878
7.55
$1,375,270
1,833,694
772,414
1,029,886
388,233
517,644
8%
8
8
4%
4
4
3%
4
3
4
3
4
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
2006
Actual
Capital adequacy minimum
requirement
Total Capital
(to Risk-Weighted Assets):
Corporation
BPPR
BPNA
Tier I Capital
(to Risk-Weighted Assets):
Corporation
BPPR
BPNA
Tier I Capital
(to Average Assets):
Corporation
BPPR
BPNA
$4,169,451
2,362,713
1,032,555
11.86%
12.81
11.04
$2,811,418
1,475,460
748,329
$3,727,860
1,700,583
944,506
10.61%
9.22
10.10
$1,405,709
737,730
374,165
$3,727,860
8.05%
1,700,583
6.90
944,506
7.91
$1,389,915
1,853,220
739,850
986,467
358,115
477,486
8%
8
8
4%
4
4
3%
4
3
4
3
4
(Dollars in thousands)
2007
2006
Amount
Ratio
Amount
Ratio
Total Capital
(to Risk-Weighted Assets):
BPPR
BPNA
Tier I Capital
(to Risk-Weighted Assets):
BPPR
BPNA
Tier I Capital
(to Average Assets):
BPPR
BPNA
$1,948,798
1,069,173
10%
10
$1,844,325
935,412
10%
10
$1,169,279
641,504
$1,287,357
647,055
6%
6
5%
5
$1,106,595
561,247
$1,233,083
596,858
6%
6
5%
5
Note 22 - Servicing assets:
Note 22 - Servicing assets:
Note 22 - Servicing assets:
Note 22 - Servicing assets:
Note 22 - Servicing assets:
The Corporation recognizes as assets the rights to service loans
for others, whether these rights are purchased or result from asset
transfers (sales and securitizations). Commencing in 2007 and in
accordance with SFAS No. 156, the Corporation no longer records
servicing rights in connection with on-balance sheet mortgage
loan securitizations.
Effective January 1, 2007, under SFAS No. 156, the Corporation
identified servicing rights related to residential mortgage loans
as a class of servicing rights and elected to apply fair value
accounting to these mortgage servicing rights (“MSRs”). These
MSRs are segregated between loans serviced by PFH and by the
Corporation’s banking subsidiaries. Fair value determination is
performed on a subsidiary basis, with assumptions varying in
accordance with the types of assets or markets served (i.e. PFH -
primarily subprime mortgage loans vs. banking subsidiaries –
primarily conforming loans).
Classes of servicing rights were determined based on the
different markets or types of assets served. Management also
considered trends in the markets and elections by other major
participants in the industries served in determining the accounting
methodology to be followed for the different types of servicing
rights.
Under the fair value accounting method of SFAS No. 156,
purchased MSRs and MSRs resulting from asset transfers are
capitalized and carried at fair value. Prior to the adoption of SFAS
No. 156, the Corporation capitalized purchased residential MSRs
at cost, and MSRs from asset transfers based on the relative fair
value of the servicing right and the residential mortgage loan at
2007 Annual Report 113
2007
2007
Popular, Inc. 2007
2007
the time of sale. Prior to SFAS No. 156, both purchased MSRs and
MSRs from asset transfers were accounted for at quarter-end at the
lower of cost or market value.
Residential mortgage loans serviced for others were
$20,509,655,000 at December 31, 2007 (2006 -
$13,267,700,000; 2005 - $9,164,361,000).
The changes in amortized MSR's for the years ended December
31, 2006 and 2005 were as follows:
(In thousands)
Balance at beginning of year
Rights originated
Rights purchased
Amortization
Balance at end of year
Less: Valuation allowance
Balance at end of year, net of valuation allowance
Fair value at end of year
2006
$137,701
62,877
23,769
(63,202)
161,145
1,006
$160,139
$175,469
2005
$54,326
103,092
5,039
(24,756)
137,701
951
$136,750
$150,627
Included in the table above were $11,207,000 in rights
originated and $2,796,000 in amortization corresponding to the
activity for the month of December 2005 for PFH, which changed
its fiscal year in the first quarter of 2006, as described in Note 1
to the consolidated financial statements.
The activity in the valuation allowance for impairment of
recognized servicing assets for the years ended December 31,
2006 and 2005 was as follows:
(In thousands)
Balance at beginning of year
Additions charged to operations
Reductions credited to operations
Balance at end of year
2006
2005
$951
536
(481)
$1,006
$920
362
(331)
$951
Net mortgage servicing fees, a component of other service
fees in the consolidated statement of income, include the changes
from period to period in fair value of the MSRs, which may result
from changes in the valuation model inputs or assumptions
(principally reflecting changes in discount rates and prepayment
speed assumptions) and other changes, representing changes due
to collection / realization of expected cash flow. Prior to the
adoption of SFAS No. 156, the Corporation carried residential
MSRs at the lower cost of market, with amortization of MSRs and
changes in the MSRs valuation allowance recognized in net
mortgage servicing fees.
Effective January 1, 2007, upon the remeasurement of the MSRs
at fair value in accordance with SFAS No. 156, the Corporation
recorded a cumulative effect adjustment to increase the 2007
beginning balance of MSRs by $15,330,000, which resulted in a
$9,574,000, net of tax, increase in the retained earnings account
of stockholders’ equity. The table below reconciles the balance of
MSRs as of December 31, 2006 and January 1, 2007.
(In thousands)
Residential MSRs Residential MSRs Total
Banking subsidiaries
PFH
Balance at December 31, 2006
Remeasurement upon adoption of
$77,801
$82,338
$160,139
SFAS No. 156 (a)
15,330
Balance at January 1, 2007
$175,469
(a) The remeasurement effect, net of deferred taxes, amounted to $9.6 million
on a consolidated basis.
13,630
$91,431
1,700
$84,038
At the end of each quarter, the Corporation uses a discounted
cash flow model to estimate the fair value of MSRs, which is
benchmarked against third party opinions of fair value. The
discounted cash flow model incorporates assumptions that market
participants would use in estimating future net servicing income,
including estimates of prepayment speeds, discount rate, cost to
service, escrow account earnings, contractural servicing fee
income, prepayment and late fees, among other considerations.
The Corporation uses assumptions in the model that it believes
are comparable to those used by brokers or other service providers.
Refer to Note 23 to the consolidated financial statements for
information on assumptions used in the valuation model of MSRs
as of December 31, 2007.
The changes in mortgage servicing assets for the year ended
December 31, 2007 were as follows:
Banking subsidiaries
PFH
(In thousands)
Fair value at January 1, 2007
Purchases
Servicing from securitizations or
asset transfers
Changes due to payments on
loans (1)
Changes in fair value due to
Residential MSRs Residential MSRs Total
$91,431
4,256
$84,038
22,251
$175,469
26,507
22,817
26,048
48,865
(9,117)
(35,516)
(44,633)
changes in valuation model inputs
or assumptions
(14,530)
(54)
Other changes
Fair value at December 31, 2007
$191,624
(1) Represents changes due to collection / realization of expected cash flows over
time.
1,213
12
$110,612
(15,743)
(66)
$81,012
114
The changes in servicing rights associated with Small Business
Administration (“SBA”) commercial loans, the other class of
servicing assets held by the Corporation, will continue to be
accounted for at the lower of cost or market method as follows:
(In thousands)
Balance at beginning of year
Rights originated
Rights purchased
Amortization
Balance at end of year
Less: Valuation allowance
Balance at end of year, net of valuation allowance $5,021
$7,324
Fair value at end of year
2007
$4,860
2,051
3
(1,893)
$5,021
-
2006
$4,739
2,534
-
(2,413)
$4,860
-
$4,860
$7,705
2005
$3,777
1,972
-
(1,010)
$4,739
-
$4,739
$7,200
SBA loans serviced for others were $527,241,000 at December
31, 2007 (2006 - $477,869,000; 2005 - $367,352,000).
N o t e 2 3 - R e t a i n e d i n t e r e s t s o n t r a n s f e r s o f
N o t e 2 3 - R e t a i n e d i n t e r e s t s o n t r a n s f e r s o f
N o t e 2 3 - R e t a i n e d i n t e r e s t s o n t r a n s f e r s o f
N o t e 2 3 - R e t a i n e d i n t e r e s t s o n t r a n s f e r s o f
N o t e 2 3 - R e t a i n e d i n t e r e s t s o n t r a n s f e r s o f
f i n a n c i a l a s s e t s :
f i n a n c i a l a s s e t s :
f i n a n c i a l a s s e t s :
f i n a n c i a l a s s e t s :
f i n a n c i a l a s s e t s :
During the years ended December 31, 2007 and 2006, the
Corporation retained servicing responsibilities and other residual
interests on various securitization transactions and whole loan
sales of residential mortgage and commercial loans performed by
various subsidiaries. Valuation methodologies used in determining
the fair value of the retained interests, including servicing assets
and residual assets, are disclosed in Note 1 to the consolidated
financial statements.
Popular Financial Holdings
During 2007 and 2006, the Corporation, through its subsidiary
PFH, retained mortgage servicing rights (“MSRs”) and residual
interests on mortgage loan securitizations.
During 2007, the Corporation conducted one off-balance sheet
asset securitization that involved the transfer of mortgage loans
to a qualifying special purpose entity (“QSPE”), which in turn
transferred these assets and their titles to different trusts, thus
isolating those loans from the Corporation’s assets. Approximately
$460,767,000 in adjustable (“ARM”) and fixed-rate loans were
securitized and sold by PFH during 2007 as part of this off-balance
sheet asset securitization and PFH realized a gain on sale of
approximately $13,466,000. As part of this transaction, the
Corporation initially recognized MSRs of $8,040,000 and residual
interests of $4,667,000. Also, in December 2007, the Corporation
completed the recharacterization of certain on-balance sheet
securitizations that allowed the Corporation to recognize the
transactions as sales under SFAS No. 140.
From 2001 through 2006, the Corporation conducted 21
mortgage loan securitizations that were sales for legal purposes
but did not qualify for sale accounting treatment at the time of
inception because the securitization trusts did not meet the
criteria for QSPEs contained in SFAS No. 140. As a result, the
transfers of the mortgage loans pursuant to these securitizations
were initially accounted for as secured borrowings with the
mortgage loans continuing to be reflected as assets on the
Corporation’s consolidated statement of financial condition with
appropriate footnote disclosure indicating that the mortgage loans
were, for legal purposes, sold to the securitization trusts.
As part of the Corporation’s strategy of exiting the subprime
business at PFH and improving the Corporation’s capital ratios,
on December 19, 2007, PFH and the trustee for each of the related
securitization trusts amended the provisions of the related pooling
and servicing agreements to delete the discretionary provisions
that prevented the Corporation from removing the loans from its
accounting books. These changes in the primary discretionary
provisions included:
• deleting the provision that grants the servicer “sole
discretion” to have the right to purchase for its own account
or for resale from the trust fund any loan which is 91 days or
more delinquent;
• deleting the provision that grants the servicer (PFH) “sole
discretion” to sell loans with respect to which it believes
default is imminent;
• deleting the provision that grants the servicer “sole
discretion” to determine whether an immediate sale of a
real estate owned (“REO”) property or continued
management of such REO property is in the best interest of
the certificateholders; and
• deleting the provision that grants the residual holder (PFH)
to direct the trustee to acquire derivatives post closing.
The Corporation obtained a legal opinion which among other
considerations indicated that each amendment (a) is authorized
or permitted under the pooling and servicing agreement related
to such amendment, and (b) will not adversely affect in any material
respect the interests of any certificateholders covered by the related
pooling and servicing agreement.
The amendments to the provisions of the pooling and servicing
agreement allowed the Corporation to recognize 16 out of the 21
transactions as sales under SFAS No. 140. When accounting for
the transfers as sales, the Corporation (i) reclassified the loans as
held-for-sale with the corresponding lower of cost or market
adjustment as of the date of the transfer, (ii) removed from the
Corporation’s books approximately $3,221,003,000 in mortgage
loans and $3,083,259,000 in related liabilities representing
secured borrowings, (iii) recognized assets referred to as residual
interests, which represent the fair value of residual interest
certificates that were issued by the securitization trusts and
retained by PFH, and (iv) recognized mortgage servicing rights,
which represent the fair value of PFH’s right to continue to service
2007 Annual Report 115
2007
2007
Popular, Inc. 2007
2007
been an adverse change in estimated cash flows (considering both
the timing and amount of flows), then residual interest security is
written down to fair value, which becomes the new amortized cost
basis. The Corporation recognized other-than-temporary
impairment losses on these residual interests of $45,379,000 for
the year ended December 31, 2007 (2006 - $17,761,000) and are
classified as part of net gain (loss) on sale and valuation adjustment
of investment securities in the consolidated statement of income.
During 2007, all declines in fair value in residual interests
classified as available-for-sale have been considered other-than-
temporary.
Commencing in January 2006 and as permitted by accounting
guidance, the residual interests derived from newly-issued PFH’s
off-balance sheet securitizations and from the recharacterization
previously described, were accounted as trading securities.
Management’s determination to prospectively classify the residual
interests as trading securities was driven by accounting
considerations and not by intent to actively trade these assets.
Trading securities are marked-to-market through earnings
(favorable and unfavorable value changes) as opposed to available-
for-sale securities in which the changes in value are recorded as
unrealized gains (losses) through equity, unless unfavorable
changes are considered other-than-temporary. The fair value
determinations for residual interests classified as trading securities
are also performed on a quarterly basis. Any valuation adjustment
related to these particular residual interests is reflected in earnings
as it occurs and is recorded as part of trading account profit (loss)
in the consolidated statements of operations. Residual interests
from PFH’s securitizations and recharacterization accounted for
as trading securities amounted to $40,197,000 at December 31,
2007 (2006 - $36,552,000). The Corporation recognized trading
losses on these residual interests of $39,661,000 for the year
ended December 31, 2007 (2006 - $970,000).
PFH receives average annual servicing fees based on a
percentage of the outstanding loan balance. In 2007, those average
fees were 0.50% for mortgage loans (2006 – 0.50%).
the mortgage loans transferred to the securitization trusts. As
part of the recharacterization, the Corporation recognized residual
interests of $38,308,000 and MSRs of $18,008,000. The
Corporation had previously recorded MSRs in several of these
securitization transactions and their outstanding fair value
approximated $17,505,000 at December 31, 2007. The impact of
the recharacterization transaction was a pre-tax loss of
$90,143,000, which is included in the caption “(Loss) gain on
sale of loans and valuation adjustments on loans held-for-sale” in
the consolidated statement of income.
During 2006, the Corporation conducted three off-balance
sheet asset securitizations that involved the transfer of mortgage
loans to QSPEs. Approximately $1,024,633,000 in ARM and fixed-
rate loans were securitized and sold by PFH during 2006, with a
gain on sale of approximately $18,849,000. As part of these
transactions, the Corporation initially recognized MSRs of
$18,542,000 and residual interests of $36,927,000.
When the Corporation transfers financial assets and the transfer
fails any one of the SFAS No. 140 criteria, the Corporation is not
permitted to derecognize the transferred financial assets and the
transaction is accounted for as a secured borrowing (“on-balance
sheet securitization”). The loans are included in Note 8 as pledged
loans held-in-portfolio.
The Corporation did not execute any on-balance sheet
securitization during 2007. During 2006, the Corporation
completed three on-balance sheet securitizations consisting of
approximately $1,163,619,000 in adjustable and fixed-rate
nonprime mortgage loans. As part of these transactions, the
Corporation recognized MSRs of $16,521,000.
Under SFAS No. 140, interest-only strips, retained interests
in securitizations or other financial assets that can contractually
be prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its investment shall be subsequently
measured like investments in debt securities classified as available-
for-sale or trading under SFAS No. 115.
Residual interests retained as part of off-balance sheet
securitizations of subprime mortgage loans prior to 2006 had
been classified as investment securities available-for-sale and are
presented at fair value in the consolidated statements of condition.
PFH’s residual interests classified as available-for-sale as of
December 31, 2007 amounted to $4,812,000 (2006 -
$49,413,000). The Corporation reviews the residual interests for
potential impairment on a quarterly basis and records impairment
in accordance with SFAS No. 115 and EITF 99-20. Management’s
basis in determining when these securities must be written down
to fair value due to other-than-temporary impairment is based on
EITF 99-20. Whenever the current fair value of the residual interests
classified as available-for-sale is lower than its current amortized
cost, management evaluates to see if an impairment charge for the
deficiency is required to be taken through earnings. If there has
116
Key economic assumptions used in measuring the retained
interests at the date of the securitization and recharacterization
transactions completed during the year ended December 31, 2007
were:
At December 31, 2007 and 2006, key economic assumptions
used to estimate the fair value of the residual interests and MSRs
derived from PFH’s securitizations and the sensitivity of residual
cash flows to immediate changes in those assumptions were as
follows:
MSRs
Residual
interests
Fixed-rate
loans
ARM
loans
Average prepayment
speed
20.7% to 28% 20.7% to 28% 30% to 35%
(Fixed-rate loans)
30% to 35%
(ARM loans)
Weighted average life
of collateral (in years)
6.8 years
4.2 years
2.6 years
Cumulative credit
losses
Discount rate
(annual rate)
4.21% to 13.13%
-
-
25% to 40%
17%
17%
In connection with the securitizations, PFH’s retained interests
are subordinated to investors’ interests. Their value is subject to
credit, prepayment and interest rate risks on the transferred
financial assets. The securitization related assets recorded in the
statements of condition at year-end were as follows:
(Dollars in thousands)
Carrying amount of retained interests
Fair value of retained interests
December 31, 2007
Residual
interests
$45,009
$45,009
MSRs
Fixed-rate
loans
$47,243
$47,243
ARM
loans
$11,335
$11,335
Weighted average collateral life (in years)
7.6 years
4.3 years
2.6 years
Weighted average prepayment speed
(annual rate)
20.7% (Fixed-rate
loans)
30% (ARM loans)
20.7%
30.0%
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
$5,031
($192)
$6,766
($886)
$272
$688
Weighted average discount rate (annual rate)
40.0%
17.0%
17.0%
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
($2,884)
($1,466)
($225)
($5,427)
($2,846)
($441)
(In thousands)
Residual interests
MSRs
Servicing advances
2007
$45,009
58,578
167,610
2006
$85,965
67,855
42,617
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
($8,829)
($15,950)
December 31, 2006
Cumulative credit losses
3.35% to 11.03%
-
-
-
-
-
-
(Dollars in thousands)
Carrying amount of retained interests
Fair value of retained interests
Weighted average collateral life (in years)
Residual
interests
$85,965
$85,965
3.2 years
MSRs
Fixed-rate
loans
$38,017
$37,815
3.1 years
ARM
loans
$29,838
$32,212
2.1 years
Weighted average prepayment speed
(annual rate)
28% (Fixed-rate loans)
35% (ARM loans)
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
($5,543)
($9,284)
Weighted average discount rate (annual rate)
17%
28%
35%
$210
$234
16%
($149)
($200)
16%
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
($4,172)
($901)
($542)
($8,081)
($1,761)
($1,060)
Cumulative credit losses
1.28% to 3.19%
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
($4,792)
($9,558)
-
-
-
-
-
-
2007 Annual Report 117
2007
2007
Popular, Inc. 2007
2007
PFH, as servicer, collects prepayment penalties on a substantial
portion of the underlying serviced loans. As such, an adverse
change in the prepayment assumptions with respect to the MSRs
could be partially offset by the benefit derived from the prepayment
penalties estimated to be collected.
The amounts included in the tables above exclude any
purchased MSRs since these assets were not derived from
securitizations or loan sales executed by the Corporation.
Certain cash flows received from and paid to securitization
trusts for the years ended December 31, 2007 and 2006, included:
(In thousands)
Servicing fees received
Servicing advances, net of
repayments
Other cash flows received
on retained interests
2007
$18,115
124,993
19,899
2006
$20,440
8,726
25,250
Banking subsidiaries
In addition, the Corporation’s banking subsidiaries retain
servicing responsibilities on the sale of wholesale mortgage loans
and loans guaranteed by the Small Business Administration
(“SBA”). Also, servicing responsibilities are retained under pooling
/ selling arrangements of mortgage loans into mortgage-backed
securities, primarily GNMA and FNMA securities. Substantially
all mortgage loans securitized by the banking subsidiaries have
fixed rates. Under these servicing agreements, the banking
subsidiaries do not earn significant prepayment penalties on the
underlying loans serviced.
Gains of $21,092,000 and $42,672,000 were realized by the
banking subsidiaries on the securitization transactions that met
the sale criteria under SFAS No. 140 and the whole loan sales
involving retained interests, which took place in 2007 and 2006,
respectively.
The banking subsidiaries receive average annual servicing
fees based on a percentage of the outstanding loan balance. In
2007, those weighted average fees were 0.26% for mortgage loans
(2006 - 0.27%) and 1.07% for SBA loans (2006 - 1.10%).
Key economic assumptions used in measuring the servicing
rights retained at the date of the securitizations and whole loan
sales by the banking subsidiaries were:
Residential Mortgage
Loans
SBA
Loans
2007
2006
2007
2006
Prepayment speed
Weighted average life (in years)
Discount rate (annual rate)
9.5%
10.6 years
10.7%
13.9%
8.3 years
10.2%
18.3%
17.0%
3.0 years 3.3 years
13.0%
13.0%
At December 31, 2007 and 2006, key economic assumptions
used to estimate the fair value of servicing rights derived from
transactions performed by the banking subsidiaries and the
sensitivity of residual cash flows to immediate changes in those
assumptions were as follows:
December 31, 2007
(Dollars in thousands)
Carrying amount of retained interests
Fair value of retained interests
Weighted average life (in years)
Weighted average prepayment speed (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Weighted average discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Residential
Mortgage Loans
$86,453
$86,453
12.5 years
8.0%
($1,983)
($3,902)
10.83%
($2,980)
($5,795)
December 31, 2006
(Dollars in thousands)
Carrying amount of retained interests
Fair value of retained interests
Weighted average life (in years)
Weighted average prepayment speed (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Weighted average discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Residential
Mortgage Loans
$62,784
$73,332
9.2 years
14.0%
($1,868)
($4,151)
10.3%
($2,142)
($4,200)
SBA Loans
$5,021
$7,324
3.0 years
18.3%
($348)
($706)
13.00%
($209)
($427)
SBA Loans
$4,860
$7,705
3.3 years
17.0%
($355)
($724)
13.0%
($235)
($479)
The amounts of MSRs presented in the table above exclude
purchased MSRs.
The expected credit losses for the residential mortgage loans
securitized / sold are minimal. Also, no credit losses are anticipated
on the retained servicing assets derived from the sale of SBA loans
since the participation sold is substantially guaranteed by SBA.
The sensitivity analyses presented in the tables above for
residual interests and servicing rights of PFH and the banking
subsidiaries are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10 and 20
percent variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in the sensitivity tables
included herein, the effect of a variation in a particular assumption
on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor
may result in changes in another (for example, increases in market
interest rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities.
118
Quantitative information about delinquencies, net credit
losses, and components of securitized financial assets and other
assets managed together with them by the Corporation for the
years ended December 31, 2007 and 2006, were as follows:
2007
Total principal Principal amount
amount of loans,
net of unearned
past due
60 days or more Net credit
(In thousands)
Loans (owned and managed):
Commercial
Lease financing
Mortgage
Consumer
Less:
Loans securitized / sold
Loans held-for-sale
Loans held-in-portfolio
(In thousands)
Loans (owned and managed):
Commercial
Lease financing
Mortgage
Consumer
Less:
Loans securitized / sold
Loans held-for-sale
Loans held-in-portfolio
losses
$78,557
15,027
160,319
186,173
losses
$38,322
13,883
67,478
118,906
$15,746,646
1,164,439
16,026,827
5,684,600
$478,067
18,653
1,325,228
141,142
(8,711,510)
(1,889,546)
$28,021,456
(760,931)
-
$1,202,159
(16,979)
-
$423,097
2006
Total principal Principal amount
amount of loans,
net of unearned
past due
60 days or more Net credit
$14,599,245
1,226,490
17,083,839
5,278,456
$186,257
35,083
927,036
117,976
(5,451,091)
(719,922)
$32,017,017
(204,701)
-
$1,061,651
(8,844)
-
$229,745
Under the GNMA securitizations, the Corporation, as servicer,
has the right to repurchase, at its option and without GNMA’s
prior authorization, any loan that is collateral for a GNMA
guaranteed mortgage-backed security when certain delinquency
criteria are met. At the time that individual loans meet GNMA’s
specified delinquency criteria and are eligible for repurchase, the
Corporation is deemed to have regained effective control over
these loans. At December 31, 2007, the Corporation had recorded
$41,564,000 in mortgage loans under this buy-back option
program (2006 - $24,822,000).
Note 24 - Employee benefits:
Note 24 - Employee benefits:
Note 24 - Employee benefits:
Note 24 - Employee benefits:
Note 24 - Employee benefits:
Pension and benefit restoration plans
Certain employees of BPPR and BPNA are covered by non-
contributory defined benefit pension plans. Pension benefits are
based on age, years of credited service, and final average
compensation.
BPPR’s non-contributory, defined benefit retirement plan is
currently closed to new hires and to employees who as of
December 31, 2005 were under 30 years of age or were credited
with less than 10 years of benefit service. The retirement plan’s
benefit formula is based on a percentage of average final
compensation and years of service. Normal retirement age under
the retirement plans is age 65 with 5 years of service. Pension
costs are funded in accordance with minimum funding standards
under the Employee Retirement Income Security Act of 1974
(“ERISA”). Benefits under the BPPR retirement plan are subject to
the U.S. Internal Revenue Code limits on compensation and benefits.
Benefits under restoration plans restore benefits to selected
employees that are limited under the retirement plan due to U.S.
Internal Revenue Code limits and a compensation definition that
excludes amounts deferred pursuant to nonqualified arrangements.
Effective April 1, 2007, the Corporation froze its non-
contributory, defined benefit retirement plan, which covered
substantially all salaried employees of BPNA hired before June 30,
2004. This plan was in the process of termination on December
31, 2007. These actions were also applicable to the related plan
that restored benefits to select employees that were limited under
the retirement plan.
The Corporation’s funding policy is to make annual
contributions to the plans in amounts which fully provide for all
benefits as they become due under the plans.
The Corporation’s pension fund investment strategy is to invest
in a prudent manner for the exclusive purpose of providing benefits
to participants. A well defined internal structure has been
established to develop and implement a risk-controlled investment
strategy that is targeted to produce a total return that, when
combined with the bank’s contributions to the fund, will maintain
the fund’s ability to meet all required benefit obligations. Risk is
controlled through diversification of asset types, such as
investments in domestic and international equities and fixed
income.
Equity investments include various types of stock and index
funds. Also, this category includes Popular, Inc.’s common stock.
Fixed income investments include U.S. Government securities
and other U.S. agencies’ obligations, corporate bonds, mortgage
loans, mortgage-backed securities and index funds, among others.
A designated committee, with the assistance of an external
consultant, periodically reviews the performance of the pension
plans’ investments and assets allocation. The Trustee and the
money managers are allowed to exercise investment discretion,
subject to limitations established by the pension plans’ investment
policies. The plans forbid money managers to enter into derivative
transactions, unless approved by the Trustee.
The overall expected long-term rate-of-return-on-assets
assumption reflects the average rate of earnings expected on the
funds invested or to be invested to provide for the benefits included
in the benefit obligation. The assumption has been determined by
reflecting expectations regarding future rates of return for the
plan assets, with consideration given to the distribution of the
investments by asset class and historical rates of return for each
2007 Annual Report 119
2007
2007
Popular, Inc. 2007
2007
individual asset class. This process is reevaluated at least on an
annual basis and if market, actuarial and economic conditions
change, adjustments to the rate of return may come into place.
The plans’ weighted-average asset allocations at December
31, by asset category were as follows:
Equity securities
Fixed income securities
Other
2007
69%
31
-
100%
2006
67%
31
2
100%
The plans’ target allocation for 2007 and 2006, by asset
category, approximated 70% in equity securities and 30% in
debt securities.
At December 31, 2007, these plans included 2,745,720 shares
(2006 - 2,745,720) of the Corporation’s common stock with a
market value of approximately $29,105,000 (2006 -
$49,286,000). Dividends paid on shares of the Corporation’s
common stock held by the plan during 2007 amounted to
$1,757,000 (2006 - $1,757,000).
As indicated in Note 1, the Corporation adopted SFAS No.
158 as of December 31, 2006. Under SFAS No. 158 each
overfunded plan is recognized as an asset and each underfunded
plan is recognized as a liability. The initial impact of the standard
due to unrecognized prior service costs or credits and net actuarial
gains or losses as well as subsequent changes in the funded status
was recognized as a component of accumulated comprehensive
loss in stockholders’ equity. Additional minimum pension
liabilities (“AMPL”) and related intangible assets were also
derecognized upon adoption of the new standard. The following
table summarizes the effect of required changes in the AMPL as of
December 31, 2006 prior to the adoption of SFAS No. 158 as well
as the impact of the initial adoption of SFAS No. 158.
Pension Plans:
December 31,
2006 prior
AMPL and
December 31,
2006 Post
AMPL and
SFAS
Benefit Restoration Plans:
December 31,
2006 prior to
AMPL and
December 31,
2006 Post
AMPL and
SFAS
(In thousands)
SFAS No. 158 AMPL
No. 158 SFAS No. 158
AdjustmentsAdjustment Adjustment Adjustment
Prepaid pension costs
Benefit liabilities
Accumulated other
$2,057
(5,634)
-
-
($2,057)
(6,507)
-
($12,141)
comprehensive loss
2,354
$1,539
8,564
12,457
The following table sets forth the aggregate status of the plans
and the amounts recognized in the consolidated financial
statements at December 31:
(In thousands)
Change in benefit obligation:
Benefit obligation
at beginning of year
Service cost
Interest cost
Curtailment gain
Actuarial (gain) loss
Benefits paid
Benefit obligations
at end of year
Change in plan assets:
Fair value of plan assets
at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at
Pension Plans
Benefit
Restoration Plans
2007
Total
$569,457
11,023
31,850
(1,291)
(30,314)
(25,392)
$29,619
898
1,677
(334)
(2,511)
(284)
$599,076
11,921
33,527
(1,625)
(32,825)
(25,676)
$555,333
$29,065
$584,398
$536,856
13,624
1,002
(25,392)
$17,477
2,053
1,154
(284)
$554,333
15,677
2,156
(25,676)
end of year
$526,090
$20,400
$546,490
Amounts recognized in
accumulated other
comprehensive loss
under SFAS No. 158:
Net prior service cost
Net loss
Accumulated other
$1,130
44,879
($356)
8,709
$774
53,588
comprehensive loss (AOCL)
$46,009
$8,353
$54,362
(In thousands)
SFAS No. 158 AMPL
No. 158 SFAS No. 158
AdjustmentsAdjustment Adjustment Adjustment
Reconciliation of net (liability) / asset:
Net (liability) / asset at beginning
Prepaid pension costs
Benefit liabilities
Accumulated other
comprehensive loss
$21,071
(4,595)
-
-
-
-
($21,071)
(28,007)
-
($32,602)
49,078
49,078
of year
($32,602)
($12,141)
($44,743)
Amount recognized in AOCL at
beginning of year, pre-tax
49,078
12,457
61,535
(Accrual) / prepaid at beginning
of year
Net periodic benefit (cost) / income
Additional benefit (cost) / income
Contributions
(Accrual) / prepaid at end of year
Amount recognized in AOCL
Net (liability) / asset at end of year
Accumulated benefit obligation
16,476
(959)
247
1,002
16,766
(46,009)
($29,243)
$512,238
316
(2,040)
258
1,154
(312)
(8,353)
($8,665)
$24,438
16,792
(2,999)
505
2,156
16,454
(54,362)
($37,908)
$536,676
Pension Plans
Benefit
Restoration Plans
2006
The change in accumulated other comprehensive loss
Total
(“AOCL”), pre-tax for the plans was as follows:
120
(In thousands)
Change in benefit obligation:
Benefit obligation
at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Transfer of obligation*
Benefit obligations
at end of year
Change in plan assets:
Fair value of plan assets
at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at
$567,154
12,509
30,558
(18,265)
(23,561)
1,062
$29,316
1,047
1,601
(983)
(300)
(1,062)
$596,470
13,556
32,159
(19,248)
(23,861)
-
$569,457
$29,619
$599,076
$509,457
49,037
1,923
(23,561)
$12,259
(20)
5,538
(300)
$521,716
49,017
7,461
(23,861)
end of year
$536,856
$17,477
$554,333
Amounts recognized in
accumulated other
comprehensive loss
under SFAS No. 158:
Net prior service cost
Net loss
Accumulated other
comprehensive loss
$1,340
47,738
($412)
12,869
$928
60,607
$49,078
$12,457
$61,535
Reconciliation of net (liability) asset:
Net (liability) asset at
beginning of year
Net periodic benefit cost
Contributions
Amount recognized in AOCL
Transfer of unrecognized amounts*
Net (liability) asset at end of year
Accumulated benefit obligation
$20,485
(5,289)
1,923
(49,078)
(643)
($32,602)
$504,976
($3,228)
(2,637)
5,538
(12,457)
643
($12,141)
$20,801
$17,257
(7,926)
7,461
(61,535)
-
($44,743)
$525,777
* Benefit obligations were transferred from the benefit restoration plans to the qualified retirement
plan due to removal of the compensation limit "sunset provisions" under the Pension Protection Act
of 2006. Pro-rata amounts of the unrecognized prior service costs and losses were also transferred.
(In thousands)
Pension Plans
Restoration Plans
Total
Accumulated other comprehensive
loss at January 1, 2007
$49,078
$12,457
$61,535
Benefit
Increase (decrease) in AOCL:
Recognized during the year:
Prior service (cost) / credit
Actuarial (losses) / gains
Ocurring during the year:
Net actuarial losses / (gains)
Total decrease in AOCL
Accumulated other comprehensive
(210)
250
(3,109)
(3,069)
56
(736)
(3,424)
(4,104)
(154)
(486)
(6,533)
(7,173)
loss at December 31, 2007
$46,009
$8,353
$54,362
The amounts in accumulated other comprehensive loss that
are expected to be recognized as components of net periodic
benefit cost (credit) during 2008 are as follows:
(In thousands)
Net prior service cost (credit)
Net loss
Pension Plans Benefit Restoration Plans
$266
(250)
($53)
686
Information for plans with an accumulated benefit obligation
in excess of plan assets for the years ended December 31, follows:
(In thousands)
Pension Plans
2006
2007
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$13,075
13,075
9,616
$13,721
9,318
8,075
Benefit
Restoration Plans
2006
2007
$29,065
24,438
20,400
$29,619
20,801
17,477
Information for plans with plan assets in excess of the
accumulated benefit obligation for the years ended December 31,
follows:
Of the total liabilities of the pension plans and benefit
restoration plans as of December 31, 2007, approximately
$3,459,000 and $294,000, respectively, were considered current
liabilities.
(In thousands)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Pension Plans
2007
$542,258
499,163
516,474
2006
$555,736
495,658
528,781
The actuarial assumptions used to determine benefit
obligations for the years ended December 31, were as follows:
Discount rate
Rate of compensation
2007
6.40% (P.R. Plan)
4.50% (U.S. Plan)*
2006
5.75%
increase - weighted average
4.20%
* A discount rate of 4.50% was used to remeasure liabilities under the U.S. retirement plan as of
January 31, 2007 to reflect plan freeze as of April 1, 2007 and pending plan termination.
4.60%
2007 Annual Report 121
2007
2007
Popular, Inc. 2007
2007
The actuarial assumptions used to determine the components
of net periodic pension cost for the years ended December 31,
were as follows:
The following benefit payments, attributable to past and
estimated future service, as appropriate, are expected to be paid:
(In thousands)
2008
2009
2010
2011
2012
2013 - 2017
Pension
$39,854
28,075
29,436
30,847
32,336
185,002
Benefit
Restoration Plans
$842
781
1,019
1,253
1,467
10,749
Postretirement health care benefits
In addition to providing pension benefits, BPPR provides certain
health care benefits for retired employees. Regular employees of
BPPR, except for employees hired after February 1, 2000, may
become eligible for health care benefits, provided they reach
retirement age while working for BPPR.
The adoption of SFAS No. 158 also impacted the accounting
for the postretirement health care benefits plan. The following
table summarizes the impact of the initial adoption of SFAS No.
158 on December 31, 2006.
(In thousands)
Postretirement liabilities
Accumulated other
comprehensive loss
December 31,
2006 prior
SFAS No. 158
adjustments
December 31,
2006 Post
SFAS No 158. SFAS No. 158
adjustment Adjustment
($126,881)
($7,725)
($134,606)
-
$7,725
$7,725
The amounts in accumulated other comprehensive loss that
are expected to be recognized as components of net periodic
benefit cost for the postretirement health care benefit plan during
2008 are as follows:
(In thousands)
Net prior service cost (credit)
($1,046)
Pension Plans
2006
2005
2007
Benefit
Restoration Plans
2005
2007 2006
Discount rate
5.75% (P.R. Plan) 5.50% 5.75%
5.75% 5.50% 5.75%
4.50% (U.S. Plan)
Expected return on
plan assets
Rate of compensation
8.00% 8.00% 8.00%
8.00% 8.00% 8.00%
increase - weighted average
4.80% 4.20% 5.10%
4.80% 4.20% 5.10%
The components of net periodic pension cost for the years
ended December 31, were as follows:
Pension Plans
Benefit
Restoration Plans
(In thousands)
2007
2006
2005
2007
2006
2005
Components of net
periodic pension cost:
Service cost
Interest cost
Expected return
on plan assets
Amortization of
asset obligation
Amortization of
prior service cost
Amortization of
net loss
Net periodic
cost (benefit)
Curtailment loss (gain)
Total cost
$11,023
31,850
$12,509
30,558
$15,274
29,873
$898
1,677
$1,047
1,601
$967
1,330
(42,121)
(39,901)
(40,674)
(1,473)
(1,056)
(843)
-
207
-
959
(247)
$712
-
177
1,946
5,289
-
$5,289
(862)
-
-
-
345
271
4,227
1,982
$6,209
(53)
(55)
(93)
991
1,100
719
2,040
(258)
$1,782
2,637
-
$2,637
2,080
(338)
$1,742
In October 2005, the Board of Directors of BPPR adopted an
amendment for the Puerto Rico Retirement and Tax Qualified
Retirement Restoration Plans to freeze benefits for all employees
under age 30 or who have less than 10 years of credited service
effective January 1, 2006. As part of the amendment, these
employees were 100% vested in their accrued benefit as of
December 31, 2005. The expense for these plans was remeasured
as of September 30, 2005 to consider this change using a discount
rate of 5.50%. Curtailment costs were considered for these plans
and are included as part of the December 31, 2005 disclosures. In
connection with the plan's change, these employees received a
base salary increase according to their age and years of service,
effective January 1, 2006.
During 2008, the Corporation expects to contribute
$3,359,000 to the pension plans and $2,302,000 to the benefit
restoration plans.
122
The status of the Corporation’s unfunded postretirement benefit
plan at December 31, was as follows:
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning
of the year
Service cost
Interest cost
Benefits paid
Actuarial gain
Benefit obligation at end of year
Funded status at end of year:
Benefit obligation at end of year
Fair value of plan assets
Funded status at end of year
Amounts recognized in
accumulated other
comprehensive loss
under SFAS No. 158:
Net prior service cost
Net loss
Accumulated other
2007
2006
$134,606
2,312
7,556
(6,434)
(11,994)
$126,046
$143,183
2,797
7,707
(6,304)
(12,777)
$134,606
($126,046)
-
($126,046)
($134,606)
-
($134,606)
($4,299)
1,076
($5,345)
13,070
comprehensive (income) loss
($3,223)
$7,725
Reconciliation of net (liability) / asset:
Net (liability) / asset at beginning of year
Amount recognized in accumulated other
comprehensive loss at beginning of year,
pre-tax
(Accrual) / prepaid at beginning of year
Net periodic benefit (cost) / income
Contributions
(Accrual) / prepaid at end of year
Amount recognized in accumulated other
comprehensive income (loss)
Net (liability) / asset at end of year
($134,606)
($122,769)
7,725
(126,881)
(8,822)
6,434
(129,269)
-
(122,769)
(10,416)
6,304
(126,881)
3,223
($126,046)
(7,725)
($134,606)
Of the total postretirement liabilities as of December 31, 2007,
approximately $6,284,000 were considered current liabilities.
The change in accumulated other comprehensive income, pre-
tax for the postretirement plan was as follows:
The weighted average discount rate used to determine the
components of net periodic postretirement benefit cost for the
year ended December 31, 2007 was 5.75% (2006 - 5.50%; 2005
- 5.75%).
The components of net periodic postretirement benefit cost
for the year ended December 31, were as follows:
(In thousands)
Service cost
Interest cost
Amortization of prior service benefit
Amortization of net loss
Total net periodic benefit cost
2007
2006
2005
$2,312
7,556
(1,046)
-
$8,822
$2,797
7,707
(1,046)
958
$10,416
$2,713
8,267
(1,046)
1,691
$11,625
The assumed health care cost trend rates at December 31, were
as follows:
To determine postretirement benefit obligation:
Initial health care cost trend rate
Ultimate health care cost trend rate
Year that the ultimate trend
rate is reached
To determine net periodic benefit cost:
Initial health care cost trend rate
Ultimate health care cost trend rate
Year that the ultimate trend
rate is reached
2007
8.00%
5.00%
2011
2007
9.00%
5.00%
2011
2006
9.00%
5.00%
2011
2006
10.00%
5.00%
2011
The Plan provides that the cost will be capped to 3% of the
annual health care cost increase affecting only those employees
retiring after February 1, 2001.
Assumed health care trend rates generally have a significant
effect on the amounts reported for a health care plan. A one-
percentage-point change in assumed health care cost trend rates
would have the following effects:
(In thousands)
Accumulated other comprehensive loss at January 1, 2007
Increase (decrease) in accumulated other comprehensive income (loss):
Recognized during the year:
Prior service (cost) / credit
Ocurring during the year:
Net actuarial losses (gains)
Total decrease in accumulated other comprehensive loss
Accumulated other comprehensive income at December 31, 2007
$7,725
(In thousands)
Effect on total service cost and
interest cost components
1,046
Effect on postretirement
benefit obligation
1-Percentage
Point Increase
1-Percentage
Point Decrease
$436
6,100
($379)
(5,300)
(11,994)
($10,948)
($3,223)
The Corporation expects to contribute $6,284,000 to the
postretirement benefit plan in 2008 to fund current benefit payment
requirements.
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation at December 31,
2007 was 6.40% (2006 - 5.75%).
2007 Annual Report 123
2007
2007
Popular, Inc. 2007
2007
The Corporation’s policy has been to use authorized but unissued
shares of common stock to cover each grant. The maximum
option term is ten years from the date of grant. Unless an option
agreement provides otherwise, all options granted are 20%
exercisable after the first year and an additional 20% is exercisable
after each subsequent year, subject to an acceleration clause at
termination of employment due to retirement.
The following table presents information on stock options as
of December 31, 2007:
Exercise
Price
Range
per Share
$14.39 - $18.50
$19.25 - $27.20
Options
Outstanding
1,511,613
1,580,579
Weighted-
Average
Exercise
Price of
Options
Outstanding
$15.81
$25.27
Weighted-
Average
Remaining
Life of Options
Outstanding
in Years
4.73
6.50
Options
Exercisable
(fully vested)
1,394,068
1,008,413
Weighted-
Average
Exercise
Price of
Options
Exercisable
$15.73
$25.02
$14.39 - $27.20
3,092,192
$20.64
5.63
2,402,481
$19.63
The aggregate intrinsic value of options outstanding as of
December 31, 2007 was $7,311,000 (2006 - $24,097,000). There
was no intrinsic value of options exercisable as of December 31,
2007 (2006 - $2,642,000).
The following table summarizes the stock option activity and
related information:
Outstanding at January 1, 2005
Granted
Exercised
Forfeited
Outstanding at December 31, 2005
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2006
Granted
Exercised
Forfeited
Expired
Options
Outstanding
2,584,620
707,342
(47,858)
(20,401)
3,223,703
-
(39,449)
(37,818)
(1,637)
3,144,799
-
(10,064)
(19,063)
(23,480)
Weighted-Average
Exercise Price
$18.76
27.20
16.14
22.18
$20.63
-
15.78
23.75
24.05
$20.65
-
15.83
25.50
20.08
Outstanding at December 31, 2007
3,092,192
$20.64
The stock options exercisable at December 31, 2007 totaled
2,402,481 (2006 - 1,949,522; 2005 - 1,501,447). The cash
received from the stock options exercised during the year ended
December 31, 2007 amounted to $159,000. The total intrinsic
value of options exercised during the year ended December 31,
2007 was $28,000 (2006 - $86,000; 2005 - $247,000).
The following benefit payments, attributable to past and
estimated future service, as appropiate, are expected to be paid:
(In thousands)
2008
2009
2010
2011
2012
2013 - 2017
$6,284
6,628
6,939
7,223
7,458
41,915
Savings plans
The Corporation also provides contributory savings plans
pursuant to Section 1165(e) of the Puerto Rico Internal Revenue
Code and Section 401(k) of the U.S. Internal Revenue Code, as
applicable, 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 five years of service. The cost of providing
these benefits in 2007 was $17,383,000 (2006 - $27,306,000;
2005 - $32,975,000).
The plans held 14,972,919 (2006 - 14,483,925; 2005 -
15,950,027) shares of common stock of the Corporation with a
market value of approximately $158,713,000 at December 31,
2007 (2006 - $259,986,000; 2005 - $337,343,000).
Note 25 - Stock-based compensation:
Note 25 - Stock-based compensation:
Note 25 - Stock-based compensation:
Note 25 - Stock-based compensation:
Note 25 - Stock-based compensation:
The Corporation maintained a Stock Option Plan (the “Stock
Option Plan”), which permitted the granting of incentive awards
in the form of qualified stock options, incentive stock options,
or non-statutory stock options of the Corporation. In April 2004,
the Corporation’s shareholders adopted the Popular, Inc. 2004
Omnibus Incentive Plan (the “Incentive Plan”), which replaced
and superseded the Stock Option Plan. Nevertheless, all
outstanding award grants under the Stock Option Plan continue
to remain in effect at December 31, 2007 under the original terms
of the Stock Option Plan.
Stock Option Plan
Employees and directors of the Corporation or any of its
subsidiaries were eligible to participate in the Stock Option Plan.
The Board of Directors or the Compensation Committee of the
Board had the absolute discretion to determine the individuals
that were eligible to participate in the Stock Option Plan. This
plan provides for the issuance of Popular, Inc.’s common stock at
a price equal to its fair market value at the grant date, subject to
certain plan provisions. The shares are to be made available from
authorized but unissued shares of common stock or treasury stock.
124
The fair value of these options was estimated on the date of the
grants using the Black-Scholes Option Pricing Model. The
weighted average assumptions used for the grant issued during
2005 was:
Expected dividend yield
Expected life of options
Expected volatility
Risk-free interest rate
Weighted average fair value
of options granted (per option)
2005
2.56%
10 years
17.54%
4.16%
$5.95
There were no new stock option grants issued by the
Corporation under the Stock Option Plan during 2007 and 2006.
During the year ended December 31, 2007, the Corporation
recognized $1,763,000 in stock options expense, with a tax
benefit of $700,000 (2006 - $3,006,000, with a tax benefit of
$1,221,000; 2005 - $5,226,000, with a tax benefit of $2,095,000).
The total unrecognized compensation cost at December 31, 2007
related to non-vested stock option awards was $1,674,000 and is
expected to be recognized over a weighted-average period of 1.3
years.
Incentive Plan
The Incentive Plan permits the granting of incentive awards in
the form of Annual Incentive Awards, Long-term Performance Unit
Awards, Options, Stock Appreciation Rights, Restricted Stock,
Restricted Units, or Performance Shares. Participants in the
Incentive Plan are designated by the Compensation Committee of
the Board of Directors (or its delegate as determined by the Board).
Employees and directors of the Corporation and / or any of its
subsidiaries are eligible to participate in the Incentive Plan. The
shares may be made available from common stock purchased by
the Corporation for such purpose, authorized but unissued shares
of common stock or treasury stock. The Corporation’s policy
with respect to the shares of restricted stock has been to purchase
such shares in the open market to cover each grant.
Under the Incentive Plan, the Corporation has issued only
restricted shares, which become vested based on the employees’
continued service with Popular. The compensation cost associated
with the shares of restricted stock is estimated based on a two-
prong vesting schedule, unless otherwise stated in an agreement.
The first part is vested ratably over five years commencing at the
date of grant and the second part is vested at termination of
employment after attainment of 55 years of age and 10 years of
service. The five-year vesting part is accelerated at termination
of employment after attaining 55 years of age and 10 years of
service.
Beginning in 2007, the Corporation authorized the issuance
of performance shares, in addition to restricted shares, under a
long-term incentive plan. The perfomance shares award consists
of the opportunity to receive shares of Popular Inc.’s common
stock provided the Corporation achieves certain perfomance goals
during a 3-year perfomance cycle. The compensation cost
associated with the perfomance shares will be recorded ratably
over a three-year perfomance period. The performance shares will
be granted at the end of the three-year period and will be vested at
grant date. As of December 31, 2007, no shares have been granted
under this plan.
The following table summarizes the restricted stock activity
under the Incentive Plan and related information to members of
management:
Nonvested at January 1, 2005
Granted
Vested
Forfeited
Nonvested at January 1, 2006
Granted
Vested
Forfeited
Nonvested at December 31, 2006
Granted
Vested
Forfeited
Nonvested at December 31, 2007
Restricted
Stock
-
172,622
-
-
172,622
444,036
-
(5,188)
611,470
-
(304,003)
(3,781)
303,686
Weighted-Average
Grant Date Fair Value
-
$27.65
-
-
$27.65
20.54
-
19.95
$22.55
-
22.76
19.95
$22.37
During the year ended December 31, 2007, no shares of
restricted stock were awarded to management under the Incentive
Plan (2006 - 444,036; 2005 - 172,622).
During the year ended December 31, 2007, the Corporation
recognized $2,432,000 of restricted stock expense related to
management incentive awards, with an income tax benefit of
$944,000 (2006 - $2,296,000, with a tax benefit of $898,000;
2005 - $3,998,000, with a tax benefit of $1,524,000). The fair
market value of the restricted stock was $1,538,000 at grant
date and $1,286,000 at vesting date. This difference triggers a
shortfall of $252,000 that was recorded as an additional income
tax expense since the Corporation does not have any pool of
windfall tax benefit. The fair market value at grant date of the
restricted stocks earned was $5,383,000. The total unrecognized
compensation cost related to non-vested restricted stock awards
was $3,984,000 and is expected to be recognized over a weighted-
average period of 2.8 years.
2007 Annual Report 125
2007
2007
Popular, Inc. 2007
2007
The following table summarizes the restricted stock activity
under the Incentive Plan and related information to members of
the Board of Directors:
Note 27 - Income tax:
Note 27 - Income tax:
Note 27 - Income tax:
Note 27 - Income tax:
Note 27 - Income tax:
The components of income tax expense for the years ended
December 31, are summarized below.
(In thousands)
2007
2006
2005
Current income tax expense:
Puerto Rico
Federal and States
Subtotal
Deferred income tax (benefit) expense:
Puerto Rico
Federal and States
Subtotal
Total income tax (benefit) expense
$157,436
7,302
164,738
(11,982)
(211,758)
(223,740)
($59,002)
$131,687
2,848
134,535
(6,596)
(21,053)
(27,649)
$113,888
38,162
152,050
(10,986)
7,851
(3,135)
$106,886
$148,915
The reasons for the difference between the income tax expense
applicable to income before provision for income taxes and the
amount computed by applying the statutory tax rate in Puerto
Rico, were as follows:
2007
2006
2005
% of
pre-tax
loss
% of
pre-tax
income Amount
% of
pre-tax
income
Amount
(Dollars in thousands)
Amount
Computed income tax at
statutory rates
($48,163)
39% $202,084
43.5% $284,694
41.5%
Benefits of net tax exempt
interest income
Effect of income subject to
capital gain tax rate
Non deductible goodwill
(60,304)
(24,555)
49
20
(70,250)
(15)
(78,216)
(11)
(2,426)
(1)
(24,612)
(4)
impairment
57,544
(47)
Difference in tax rates due to
multiple jurisdictions
27,038
(22)
(12,549)
States taxes
and other
(10,562)
9
(9,973)
(3)
(2)
(14,886)
(2)
(18,065)
(3)
Income tax (benefit) expense ($59,002)
48% $106,886
22.5% $148,915
21.5%
Nonvested at January 1, 2005
Granted
Vested
Forfeited
Nonvested at January 1, 2006
Granted
Vested
Forfeited
Nonvested at December 31, 2006
Granted
Vested
Forfeited
Nonvested at December 31, 2007
Restricted
Stock
20,802
29,208
(3,062)
-
46,948
32,267
(2,601)
-
76,614
38,427
(115,041)
-
-
Weighted-Average
Grant Date Fair Value
$23.51
23.71
23.87
-
$23.61
19.82
23.54
-
$22.02
15.89
19.97
-
-
During the year ended December 31, 2007, the Corporation
granted 38,427 (2006 - 32,267; 2005 - 29,208) shares of restricted
stock to members of the Board of Directors of Popular, Inc. and
BPPR, which became vested at grant date. During this period, the
Corporation recognized $538,000 of restricted stock expense
related to these restricted stock grants, with a tax benefit of
$210,000 (2006 - $570,000, with a tax benefit of $222,000;
2005 - $635,000, with a tax benefit of $247,000). The fair value
of all restricted stocks outstanding as of December 31, 2007 was
$2,196,000.
Note 26 - Rental expense and commitments:
Note 26 - Rental expense and commitments:
Note 26 - Rental expense and commitments:
Note 26 - Rental expense and commitments:
Note 26 - Rental expense and commitments:
At December 31, 2007, the Corporation was obligated under a
number of noncancelable leases for land, buildings, and equipment
which require rentals (net of related sublease rentals) as follows:
Year
2008
2009
2010
2011
2012
Later years
Minimum
payments
Sublease
rentals
Net
(In thousands)
$49,018
40,231
33,957
28,785
26,205
202,742
$380,938
$2,169
1,842
1,331
1,260
997
4,452
$12,051
$46,849
38,389
32,626
27,525
25,208
198,290
$368,887
Total rental expense for the year ended December 31, 2007
was $84,515,000 (2006 - $70,562,000; 2005 - $62,395,000),
w h i c h i s i n c l u d e d i n n e t o c c u p a n c y , e q u i p m e n t a n d
communication expenses, according to their nature.
126
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and their tax bases. Significant
components of the Corporation’s deferred tax assets and liabilities
at December 31, were as follows:
likelihood of its realization. Based on the information available,
the Corporation expects to fully realize all other items comprising
the net deferred tax asset as of December 31, 2007.
The net operating loss carryforwards (“NOLs”) outstanding at
December 31, 2007 expire as follows:
2007
2006
(In thousands)
(In thousands)
Deferred tax assets:
Tax credits available for carryforward
Net operating loss and donation
carryforward available
Deferred compensation
Postretirement and pension benefits
Unrealized net loss on trading and
available-for-sale securities
Deferred loan origination fees
Allowance for loan losses
Amortization of intangibles
Unearned income
Deferred gains
Unrealized loss on derivatives
Basis difference related to securitizations
treated as sales for tax and borrowings
for books
Intercompany deferred gains
Other temporary differences
Total gross deferred tax assets
Deferred tax liabilities:
Differences between the assigned
values and the tax bases of assets
and liabilities recognized in purchase
business combinations
Unrealized net gain on trading and
available for sale securities
Deferred loan origination costs
Accelerated depreciation
Amortization of intangibles
Unrealized gain on derivatives
Other temporary differences
Total gross deferred tax liabilities
Valuation allowance
Net deferred tax asset
The net deferred tax asset shown in the table above at December
31, 2007 is reflected in the consolidated statements of condition
as $525,369,000 in deferred tax assets (in the “other assets”
caption) (2006 - $359,433,000) and $5,398,000 in deferred tax
liabilities (in the “other liabilities” caption) (2006 - $23,000),
reflecting the aggregate deferred tax assets or liabilities of
individual tax-paying subsidiaries of the Corporation.
At December 31, 2007, the Corporation had total credits of
$20,132,000 that will reduce the regular income tax liability in
future years expiring in annual installments through the year 2016.
A valuation allowance of $39,000 is reflected in 2007 and
2006, related to deferred tax assets arising from temporary
differences for which the Corporation could not determine the
$20,132
$23,568
175,349
4,993
62,548
-
8,333
214,544
-
1,488
16,355
932
66,105
17,017
14,204
602,000
17,254
19,367
9,938
10,346
8,819
-
16,266
81,990
39
35,327
4,452
71,277
51,417
5,766
200,155
168
1,218
-
-
7,588
16,369
19,725
437,030
38,546
-
24,112
12,037
-
258
2,628
77,581
39
$519,971
$359,410
2013
2014
2016
2017
2018
2019
2021
2022
2023
2026
2027
$1,573
1,832
7,263
8,542
14,640
1
76
971
1,248
495
138,708
$175,349
Under the Puerto Rico Internal Revenue Code, the Corporation
and its subsidiaries are treated as separate taxable entities and are
not entitled to file consolidated tax returns. The Code provides a
dividend received deduction of 100% on dividends received from
“controlled” subsidiaries subject to taxation in Puerto Rico and
85% on dividends received from other taxable domestic
corporations.
The Corporation has never received any dividend payments
from its U.S. subsidiaries. Any such dividend paid from a U.S.
subsidiary to the Corporation would be subject to a 10%
withholding tax based on the provisions of the U.S. Internal
Revenue Code. The Corporation’s U.S. subsidiaries (which are
considered foreign under Puerto Rico income tax law) have never
remitted retained earnings. The Corporation considers the
reinvestment of such earnings permanent. The Corporation’s
subsidiaries in the United States file a consolidated return. As of
December 31, 2007, the Corporation had no current or
accumulated earnings and profits on its combined U.S.
subsidiaries’ operations and, accordingly, the recognition of a
deferred tax liability was not considered necessary.
The Corporation’s subsidiaries in the United States file a
consolidated federal income tax return. The Corporation’s federal
income tax (benefit) provision for 2007 was ($196,462,000) (2006
- $26,994,000; 2005 - $34,571,000). The intercompany
settlement of taxes paid is based on tax sharing agreements which
generally allocate taxes to each entity based on a separate return
basis.
The transitory provision approved by the Government of Puerto
Rico which increased the statutory tax rate for corporations expired
in year 2007, accordingly, the maximum rate is 39%.
2007 Annual Report 127
2007
2007
Popular, Inc. 2007
2007
The Corporation adopted FIN 48 effective January 1, 2007.
The initial adoption of FIN 48 had no impact on the Corporation’s
financial statements since management determined that there was
no need to recognize changes in the liability for unrecognized
tax benefits.
The reconciliation of unrecognized tax benefits, including
accrued interest, was as follows:
(In millions)
Balance as of January 1, 2007
Additions for tax positions related
to the current year
Additions for tax positions of
prior years
Reductions for tax positions of
prior years
Balance as of December 31, 2007
Total
$20.4
5.9
0.2
(4.3)
$22.2
As of December 31, 2007, the related accrued interest
approximated $2,900,000. Management determined that as of
December 31, 2007 there was no need to accrue for the payment of
penalties. The Corporation’s policy is to report interest related to
unrecognized tax benefits in income tax expense, while the
penalties, if any, are reported in other operating expenses in the
consolidated statements of operations.
After consideration of the effect on U.S. federal tax of
unrecognized U.S. state tax benefits, the total amount of
unrecognized tax benefits, including U.S. and Puerto Rico that,
if recognized, would affect the Corporation’s effective tax rate,
was approximately $20,900,000 as of December 31, 2007.
The amount of unrecognized tax benefits may increase or
decrease in the future for various reasons including adding amounts
for current tax year positions, expiration of open income tax
returns due to the statutes of limitation, changes in management’s
judgment about the level of uncertainty, status of examinations,
litigation and legislative activity, and the addition or elimination
of uncertain tax positions.
The Corporation and its subsidiaries file income tax returns
in Puerto Rico, the U.S. federal jurisdiction, various U.S. states
and political subdivisions, and foreign jurisdictions. As of
December 31, 2007, the following years remain subject to
examination: U.S. Federal jurisdiction – 2005 and 2006 and Puerto
Rico – 2003 through 2006. The U.S. Internal Revenue Service
(“IRS”) commenced an examination of the Corporation’s U.S.
operations tax return for 2005 that is anticipated to be finished
by the first quarter of 2008. As of December 31, 2007, the IRS has
not proposed any adjustment as a result of the audit. Although the
outcome of tax audits is uncertain, the Corporation believes that
adequate amounts of tax, interest, and penalties have been provided
for any adjustments that are expected to result from open years.
The Corporation does not anticipate a significant change to the
total amount of unrecognized tax benefits within the next 12
months.
- O f f - b a l a n c e s h e e t a c t i v i t i e s a n d
- O f f - b a l a n c e s h e e t a c t i v i t i e s a n d
- O f f - b a l a n c e s h e e t a c t i v i t i e s a n d
- O f f - b a l a n c e s h e e t a c t i v i t i e s a n d
- O f f - b a l a n c e s h e e t a c t i v i t i e s a n d
N o t e 2 8
N o t e 2 8
N o t e 2 8
N o t e 2 8
N o t e 2 8
concentration of credit risk:
concentration of credit risk:
concentration of credit risk:
concentration of credit risk:
concentration of credit risk:
Off-balance sheet risk
The Corporation is a party to financial instruments with off-
balance sheet credit risk in the normal course of business to meet
the financial needs of its customers. These financial instruments
include loan commitments, letters of credit, and standby letters
of credit. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized
in the consolidated statements of condition.
The Corporation’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit and
financial guarantees written is represented by the contractual
notional amounts of those instruments. The Corporation uses the
same credit policies in making these commitments and conditional
obligations as it does for those reflected on the consolidated
statements of condition.
Financial instruments with off-balance sheet credit risk at
December 31, whose contract amounts represent potential credit
risk were as follows:
(In thousands)
Commitments to extend credit:
2007
2006
Credit card lines
Commercial lines of credit
Other unused credit commitments
Commercial letters of credit
Standby letters of credit
Commitments to originate mortgage loans
$3,143,717
4,259,851
506,680
25,584
174,080
112,704
$2,896,090
4,329,664
508,815
20,689
180,869
547,695
Commitments to extend credit
Contractual commitments to extend credit are legally binding
agreements to lend money to customers for a specified period of
time. To extend credit, the Corporation evaluates each customer’s
creditworthiness. The amount of collateral obtained, if deemed
necessary, is based on management’s credit evaluation of the
counterparty. Collateral held varies but may include cash, accounts
receivable, inventory, property, plant and equipment and
investment securities, among others. Since many of the loan
commitments may expire without being drawn upon, the total
commitment amount does not necessarily represent future cash
requirements.
Letters of credit
There are two principal types of letters of credit: commercial and
standby letters of credit. The credit risk involved in issuing
128
letters of credit is essentially the same as that involved in extending
loan facilities to customers.
value of derivative instruments refer to Note 30 to the consolidated
financial statements.
In general, commercial letters of credit are short-term
instruments used to finance a commercial contract for the
shipment of goods from a seller to a buyer. This type of letter of
credit ensures prompt payment to the seller in accordance with
the terms of the contract. Although the commercial letter of credit
is contingent upon the satisfaction of specified conditions, it
represents a credit exposure if the buyer defaults on the underlying
transaction.
Standby letters of credit are issued by the Corporation to
disburse funds to a third party beneficiary if the Corporation’s
customer fails to perform under the terms of an agreement with the
beneficiary. These letters of credit are used by the customer as a
credit enhancement and typically expire without being drawn
upon.
Other commitments
At December 31, 2007, the Corporation also maintained other
non-credit commitments for $38,750,000, primarily for the
acquisition of other investments (2006 - $43,378,000).
Geographic concentration
As of December 31, 2007, the Corporation had no significant
concentrations of credit risk and no significant exposure to highly
leveraged transactions in its loan portfolio. Note 32 provides
further information on the asset composition of the Corporation
by geographical area as of December 31, 2007 and 2006.
Included in total assets of Puerto Rico are investments in
obligations of the U.S. Treasury and U.S. Government agencies
amounting to $5,397,104,000 and $5,439,152,000 in 2007 and
2006, respectively.
Note 29 - Disclosures about fair value of financial
Note 29 - Disclosures about fair value of financial
Note 29 - Disclosures about fair value of financial
Note 29 - Disclosures about fair value of financial
Note 29 - Disclosures about fair value of financial
i n s t r u m e n t s :
i n s t r u m e n t s :
i n s t r u m e n t s :
i n s t r u m e n t s :
i n s t r u m e n t s :
The fair value of financial instruments is the amount at which an
asset or obligation could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.
Fair value estimates are made at a specific point in time based on
the type of financial instrument and relevant market information.
Many of these estimates involve various assumptions and may
vary significantly from amounts that could be realized in actual
transactions.
The information about the estimated fair values of financial
instruments presented hereunder excludes all nonfinancial
instruments and certain other specific items.
Derivatives are considered financial instruments and their
carrying value equals fair value. For disclosures about the fair
For those financial instruments with no quoted market prices
available, fair values have been estimated using present value
calculations or other valuation techniques, as well as
management’s best judgment with respect to current economic
conditions, including discount rates, estimates of future cash
flows, and prepayment assumptions.
The fair values reflected herein have been determined based on
the prevailing interest rate environment as of December 31, 2007
and 2006, respectively. In different interest rate environments,
fair value estimates can differ significantly, especially for certain
fixed rate financial instruments. In addition, the fair values
presented do not attempt to estimate the value of the Corporation’s
fee generating businesses and anticipated future business
activities, that is, they do not represent the Corporation’s value
as a going concern. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate
the fair values of significant financial instruments at December
31, 2007 and 2006:
Short-term financial assets and liabilities have relatively short
maturities, or no defined maturities, and little or no credit risk.
The carrying amounts reported in the consolidated statements of
condition approximate fair value. Included in this category are:
cash and due from banks, federal funds sold and securities purchased
under agreements to resell, time deposits with other banks,
bankers acceptances, customers’ liabilities on acceptances,
accrued interest receivable, federal funds purchased and assets
sold under agreements to repurchase, short-term borrowings,
acceptances outstanding and accrued interest payable. Resell and
repurchase agreements with long-term maturities are valued using
discounted cash flows based on market rates currently available
for agreements with similar terms and remaining maturities.
Trading and investment securities, except for investments
classified as other investment securities in the consolidated
statement of condition, are financial instruments that regularly
trade on secondary markets. The estimated fair value of these
securities was determined using either market prices or dealer
quotes, where available, or quoted market prices of financial
instruments with similar characteristics. Trading account
securities and securities available-for-sale are reported at their
respective fair values in the consolidated statements of condition
since they are marked-to-market for accounting purposes. These
instruments are detailed in the consolidated statements of condition
and in Notes 4, 5 and 30.
The estimated fair value for loans held-for-sale is based on
secondary market prices. The fair values of the loan portfolios
have been determined for groups of loans with similar characteristics.
Loans were segregated by type such as commercial, construction,
residential mortgage, consumer, and credit cards. Each loan
category was further segmented based on loan characteristics,
including repricing term and pricing. The fair value of most
fixed-rate loans was estimated by discounting scheduled cash
flows using interest rates currently being offered on loans with
similar terms. For variable rate loans with frequent repricing terms,
fair values were based on carrying values. Prepayment assumptions
have been applied to the mortgage and installment loan portfolio.
The fair value of the loans was also reduced by an estimate of
credit losses in the portfolio. Generally accepted accounting
principles do not require, and the Corporation has not performed
a fair valuation of its lease financing portfolio, therefore it is
included in the loans total at its carrying amount.
The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, NOW, and money
market accounts is, for purposes of this disclosure, equal to the
amount payable on demand as of the respective dates. The fair
value of certificates of deposit is based on the discounted value of
contractual cash flows, using interest rates currently being offered
on certificates with similar maturities.
Long-term borrowings were valued using discounted cash
flows, based on market rates currently available for debt with
similar terms and remaining maturities and in certain instances
using quoted market rates for similar instruments at December
31, 2007 and 2006, respectively.
Commitments to extend credit were valued using the fees
currently charged to enter into similar agreements. For those
commitments where a future stream of fees is charged, the fair
value was estimated by discounting the projected cash flows of
fees on commitments, which are expected to be disbursed, based
on historical experience. The fair value of letters of credit is based
on fees currently charged on similar agreements.
2007 Annual Report 129
2007
2007
Popular, Inc. 2007
2007
Carrying or notional amounts, as applicable, and estimated
fair values for financial instruments at December 31, were:
2007
2006
Carrying
amount
Fair
value
Carrying
amount
Fair
value
$1,825,537
767,955
$1,825,537
767,955
$1,251,866
382,325
$1,251,866
382,325
8,515,135
8,515,135
9,850,862
9,850,862
484,466
486,139
91,340
92,764
216,585
1,889,546
27,472,624
216,819
1,983,502
27,511,573
297,394
719,922
31,494,785
412,593
737,439
31,448,328
$28,334,478
303,492
$28,432,009
303,492
$24,438,331
1,276,818
$24,416,523
1,276,818
5,133,773
1,501,979
4,621,352
Notional
amount
5,149,571
1,501,979
4,536,434
4,485,627
4,034,125
8,737,246
Fair
value
Notional
amount
4,474,171
4,034,125
8,647,942
Fair
value
(In thousands)
Financial Assets:
Cash and money market
investments
Trading securities
Investment securities
available-for-sale
Investment securities
held-to-maturity
Other investment
securities
Loans held-for-sale
Loans held-in-porfolio, net
Financial Liabilities:
Deposits
Federal funds purchased
Assets sold under
agreements to repurchase
Short-term borrowings
Notes payable
(In thousands)
Commitments to extend
credit and letters
of credit:
Commitments to extend
credit
Letters of credit
199,664
1,960
201,558
$7,910,248
$17,199
$7,734,569
$19,110
1,935
N o t e 3 0 - D e r i v a t i v e i n s t r u m e n t s a n d h e d g i n g
N o t e 3 0 - D e r i v a t i v e i n s t r u m e n t s a n d h e d g i n g
N o t e 3 0 - D e r i v a t i v e i n s t r u m e n t s a n d h e d g i n g
N o t e 3 0 - D e r i v a t i v e i n s t r u m e n t s a n d h e d g i n g
N o t e 3 0 - D e r i v a t i v e i n s t r u m e n t s a n d h e d g i n g
a c t i v i t i e s :
a c t i v i t i e s :
a c t i v i t i e s :
a c t i v i t i e s :
a c t i v i t i e s :
The discussion and tables below provide a description of the
derivative instruments used as part of the Corporation’s interest
rate risk management strategies. The Corporation incorporates
the use of derivative instruments as part of the overall interest rate
risk management strategy to minimize significant unplanned
fluctuations in earnings and cash flows that are caused by interest
rate volatility. The Corporation’s goal is to manage interest rate
sensitivity by modifying the repricing or maturity characteristics
of certain balance sheet assets and liabilities so that the net interest
income is not, on a material basis, adversely affected by movements
in interest rates. The Corporation uses derivatives in its trading
activities to facilitate customer transactions, to take proprietary
positions and as means of risk management. As a result of interest
rate fluctuations, hedged fixed and variable interest rate assets
and liabilities will appreciate or depreciate in market value. The
effect of this unrealized appreciation or depreciation is expected
to be substantially offset by the Corporation’s gains or losses on
2 0 0 6
N o t i o n a l D e r i v a t i v e D e r i v a t i v e E q u i t y
Amount
Assets
Liabilities
OCI
Ineffectiveness
(In thousands)
Asset Hedges
Forward commitments
$190,000
$175
$2
$106
Liability Hedges
Interest rate swaps
Total
$390,000
$580,000
$887
$1,062
$523
$525
$237
$343
-
-
The Corporation utilizes forward contracts to hedge the sale
of mortgage-backed securities with duration terms over one
month. Interest rate forwards are contracts for the delayed delivery
of securities, which the seller agrees to deliver on a specified
future date at a specified price or yield. These securities are
hedging a forecasted transaction and thus qualify for cash flow
hedge accounting in accordance with SFAS No. 133, as amended.
Changes in the fair value of the derivatives are recorded in other
comprehensive income. The amount included in accumulated other
comprehensive income corresponding to these forward contracts
is expected to be reclassified to earnings in the next twelve months.
These contracts have a maximum remaining maturity of 78 days.
During 2006, the Corporation entered into interest rate swap
contracts to convert floating rate debt to fixed rate debt with the
objective of minimizing the exposure to changes in cash flows
due to changes in interest rates. These interest rate swaps have a
maximum remaining maturity of 1.3 years.
For cash flow hedges, gains and losses on derivative contracts
that are reclassified from accumulated other comprehensive income
to current period earnings are included in the line item in which
the hedged item is recorded and in the same period in which the
forecasted transaction affects earnings.
Fair Value Hedges
At December 31, 2007 and 2006, there were no derivatives
designated as fair value hedges.
130
the derivative instruments that are linked to these hedged assets
and liabilities. As a matter of policy, the Corporation does not use
highly leveraged derivative instruments for interest rate risk
management.
By using derivative instruments, the Corporation exposes
itself to credit and market risk. If a counterparty fails to fulfill its
performance obligations under a derivative contract, the
Corporation’s credit risk will equal the fair value gain in a
derivative. Generally, when the fair value of a derivative contract
is positive, this indicates that the counterparty owes the
Corporation, thus creating a repayment risk for the Corporation.
When the fair value of a derivative contract is negative, the
Corporation owes the counterparty and, therefore, assumes no
repayment risk. To manage the level of credit risk, the Corporation
deals with counterparties of good credit standing, enters into
master netting agreements whenever possible and, when
appropriate, obtains collateral. Credit risk related to derivatives
was not significant at December 31, 2007 and 2006. The
Corporation has not incurred any losses from counterparty
nonperformance on derivatives.
Market risk is the adverse effect that a change in interest
rates, currency exchange rates, or implied volatility rates might
have on the value of a financial instrument. The Corporation
manages the market risk associated with interest rates, and to a
limited extent, with fluctuations in foreign currency exchange
rates, by establishing and monitoring limits for the types and
degree of risk that may be undertaken. The Corporation regularly
measures this risk by using static gap analysis, simulations and
duration analysis.
The Corporation’s treasurers and senior finance officers at the
subsidiaries are responsible for evaluating and implementing
hedging strategies that are developed through analysis of data
derived from financial simulation models and other internal and
industry sources. The resulting hedging strategies are then
incorporated into the Corporation’s overall interest rate risk
management and trading strategies. The resulting derivative
activities are monitored by the Corporate Treasury and Corporate
Comptroller’s areas within the Corporation.
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges
for the years ended December 31, 2007, and 2006 are presented
below:
2007
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Equity
OCI
Ineffectiveness
(In thousands)
Asset Hedges
Forward commitments
$142,700
$169
$509
($207)
Liability Hedges
Interest rate swaps
Total
$200,000
$342,700
-
$169
$3,179
$3,688
($2,066)
($2,273)
-
-
-
Trading and Non-Hedging Activities
The fair value and notional amounts of non-hedging derivatives
at December 31, 2007, and 2006 were:
December 31, 2007
Fair Values
Notional Amount Derivative Assets Derivative Liabilities
$693,096
$74
$3,232
(In thousands)
Forward contracts
Interest rate swaps
associated with:
- short-term borrowings
- bond certificates offered
in an on-balance sheet
securitization
- swaps with corporate
clients
- swaps offsetting position
of corporate client swaps
Credit default swap
Foreign currency and
exchange rate commitments
w/clients
Foreign currency and
exchange rate commitments
w/counterparty
Interest rate caps
Interest rate caps for benefit
of corporate clients
Index options on deposits
Index options on S&P notes
Bifurcated embedded options
Mortgage rate lock
commitments
Total
200,000
185,315
802,008
802,008
33,463
146
146
150,000
50,000
211,267
31,152
218,327
148,501
$3,525,429
-
-
-
24,593
-
-
2
27
-
45,954
5,962
-
258
$76,870
1,129
2,918
24,593
-
-
-
-
1
18
-
-
50,227
386
$82,504
2007 Annual Report 131
2007
2007
Popular, Inc. 2007
2007
December 31, 2006
Fair Values
Notional Amount Derivative Assets Derivative Liabilities
$1,277
83
$400,572
37,500
$125
46
400,000
2,153
-
(In thousands)
Forward contracts
Call options and put options
Interest rate swaps
associated with:
- short-term borrowings
- bond certificates offered
in an on-balance sheet
securitization
- financing of auto loans
held-in-portfolio
- auto loans approvals
locked interest rates
- swaps with corporate
clients
- swaps offsetting position
of corporate client swaps
- investment securities
- mortgage loans prior to
securitization
Credit default swap
Foreign currency and
516,495
470,146
17,442
410,533
410,533
89,385
75,000
33,463
90
728
22
-
2,146
-
302
-
exchange rate commitments
w/clients
Foreign currency and
exchange rate commitments
w/counterparty
Interest rate caps
Interest rate caps for benefit
of corporate clients
Index options on deposits
Index options on S&P notes
Bifurcated embedded options
Mortgage rate lock
commitments
Total
103
-
103
889,417
50,000
204,946
31,152
229,455
215,676
$4,481,921
2
4,099
-
38,323
5,648
-
13
$54,886
1,168
-
-
2,146
-
1,645
-
-
-
-
2
90
-
-
43,844
635
$49,701
Forward Contracts
The Corporation has forward contracts to sell mortgage-backed
securities with terms lasting less than a month, which were
accounted for as trading derivatives. Also, the Corporation has
loan sale commitments to economically hedge the changes in fair
value of mortgage loans held-for-sale and mortgage pipeline
associated with interest rate lock commitments through both
mandatory and best efforts forward sale agreements. These
contracts are recognized at fair value with changes directly
reported in income. These contracts are entered into in order to
optimize the gain on sales of loans and / or mortgage-backed
securities, given levels of interest rate risk consistent with the
Corporation’s business strategies.
Call Options and Put Options
The Corporation has option contracts that grant the purchaser
the right to buy or sell the underlying asset by a certain date at a
specified price.
132
Interest Rates Swaps and Foreign Currency and Exchange
Rate Commitments
The Corporation has outstanding interest rate swap derivative
contracts to economically hedge the cost of certain short-term
borrowings. Changes in their fair value are recognized in interest
expense.
The Corporation also has an interest rate swap to economically
hedge the payments of bond certificates offered as part of an on-
b a l a n c e s h e e t s e c u r i t i z a t i o n . T h e s w a p c o n t r a c t i s
marked-to-market and the resulting impact is recognized as part
of interest expense.
At the end of 2007, the Corporation canceled certain amortizing
swap contracts that economically converted to a fixed rate the
cost of funds associated with certain auto loans held-in-portfolio
as a result of selling most of the auto loan portfolio. In 2006 and
most of 2007, these amortizing swaps economically hedged the
interest rate changes in auto loan approvals. Changes in fair value
were recognized as part of interest expense.
In addition to using derivative instruments as part of its
interest rate risk management strategy, the Corporation also
utilizes derivatives, such as interest rate swaps and foreign
exchange contracts in its capacity as an intermediary on behalf of
its customers. The Corporation minimizes its market risk and
credit risk by taking offsetting positions under the same terms
and conditions with credit limit approvals and monitoring
procedures. Market value changes on these swaps and other
derivatives are recognized in income in the period of change.
Credit Default Swaps
The credit default swap (“CDS”) allows one party to transfer the
credit risk to another for a fee in case of a credit default. The
credit default relates to the failure to make payment obligations
due to bankruptcy or insolvency. It is not foreseen that the
Corporation will have to make any payments associated with the
CDS.
The CDS outstanding at December 31, 2006 and 2007 to which
the Corporation is a party is associated to net settlement payments
on interest rate swaps, not principal bond payments. The payment
obligation is the net spread between two rates. A number of firms
participated in the economics of the CDS transaction and the
Corporation was allocated a percentage of the total notional amount
of the underlying interest rate swaps. Under the CDS, the
Corporation guarantees the third-party entity’s (“the third-party
entity”) performance under a series of interest rate swaps that the
third-party entity has with the counterparty to the CDS (“the
counterparty”). The nature of the specific credit default event that
will trigger a payment obligation by the Corporation under the
CDS consists of the failure by the third-party entity to pay any
one of the periodic payments due under the underlying swaps or a
termination payment with the counterparty. Also, although not a
third-party entity credit event under the terms of the CDS, the
interest rate swaps agreement between the third-party entity and
the counterparty has an additional termination event which is the
withdrawal, suspension or ratings downgrade of the third-party
entity to a rating below BBB- by any of the three major agencies.
The termination event will only trigger the Corporation’s
performance if the third-party entity fails to pay its obligation
under the interest rate swaps. Neither of these events is expected
to occur because of the third-party entity’s credit standing. The
underlying interest rate swaps are in the money in favor of the
third-party entity. The CDS matures in April 2008, which also
reduces the Corporation’s exposure to losses. Under the CDS, the
counterparty has no obligation to the Corporation other than
having made the initial premium payment, which amounted to
$104,000. As a result, the Corporation is not subject to the credit
risk of the counterparty.
Interest Rate Caps
During 2007, the Corporation entered into a $100,000,000
interest rate cap to mitigate its exposure to rising interest rates
on short-term borrowings. The Corporation also entered into
interest rate caps as an intermediary on behalf of its customers
and simultaneously took offseting positions under the same terms
and conditions thus minimizing its market and credit risks.
As a result of the recharacterization transactions in 2007, the
interest rate caps that the Corporation had in conjunction with a
series of mortgage loans under securitization were no longer
required to be consolidated under the Corporation's statement of
condition. Changes in fair value of these caps were recognized in
the consolidated statement of operations as part of interest
expense, while the derivative contract value was included as other
assets.
Index and Embedded Options
In connection with customers’ deposits offered by the Corporation
whose returns are tied to the performance of the Standard and
Poor’s 500 (S&P 500) stock market indexes, other deposits whose
returns are tied to other stock market indexes, certain equity
securities performance or a commodity index, the Corporation
bifurcated the related options embedded within the customers’
deposits from the host contract which does not qualify for hedge
accounting in accordance with SFAS No. 133. In order to limit
the Corporation’s exposure to changes in these indexes, the
Corporation purchases index options from major broker dealer
companies which returns are tied to the same indexes.
Accordingly, the embedded options and the related index options
are marked-to-market through earnings. These options are traded
in the over the counter (“OTC”) market. OTC options are not
listed on an options exchange and do not have standardized terms.
OTC contracts are executed between two counterparties that
negotiate specific agreement terms, including the underlying
instrument, amount, exercise price and expiration date. The
Corporation also had bifurcated and accounted for separately the
option related to the issuance of notes payable whose return is
linked to the S&P 500 Index. In order to limit its exposure, the
Corporation has a related S&P 500 index option intended to
produce the same cash outflows that the notes could produce.
Mortgage Rate Lock Commitments
Mortgage rate lock commitments to fund mortgage loans at
interest rates previously agreed for a specified period of time are
accounted for as derivatives as per SFAS No. 133, as amended.
Forward sale commitments are utilized to economically hedge the
interest rate risk associated with the time lag between when fixed
rate mortgage loans are rate-locked and when they are committed
for sale or exchange in the secondary market.
t h e
t h e
t h e
t h e
t h e
- S u p p l e m e n t a l d i s c l o s u r e o n
- S u p p l e m e n t a l d i s c l o s u r e o n
- S u p p l e m e n t a l d i s c l o s u r e o n
- S u p p l e m e n t a l d i s c l o s u r e o n
- S u p p l e m e n t a l d i s c l o s u r e o n
N o t e 3 1
N o t e 3 1
N o t e 3 1
N o t e 3 1
N o t e 3 1
consolidated statements of cash flows:
consolidated statements of cash flows:
consolidated statements of cash flows:
consolidated statements of cash flows:
consolidated statements of cash flows:
As previously mentioned in Note 1 in 2005, the Corporation
commenced a two-year plan to change the reporting period of its
non-banking subsidiaries to a December 31st calendar period.
The impact of this change corresponded to the financial results
for the month of December 2004 of those non-banking subsidiaries
which implemented the change in the first reporting period of
2005 and the month of December 2005 for those which implemented
the change in the first reporting period of 2006 .
The following table reflects the effect in the Consolidated
Statements of Cash Flows of the change in reporting period
mentioned above for the year ended December 31:
(In thousands)
Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and due from banks
2006
($80,906)
(104,732)
197,552
$11,914
2005
($26,648)
19,503
5,573
($1,572)
Also, related to the difference in the reporting period of certain
non-banking subsidiaries, as a result of the one-month lag, certain
intercompany transactions between subsidiaries having different
year-end periods remained outstanding at December 31, 2005. In
balancing the consolidated statement of condition, management
reversed an intercompany elimination in order to reinstall loans
outstanding to third parties. The impact of this reversal resulted
in an increase of $429,000,000 in the caption of other liabilities
at December 31, 2005. For the cash flow statement presentation,
for the year ended December 31, 2005, this amount was reflected
2007 Annual Report 133
2007
2007
Popular, Inc. 2007
2007
as cash provided by financing activities, while the reinstallment
of loan disbursements was presented as cash flows used in investing
activities. As of December 31, 2006, all subsidiaries have aligned
their year-end closing to that of the Corporation’s calendar year.
Additional disclosures on cash flow information as well as
non-cash activities are listed in the following table:
(In thousands)
Income taxes paid
Interest paid
2007
$160,271
1,673,768
2006
$194,423
1,604,054
2005
$196,028
1,206,434
Non-cash activities:
Loans transferred to other real estate
Loans transferred to other property
203,965
36,337
Total loans transferred to foreclosed assets
240,302
Assets and liabilities removed as part of the
recharacterization of on-balance sheet
116,250
34,340
150,590
113,840
24,395
138,235
securitizations:
Mortgage loans
Secured borrowings
Other assets
Other liabilities
3,221,003
(3,083,259)
111,446
(13,513)
-
-
-
-
Transfers from loans held-in-portfolio
to loans held-for-sale (a)
1,580,821
23,634
Transfers from loans held-for-sale to
-
-
-
-
-
loans held-in-portfolio
244,675
Loans securitized into trading securities (b)
1,321,655
591,365
1,398,342
668,591
1,304,749
Available-for-sale securities transferred to
loans held-in-portfolio
-
-
42,174
Recognition of mortgage servicing rights on
securitizations or asset transfers
48,865
62,877
103,092
Recognition of residual interests on
securitizations
Business acquisitions:
42,975
36,927
61,126
Fair value of loans and other assets acquired
225,972
Goodwill and other intangible assets acquired 149,123
Deposits and other liabilities assumed
(1,094,699)
-
4,005
(971)
1,491,521
337,180
(1,416,919)
(a) In 2007 it excludes the $3.2 billion in mortgage loans from the recharacterization that were classified
to loans held-for-sale and immediately removed from the Corporation's books. In 2006 it excludes $589
million in individual mortgage loans transferred to held-for-sale and sold as well as $613 million (2005
- $552 million) securitized into trading securities and immediately sold.
(b) Includes loans securitized into trading securities and subsequently sold before year end.
Note 32 - Segment reporting:
Note 32 - Segment reporting:
Note 32 - Segment reporting:
Note 32 - Segment reporting:
Note 32 - Segment reporting:
The Corporation’s corporate structure consists of four reportable
segments – Banco Popular de Puerto Rico, Banco Popular North
America, Popular Financial Holdings and EVERTEC. Also, a
corporate group has been defined to support the reportable
segments.
In early 2007, the Corporation changed its basis of presentation
by combining the operations of Banco Popular North America and
134
Popular Financial Holdings segments into a single reportable
segment named Popular North America. This was the result of a
restructuring plan of the Popular Financial Holdings operations
and the Corporation’s U.S. Reorganization described in Note 2 to
the consolidated financial statements. At that time, the
Corporation decided to continue the operations of Equity One
and its subsidiaries (“Equity One”), which are principally
dedicated to direct subprime loan origination, consumer finance
and mortgage servicing. However, given the unforeseen
disruption in the capital markets since the summer of 2007 and
its impact on funding, management now believes that it will be
difficult to generate an adequate return on the capital invested at
Equity One. As such, commencing in late fourth quarter of 2007,
the Corporation redefined its Popular North America reportable
segment by segregating it in two separate reportable segments:
Banco Popular North America and Popular Financial Holdings.
Management re-defined its plans and allocation of resources
with respect to the Corporation’s U.S. operations and is taking
steps to exit the PFH business, except for its mortgage servicing
unit. Part of these steps included the recharacterization of a
substantial portion of PFH’s on-balance sheet mortgage loan
securitization as sales, the signing in early 2008 of an Asset
Purchase Agreement to sell certain assets of Equity One and the
expected closure of its remaining consumer branch network
during 2008. The remaining loan portfolio that will remain in
PFH’s books will decline as it runs off. Due to the expected
discontinuance of the business, management has redefined how
to allocate resources for future growth potential in the U.S.
operations.
Management determined the reportable segments based on the
internal reporting used to evaluate performance and to assess where
to allocate resources. The segments were determined based on the
organizational structure, which focuses primarily on the markets
the segments serve, as well as on the products and services offered
by the segments.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant
portion of the Corporation’s results of operations and total assets
as of December 31, 2007, additional disclosures are provided for
the business areas included in this reportable segment, as described
below:
• Commercial banking represents the Corporation’s banking
operations conducted at BPPR, which are targeted mainly to
corporate, small and middle size businesses. It includes
aspects of the lending and depository businesses, as well as
other finance and advisory services. BPPR allocates funds
across segments based on duration matched transfer pricing
at market rates. This area also incorporates income related
with the investment of excess funds, as well as a proportionate
share of the investment function of BPPR.
• Consumer and retail banking represents the branch banking
operations of BPPR which focus on retail clients. It includes
the consumer lending business operations of BPPR, as well as
the lending operations of Popular Auto, Popular Finance, and
Popular Mortgage. These three subsidiaries focus respectively
on auto and lease financing, small personal loans and mortgage
loan originations. This area also incorporates income related
with the investment of excess funds from the branch network,
as well as a proportionate share of the investment function of
BPPR.
• Other financial services include the trust and asset
management service units of BPPR, the brokerage and
investment banking operations of Popular Securities, and
the insurance agency and reinsurance businesses of Popular
Insurance, Popular Insurance V.I. and Popular Life Re. Most of
the services that are provided by these subsidiaries generate
profits based on fee income.
Banco Popular North America:
Banco Popular North America’s reportable segment consists of
the banking operations of BPNA, E-LOAN, Popular Equipment
Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates
through a branch network with presence in 6 states, while E-
LOAN provides online consumer direct lending and supports
BPNA’s deposit gathering through its online platform. As
indicated in Note 2 to the consolidated financial statements, E-
LOAN is in the process of restructuring its operations, which
include refocusing its loan origination efforts toward a reduced
mix of loan product offerings. Popular Insurance Agency, U.S.A.
offers investment and insurance services across the BPNA branch
network. Popular Equipment Finance, Inc. provides mainly small
to mid-ticket commercial and medical equipment financing. The
U.S. operations also include the mortgage business unit of Banco
Popular, National Association.
Due to the significant losses in the E-LOAN operations,
impacted in part by the restructuring charges and impairment
losses as described in Note 2 to the consolidated financial
statements, management has determined to provide as additional
disclosure the results of E-LOAN apart from the other BPNA
subsidiaries.
2007 Annual Report 135
2007
2007
Popular, Inc. 2007
2007
Popular, Inc.
2007
At December 31, 2007
(In thousands)
Net interest income (loss)
Provision for loan losses
Non-interest income (loss)
Goodwill and trademark
impairment losses
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense (benefit)
Net income (loss)
Segment assets
(In thousands)
Net interest income (loss)
Provision for loan losses
Non-interest income
Goodwill and trademark
impairment losses
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax benefit
Net (loss) income
Segment assets
Banco Popular
de Puerto Rico North America
Banco Popular Popular Financial
$957,822
243,727
485,548
1,909
41,684
714,457
114,311
$370,605
95,486
185,962
211,750
7,602
16,069
450,576
(29,477)
Holdings
$140,670
221,431
(179,379)
Intersegment
EVERTEC Eliminations
($823)
$3,301
241,627
(150,390)
2,352
157,476
(150,520)
934
16,162
174,877
17,547
(72)
(137,688)
(2,086)
$327,282
($195,439)
($269,448)
$31,284
($7,243)
$27,102,493
$13,364,306
$3,905,279
$228,746
($417,828)
At December 31, 2007
Total
Reportable
Segments
$1,471,575
560,644
583,368
211,750
10,445
76,195
1,359,698
(50,225)
Corporate
Eliminations
($23,382)
2,006
117,981
$1,197
(7,033)
2,368
55,205
(9,215)
(11,110)
438
Total
Popular, Inc.
$1,449,390
562,650
694,316
211,750
10,445
78,563
1,403,793
(59,002)
($113,564)
$44,182,996
$44,235
$6,550,752
$4,836
($6,322,311)
($64,493)
$44,411,437
Popular, Inc.
2006
At December 31, 2006
Banco Popular
de Puerto Rico North America
Banco Popular Popular Financial
(In thousands)
Net interest income (loss)
Provision for loan losses
Non-interest income
Goodwill and trademark
impairment losses
Amortization of intangibles
Depreciation expense
Other operating expenses
Impact of change in fiscal period
Income tax expense (benefit)
Net income (loss)
Segment assets
$914,907
141,083
431,940
$379,977
46,472
218,590
2,540
43,556
679,892
(2,072)
125,985
$355,863
8,881
15,811
422,640
37,280
$67,483
Holdings
$173,532
100,205
38,977
14,239
357
6,159
179,907
6,181
(32,809)
Intersegment
EVERTEC Eliminations
($1,894)
229,237
($141,096)
599
16,599
169,117
15,052
(72)
(140,392)
(367)
($265)
$25,501,522
$13,565,992
$8,396,926
$223,384
($588,707)
($61,730)
$25,976
Popular Financial Holdings:
PFH’s clientele is primarily subprime borrowers. After considering
the restructuring events discussed in Note 2 to the consolidated
financial statements, PFH continues to carry a maturing loan
portfolio that approximated $3.3 billion at December 31, 2007,
of which $1.4 billion was classified as held-for-sale. Also, PFH
continues to provide mortgage loan services for others. As
previously indicated, PFH is in the process of exiting the
mortgage loan and consumer loan origination business.
EVERTEC:
This reportable segment includes the financial transaction
processing and technology functions of the Corporation,
including EVERTEC, with offices in Puerto Rico, Florida, the
Dominican Republic and Venezuela; EVERTEC USA, Inc.
incorporated in the United States; and ATH Costa Rica, S.A.,
EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA and T.I.I.
Smart Solutions Inc. located in Costa Rica. In addition, this
reportable segment includes the equity investments in Consorcio
de Tarjetas Dominicanas, S.A. and Servicios Financieros, S.A. de
C.V. (“Serfinsa”), which operate in the Dominican Republic and
El Salvador, respectively. This segment provides processing and
technology services to other units of the Corporation as well as to
third parties, principally other financial institutions in Puerto
Rico, the Caribbean and Central America.
The Corporate group consists primarily of the holding
companies: Popular, Inc., Popular North America and Popular
International Bank, excluding the equity investments in
CONTADO and Serfinsa, which due to the nature of their
operations, are included as part of the EVERTEC segment. The
holding companies obtain funding in the capital markets to finance
the Corporation’s growth, including acquisitions. The Corporate
group also includes the expenses of the four administrative
corporate areas that are identified as critical for the organization:
Finance, Risk Management, Legal and People, Communications
and Planning. These corporate administrative areas have the
responsibility of establishing policy, setting up controls and
coordinating the activities of their corresponding groups in each
of the reportable segments.
The Corporation may periodically reclassify reportable
segment results based on modifications to its management
reporting and profitability measurement methodologies and
changes in organizational alignment.
The accounting policies of the individual operating segments
are the same as those of the Corporation described in Note 1.
Transactions between reportable segments are primarily conducted
at market rates, resulting in profits that are eliminated for reporting
consolidated results of operations.
136
At December 31, 2006
Additional disclosures with respect to the Banco Popular de
(In thousands)
Net interest income (loss)
Provision for loan losses
Non-interest income
Goodwill and trademark
impairment losses
Amortization of intangibles
Depreciation expense
Other operating expenses
Impact of change in fiscal period
Income tax expense (benefit)
Net income (loss)
Segment assets
Total
Reportable
Segments
$1,466,522
287,760
777,648
14,239
12,377
82,053
1,311,164
4,109
145,141
Corporate
Eliminations
($39,741)
$1,129
36,642
(4,805)
2,335
57,342
3,495
(37,515)
(4,178)
2,137
(740)
Total
Popular, Inc.
$1,427,910
287,760
809,485
14,239
12,377
84,388
1,364,328
9,741
106,886
$387,327
$47,099,117
($28,756)
$6,376,487
($895)
($6,071,617)
$357,676
$47,403,987
Popular, Inc.
2005
At December 31, 2005
(In thousands)
Net interest income (loss)
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense
Net income before cumulative
effect of accounting change
Cumulative effect of
accounting change
Net income after cumulative
Banco Popular
de Puerto Rico North America
Banco Popular Popular Financial
$897,007
98,732
428,249
2,522
42,508
681,133
104,907
$359,836
23,238
149,604
6,783
15,678
309,151
56,796
Holdings
$201,349
73,288
52,664
30
4,916
159,087
6,205
Intersegment
EVERTEC Eliminations
($404)
221,369
244
17,405
166,929
12,149
($139,633)
(71)
(139,502)
(57)
$395,454
$97,794
$10,487
$24,238
($3)
3,221
(209)
412
(247)
effect of accounting change
$398,675
$97,585
$10,487
$24,650
($250)
Puerto Rico reportable segment are as follows:
Banco Popular de Puerto Rico
2007
At December 31, 2007
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Impact of change in fiscal period
Income tax expense
Net income
Segment assets
Commercial
Banking
$379,673
79,810
91,596
565
14,457
178,193
Consumer
and Retail
Banking
$566,635
163,917
303,945
860
26,001
470,184
Other Financial
Services
Eliminations
$10,909
$605
90,969
484
1,226
66,466
Total
Banco Popular
de Puerto Rico
$957,822
243,727
485,548
1,909
41,684
714,457
114,311
$327,282
(962)
(386)
26
$3
56,613
46,812
$141,631
$162,806
10,860
$22,842
$11,601,186
$19,407,327
$478,252 ($4,384,272)
$27,102,493
Banco Popular de Puerto Rico
2006
At December 31, 2006
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Impact of change in fiscal period
Income tax expense
Commercial
Banking
$342,419
43,952
94,517
881
14,192
174,427
Consumer
and Retail
Banking
$561,788
97,131
248,117
1,338
28,214
444,024
60,476
51,351
Other Financial
Services
Eliminations
$10,229
$471
91,303
321
1,150
62,175
(2,072)
14,491
(1,997)
(734)
(333)
($459)
Total
Banco Popular
de Puerto Rico
$914,907
141,083
431,940
2,540
43,556
679,892
(2,072)
125,985
$355,863
Segment assets
$26,522,983
$12,593,434
$9,411,263
$250,749
($509,764)
Net income
$143,008
$187,847
$25,467
At December 31, 2005
Total
Reportable
Segments
$1,457,788
195,258
712,253
9,579
80,436
1,176,798
180,000
Corporate
Eliminations
($34,959)
14
73,612
1,511
59,988
(31,417)
$1,378
(590)
(112)
332
Total
Popular, Inc.
$1,424,207
195,272
785,275
9,579
81,947
1,236,674
148,915
$527,970
$8,557
$568
$537,095
3,177
430
3,607
Segment assets
$11,283,178
$17,935,610
$581,981 ($4,299,247)
$25,501,522
Banco Popular de Puerto Rico
2005
At December 31, 2005
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense
Net income before cumulative
Commercial
Banking
$304,142
26,600
144,008
881
14,296
199,670
47,706
Consumer
and Retail
Banking
$579,852
72,132
208,567
1,332
26,903
424,783
47,309
Other Financial
Services
Eliminations
$12,970
$43
77,351
309
1,309
58,112
9,988
(1,677)
(1,432)
(96)
Total
Banco Popular
de Puerto Rico
$897,007
98,732
428,249
2,522
42,508
681,133
104,907
$531,147
$8,987
$568
$540,702
effect of accounting change $158,997
$215,960
$20,603
($106)
$395,454
(In thousands)
Net interest income (loss)
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense (benefit)
Net income before cumulative
effect of accounting change
Cumulative effect of
accounting change
Net income after cumulative
effect of accounting change
Segment assets
$48,268,665
$6,333,610
($5,978,607)
$48,623,668
During the year ended December 31, 2007, the Corporation’s
holding companies realized net gains on sale of securities, mainly
marketable equity securities, of approximately $114,944,000
(2006 - $14,000,000; 2005 - $59,706,000). These gains are
included as part of “non-interest income” within the Corporate
group.
Cumulative effect of
accounting change
Net income after cumulative
3,797
755
(1,331)
3,221
effect of accounting change
$158,997
$219,757
$21,358
($1,437)
$398,675
Segment assets
$10,404,721
$18,537,688
$1,043,096
($3,462,522)
$26,522,983
Additional disclosures with respect to the Banco Popular North
America reportable segment are as follows:
Banco Popular North America
2007
At December 31, 2007
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Goodwill and trademark
impairment losses
Amortization of intangibles
Depreciation expense
Other operating expenses
Impact of change in fiscal period
Income tax expense (benefit)
Net income (loss)
Segment assets
Banco Popular
North America
$348,728
77,832
112,954
4,810
12,835
287,831
27,863
$50,511
E-LOAN
Eliminations
$20,925
17,654
74,270
211,750
2,792
3,234
162,706
(57,218)
($245,723)
$952
(1,262)
39
(122)
($227)
Total
Banco Popular
North America
$370,605
95,486
185,962
211,750
7,602
16,069
450,576
(29,477)
($195,439)
$13,965,898
$1,178,438
($1,780,030)
$13,364,306
Banco Popular North America
2006
At December 31, 2006
E-LOAN
Eliminations
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense (benefit)
Net income (loss)
Segment assets
Banco Popular
North America
$363,249
37,834
127,697
6,041
12,917
272,158
60,707
$101,289
$12,259,704
$16,601
8,638
92,188
2,840
2,894
150,482
(23,018)
($33,047)
$1,308,263
Total
Banco Popular
North America
$379,977
46,472
218,590
8,881
15,811
422,640
37,280
$67,483
$127
(1,295)
(409)
($759)
($1,975)
$13,565,992
Banco Popular North America
2005
At December 31, 2005
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense (benefit)
Net income (loss) before cumulative
Banco Popular
North America
$357,256
22,871
130,538
6,368
15,156
286,374
57,617
Total
Banco Popular
North America
$359,836
23,238
149,604
6,783
15,678
309,151
56,796
E-LOAN
$2,580
367
19,066
415
522
22,777
(821)
effect of accounting change
99,408
(1,614)
97,794
Cumulative effect of
accounting change
Net income (loss) after cumulative
(209)
(209)
effect of accounting change
$99,199
($1,614)
$97,585
Segment assets
$12,037,377
$556,057
$12,593,434
2007 Annual Report 137
2007
2007
Popular, Inc. 2007
2007
Intersegment revenues*
(In thousands)
Banco Popular de Puerto Rico:
P.R. Commercial Banking
P.R. Consumer and Retail Banking
P.R. Other Financial Services
EVERTEC
Banco Popular North America:
Banco Popular North America
E-LOAN
Popular Financial Holdings
Total intersegment revenues
2007
$1,519
3,311
(449)
(140,949)
(8,597)
(8,220)
6,296
($147,089)
2006
2005
($619)
(1,409)
(326)
(138,172)
(1,212)
(608)
1,250
($141,096)
($2,437)
(5,743)
(399)
(139,100)
1,563
(24)
6,507
($139,633)
* For purposes of the intersegment revenues disclosure, revenues include interest income (expense)
related to internal funding and other non-interest income derived from intercompany transactions,
mainly related to gain on sales of loans and processing / information technology services.
Geographic Information
(In thousands) 2007 2006
Revenues*:
Puerto Rico
United States
Other
Total consolidated revenues
$1,567,276
488,038
88,392
$2,143,706
$1,396,714
762,313
78,368
$2,237,395
2005
$1,252,906
891,820
64,756
$2,209,482
* Total revenues include net interest income, service charges on deposit accounts, other service fees, net
gain on sale and valuation adjustment of investment securities, trading account (loss) profit, (loss) gain
on sale of loans and valuation adjustments on loans held-for-sale and other operating income.
Selected Balance Sheet Information:
(In thousands)
Puerto Rico
Total assets
Loans
Deposits
United States
Total assets
Loans
Deposits
Other
Total assets
Loans
Deposits
2007
2006
2005
$26,017,716
15,679,181
17,341,601
$24,621,684
14,735,092
13,504,860
$25,759,437
14,130,645
13,093,540
$17,093,929
13,517,728
9,737,996
$21,570,276
17,363,382
9,735,264
$21,780,226
17,023,443
8,370,150
$1,299,792
714,093
1,254,881
$1,212,027
638,465
1,198,207
$1,084,005
556,119
1,174,315
Note 33 - Contingent liabilities:
Note 33 - Contingent liabilities:
Note 33 - Contingent liabilities:
Note 33 - Contingent liabilities:
Note 33 - Contingent liabilities:
The Corporation is a defendant in a number of legal proceedings
arising in the normal course of business. Management believes,
based on the opinion of legal counsel, that the final disposition of
these matters will not have a material adverse effect on the
Corporation’s financial position or results of operations.
Note 34 - Guarantees:
Note 34 - Guarantees:
Note 34 - Guarantees:
Note 34 - Guarantees:
Note 34 - Guarantees:
The Corporation has obligations upon the occurrence of certain
events under financial guarantees provided in certain contractual
agreements. These various arrangements are summarized below.
The Corporation issues financial standby letters of credit and
has risk participation in standby letters of credit issued by other
financial institutions, in each case to guarantee the performance
138
of various customers to third parties. If the customer fails to meet
its financial or performance obligation to the third party under
the terms of the contract, then, upon their request, the
Corporation would be obligated to make the payment to the
guaranteed party. In accordance with the provisions of FIN No.
45, at December 31, 2007 and 2006, the Corporation recorded a
liability of $636,000 and $658,000, respectively, which
represents the fair value of the obligations undertaken in issuing
the guarantees under the standby letters of credit issued or modified
after December 31, 2002. The fair value approximates the fee
received from the customer for issuing such commitments. These
fees are deferred and are recognized over the commitment period.
The contract amounts in standby letters of credit outstanding at
December 31, 2007 and 2006, shown in Note 28, represent the
maximum potential amount of future payments the Corporation
could be required to make under the guarantees in the event of
nonperformance by the customers. These standby letters of credit
are used by the customer as a credit enhancement and typically
expire without being drawn upon. The Corporation’s standby
letters of credit are generally secured, and in the event of
nonperformance by the customers, the Corporation has rights to
the underlying collateral provided, which normally includes cash
and marketable securities, real estate, receivables and others.
Management does not anticipate any material losses related to
these instruments.
The Corporation securitizes mortgage loans into guaranteed
mortgage-backed securities subject to limited, and in certain
instances, lifetime credit recourse on the loans that serve as
collateral for the mortgage-backed securities. Also, from time to
time, the Corporation may sell in bulk sale transactions, residential
mortgage loans and SBA commercial loans subject to credit
recourse or to certain representations and warranties from the
Corporation to the purchaser. These representations and warranties
may relate to borrower creditworthiness, loan documentation,
collateral, prepayment and early payment defaults. The Corporation
may be required to repurchase the loans under the credit recourse
agreements or representation and warranties. Generally, the
Corporation retains the right to service the loans when securitized
or sold with credit recourse.
At December 31, 2007, the Corporation serviced
$3,386,885,000 (2006 - $3,054,325,000) in residential
mortgage loans with credit recourse or other servicer-provided
credit enhancement. In the event of any customer default, pursuant
to the credit recourse provided, the Corporation is required to
reimburse the third party investor. The maximum potential amount
of future payments that the Corporation would be required to
make under the agreement in the event of nonperformance by the
borrowers is equivalent to the total outstanding balance of the
r e s i d e n t i a l m o r t g a g e l o a n s s e r v i c e d . I n t h e e v e n t o f
nonperformance, the Corporation has rights to the underlying
collateral securing the mortgage loan, thus, historically the losses
associated to these guarantees had not been significant. At
December 31, 2007, the Corporation had reserves of approximately
$4,731,000 (2006 - $3,066,000) to cover the estimated credit
loss exposure. At December 31, 2007, the Corporation also serviced
$17,122,770,000 (2006 - $10,213,375,000) in mortgage loans
without recourse or other servicer-provided credit enhancement.
Although the Corporation may, from time to time, be required to
make advances to maintain a regular flow of scheduled interest
and principal payments to investors, including special purpose
entities, this does not represent an insurance against losses. These
loans serviced are mostly insured by FHA, VA, and others, or the
certificates arising in securitization transactions may be covered
by a funds guaranty insurance policy.
Also, in the ordinary course of business, the Corporation sold
SBA loans with recourse, in which servicing was retained. At
December 31, 2007, SBA loans serviced with recourse amounted
to $119,483,000 (2006 - $62,408,000). Due to the guaranteed
nature of the SBA loans sold, the Corporation’s exposure to loss
under these agreements should not be significant.
Popular, Inc. Holding Company (“PIHC”) fully and
unconditionally guarantees certain borrowing obligations issued
by certain of its wholly-owned consolidated subsidiaries totaling
$2,877,794,000 at December 31, 2007 (2006 - $3,278,827,000).
In addition, at December 31, 2007 and 2006, PIHC fully and
unconditionally guaranteed $824,000,000 of Capital Securities
issued by four wholly-owned issuing trust entities that have been
deconsolidated based on FIN No. 46R. Refer to Note 18 to the
consolidated financial statements for further information.
A number of the acquisition agreements to which the
Corporation is a party and under which it has purchased various
types of assets, including the purchase of entire businesses, require
the Corporation to make additional payments in future years if
certain predetermined goals, such as revenue targets, are achieved
or certain specific events occur within a specified time.
Management’s estimated maximum future payments at December
31, 2007 approximated $5,829,000 (2006 -$4,606,000). Due to
the nature and size of the operations acquired, management does
not anticipate that these additional payments will have a material
impact on the Corporation’s financial condition or results of future
operations.
The Corporation is a member of the Visa USA network through
its subsidiary BPNA. On October 3, 2007, the Visa organization
completed a series of restructuring transactions to combine its
affiliated operating companies, including Visa USA, under a single
holding company, Visa, Inc. As a result of Visa’s restructuring,
the Corporation’s membership interest in Visa USA was exchanged
for an approximately 0.00874% equity interest in Visa Inc. Class
USA stock. On November 11, 2007, Visa Inc. filed a registration
statement with the Securities and Exchange Commission for the
2007 Annual Report 139
2007
2007
Popular, Inc. 2007
2007
N o t e 3 6 - P o p u l a r , I n c . ( H o l d i n g C o m p a n y o n l y )
N o t e 3 6 - P o p u l a r , I n c . ( H o l d i n g C o m p a n y o n l y )
N o t e 3 6 - P o p u l a r , I n c . ( H o l d i n g C o m p a n y o n l y )
N o t e 3 6 - P o p u l a r , I n c . ( H o l d i n g C o m p a n y o n l y )
N o t e 3 6 - P o p u l a r , I n c . ( H o l d i n g C o m p a n y o n l y )
f i n a n c i a l i n f o r m a t i o n :
f i n a n c i a l i n f o r m a t i o n :
f i n a n c i a l i n f o r m a t i o n :
f i n a n c i a l i n f o r m a t i o n :
f i n a n c i a l i n f o r m a t i o n :
The following condensed financial information presents the
financial position of Holding Company only as of December 31,
2007 and 2006, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 2007.
Statements of Condition
(In thousands)
ASSETS
Cash
Money market investments
Investments securities held-to-maturity, at
amortized cost
Other investment securities, at lower of cost
or realizable value
Investment in BPPR and subsidiaries, at equity
Investment in Popular International Bank
and subsidiaries, at equity
Investment in other subsidiaries, at equity
Advances to subsidiaries
Loans to affiliates
Loans
Less - Allowance for loan losses
Premises and equipment
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other short-term borrowings
Notes payable
Accrued expenses and other liabilities
Stockholders’ equity
December 31,
2007
$1,391
46,400
2006
$2
8,700
626,129
430,000
14,425
1,817,354
767,608
232,972
712,500
10,000
2,926
60
23,772
42,969
143,469
1,690,968
1,257,748
228,655
452,400
10,000
5,249
40
25,628
62,042
$4,298,386
$4,314,821
$165,000
480,117
71,387
3,581,882
$150,787
484,406
59,322
3,620,306
Total liabilities and stockholders’ equity
$4,298,386
$4,314,821
offer and sale of its common stock to the public. Visa has disclosed
that it plans to use the proceeds from its initial public offering to
partially redeem Visa USA members’ equity interests and to fund
the settlement of certain Visa USA related litigation.
Pursuant to the Visa USA bylaws, BPNA is obligated to
indemnify Visa, Inc. for certain losses. On October 3, 2007, a
Loss Sharing Agreement (“LSA”) became effective which reaffirmed
the Corporation’s obligation to indemnify Visa, Inc. for potential
future settlement of certain litigation. The Corporation’s
indemnification obligation is limited to its 0.00874%
proportionate equity interest in Visa USA. The Corporation
recorded an estimated liability related to its obligation to indemnify
Visa for covered litigation of $223,000 as of December 31, 2007.
If the Visa initial public offering is successfully completed,
the Corporation is expected to receive cash in partial redemption
of its equity interest currently carried at zero value. Further,
management expects that the indemnification obligation to Visa
will be reduced when Visa either disburses funds for negotiated
settlements, or funds an escrow account designated for settlement
of covered litigation. Management expects that the gain to be
realized from redemption of Visa shares will more than exceed the
indemnification obligations recorded to date.
Note 35 - Other service fees:
Note 35 - Other service fees:
Note 35 - Other service fees:
Note 35 - Other service fees:
Note 35 - Other service fees:
The caption of other service fees in the consolidated statements
of income consists of the following major categories as of
December 31,
(In thousands)
Credit card fees and discounts
Debit card fees
Insurance fees
Processing fees
Mortgage servicing fees, net of
amortization and fair value adjustments
Other
Total
2007
$102,176
76,573
55,824
47,476
11,708
69,500
2006
$89,827
61,643
53,889
44,050
(2,750)
74,216
2005
$82,062
52,675
50,734
42,773
6,226
97,031
$363,257
$320,875
$331,501
140
Statements of Operations
Statements of Cash Flows
(In thousands)
Income:
Dividends from subsidiaries
Interest on money market and
investment securities
Other operating income
Gain on sale and valuation
adjustment of investment securities
Interest on advances to
subsidiaries
Interest on loans to affiliates
Interest on loans
Total income
Expenses:
Interest expense
Provision for loan losses
Operating expenses
Total expenses
Income before income taxes
and equity in undistributed
earnings of subsidiaries
Income taxes
Income before equity in
undistributed earnings of
subsidiaries
Equity in undistributed (losses) earnings
of subsidiaries
Net (loss) income
Year ended December 31,
2006
2005
2007
$383,100
$247,899
$171,000
38,555
9,862
115,567
19,114
1,144
382
567,724
37,095
2,007
2,226
41,328
526,396
30,288
39,286
17,518
290
6,069
1,256
457
34,259
11,771
50,469
416
1,176
530
312,775
269,621
36,154
1,057
37,211
43,850
14
1,380
45,244
275,564
1,648
224,377
3,155
496,108
273,916
221,222
(560,601)
($64,493)
83,760
$357,676
319,480
$540,702
accretion of discounts on investments
(8,244)
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income
to net cash provided by operating
activities:
Equity in undistributed losses (earnings)
of subsidiaries and dividends from
subsidiaries
Provision for loan losses
Net gain on sale and valuation adjustment
of investment securities
Net amortization of premiums and
Net amortization of premiums and
deferred loan origination fees and costs
Earnings from investments under
the equity method
Stock options expense
Net decrease (increase) in other assets
Deferred income taxes
Net increase in interest payable
Net increase in other liabilities
Total adjustments
Net cash provided by operating
activities
Cash flows from investing activities:
Net (increase) decrease in money
market investments
Purchases of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from maturities and
redemptions of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from sales of investment
securities available-for-sale
Proceeds from sale of other
investment securities
Year ended December 31,
2006
2005
2007
($64,493)
$357,676
$540,702
177,501
2,007
(115,567)
(4,612)
568
28,340
1,156
1,508
4,354
87,011
22,518
(331,659)
(290)
(427)
(54)
(2,507)
684
(9,192)
(569)
647
10,158
(490,480)
14
(50,469)
(546)
(99)
(3,097)
305
6,941
(182)
1,349
5,722
(333,209)
(530,542)
24,467
10,160
(37,700)
221,300
(181,500)
(6,808)
(4,087,972)
(269,683)
3,900,087
5,783
245,484
269,683
2,646
17,781
(127,628)
(445)
110,432
150,000
500
57,458
Capital contribution to subsidiaries
Net change in advances to subsidiaries
and affiliates
Net repayments on loans
Acquisition of premises and equipment
Proceeds from sale of premises and equpment
Proceeds from sale of foreclosed assets
Dividends received from subsidiaries
Net cash provided by investing activities
(260,100)
337
(522)
11
383,100
141,700
Cash flows from financing activities:
Net decrease in assets sold under
agreements to repurchase
Net decrease in commercial paper
Net increase in other
short-term borrowings
Payments of notes payable
Proceeds from issuance of notes payable
Cash dividends paid
Proceeds from issuance of
common stock
Treasury stock acquired
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
14,213
(5,000)
397
(190,617)
20,414
(2,236)
(162,829)
1,389
2
$1,391
(36,000)
(75,000)
(442,400)
459
(4,939)
99
247,899
6,845
150,787
(50,450)
393
(188,321)
55,678
(93)
15,569
216
(3)
297
171,000
120,896
(6,690)
(4,501)
(135,763)
5,383
(182,751)
193,679
(32,006)
(130,643)
(694)
696
$2
413
283
$696
The principal source of income for the Holding Company
consists of dividends from BPPR. As members subject to the
2007 Annual Report 141
2007
2007
Popular, Inc. 2007
2007
regulations of the Federal Reserve System, BPPR and BPNA must
obtain the approval of the Federal Reserve Board for any dividend
if the total of all dividends declared by each entity during the
calendar year would exceed the total of its net income for that
year, as defined by the Federal Reserve Board, combined with its
retained net income for the preceding two years, less any required
transfers to surplus or to a fund for the retirement of any preferred
stock. The payment of dividends by BPPR may also be affected by
other regulatory requirements and policies, such as the
maintenance of certain minimum capital levels described in Note
21. At December 31, 2007, BPPR could have declared a dividend
of approximately $44,954,000 (2006 - $208,109,000; 2005 -
$230,685,000) without the approval of the Federal Reserve Board.
At December 31, 2007, BPNA was required to obtain the approval
of the Federal Reserve Board to declare a dividend. The Corporation
has never received dividend payments from its U.S. subsidiaries.
PNA is an operating subsidiary of PIBI and is the holding
company of its wholly-owned subsidiaries:
• PFH, including its wholly-owned subsidiaries Equity One,
Inc., Popular Financial Management, LLC, Popular Housing
Services, Inc., and Popular Mortgage Servicing, Inc.;
• BPNA, including its wholly-owned subsidiaries Popular
Equipment Finance, Inc. (formerly Popular Leasing,
U.S.A.), Popular Insurance Agency, U.S.A., Popular FS, LLC,
and E-LOAN;
• BP, N.A., including its wholly-owned subsidiary Popular
Insurance, Inc.; and
• EVERTEC USA, Inc.
PIHC fully and unconditionally guarantees all registered debt
securities and preferred stock issued by PIBI and PNA. As described
in Note 36 to the consolidated financial statements, the principal
source of income for PIHC consists of dividends from BPPR.
N o t e 3 7 - C o n d e n s e d c o n s o l i d a t i n g f i n a n c i a l
N o t e 3 7 - C o n d e n s e d c o n s o l i d a t i n g f i n a n c i a l
N o t e 3 7 - C o n d e n s e d c o n s o l i d a t i n g f i n a n c i a l
N o t e 3 7 - C o n d e n s e d c o n s o l i d a t i n g f i n a n c i a l
N o t e 3 7 - C o n d e n s e d c o n s o l i d a t i n g f i n a n c i a l
information of guarantor and issuers of registered
information of guarantor and issuers of registered
information of guarantor and issuers of registered
information of guarantor and issuers of registered
information of guarantor and issuers of registered
g u a r a n t e e d s e c u r i t i e s :
g u a r a n t e e d s e c u r i t i e s :
g u a r a n t e e d s e c u r i t i e s :
g u a r a n t e e d s e c u r i t i e s :
g u a r a n t e e d s e c u r i t i e s :
The following condensed consolidating financial information
presents the financial position of Popular, Inc. Holding Company
(“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”),
Popular North America, Inc. (“PNA”) and all other subsidiaries of
the Corporation as of December 31, 2007 and 2006, and the results
of their operations and cash flows for each of the years ended
December 31, 2007, 2006 and 2005, respectively.
In 2005, the Corporation commenced a two-year plan to change
its non-banking subsidiaries to a calendar reporting year-end. As
of December 31, 2005, Popular Securities, Inc., Popular North
America (holding company), Popular FS, LLC and Popular
Financial Holdings, Inc. (“PFH”), including its wholly-owned
subsidiaries, except E-LOAN, which already had a December 31st
year-end since its acquisition, continued to have a fiscal year
that ended on November 30. Accordingly, their financial
information as of November 30, 2005 corresponds to their financial
information included in the consolidated financial statements of
Popular, Inc. as of December 31, 2005. As of December 31, 2006,
all subsidiaries have aligned their year-end closing to that of the
Corporation’s calendar year.
PIHC, PIBI and PNA are authorized issuers of debt securities
and preferred stock under a shelf registration statement filed with
the Securities and Exchange Commission.
PIBI is an operating subsidiary of PIHC and is the holding
company of its wholly-owned subsidiaries: ATH Costa Rica S.A.,
EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA (formerly
named EVERTEC, Centroamérica Sociedad Anónima), T.I.I.
Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.
142
Condensed Consolidating Statement of Condition
At December 31, 2007
(In thousands)
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
All other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
ASSETS
Cash and due from banks
Money market investments
Trading account securities, at fair value
Investment securities
available-for-sale, at fair value
Investment securities
held-to-maturity, at amortized cost
Other investment securities, at lower of cost or
realizable value
Investment in subsidiaries
Loans held-for-sale, at lower of cost or market value
Loans held-in-portfolio
Less - Unearned income
Allowance for loan losses
Premises and equipment, net
Other real estate
Accrued income receivable
Servicing assets
Other assets
Goodwill
Other intangible assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and assets sold under
agreements to repurchase
Other short-term borrowings
Notes payable
Subordinated notes
Other liabilities
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Preferred stock
Common stock
Surplus
Retained earnings (deficit)
Treasury stock, at cost
Accumulated other comprehensive loss,
net of tax
$1,391
46,400
626,129
14,425
2,817,934
725,426
60
725,366
23,772
1,675
40,740
554
$4,298,386
$165,000
480,117
71,387
716,504
186,875
1,761,908
563,183
1,324,468
(207,740)
(46,812)
3,581,882
$4,298,386
($93,645)
(321,345)
(1,743)
$910,303
1,281,206
769,698
8,483,430
287,087
(430,000)
189,766
413,566
1,889,546
32,737,346
182,110
548,772
32,006,464
564,393
81,410
233,010
196,645
1,349,916
630,761
68,949
$49,356,150
$4,604,376
24,015,437
28,619,813
5,391,273
2,494,090
7,303,782
430,000
884,859
45,123,817
109
(5,598,043)
(8,262,884)
(8,262,884)
(133)
(32,904)
(41,686)
($14,782,383)
($93,587)
(191,748)
(285,335)
(122,900)
(2,312,884)
(5,916,886)
(430,000)
(84,049)
(9,152,054)
70,421
3,404,586
770,339
(664)
(74,384)
(4,985,742)
(628,637)
664
$376
300
31,705
1,250
1
648,720
$400
151
12,392
1,717,823
25,150
2,978,528
25,150
62
60,814
2,978,528
131
14,271
47,210
$768,378
$4,770,906
$168,892
1,155,773
2,754,339
62,059
4,141,063
2
734,964
(99,806)
$116
116
3,961
851,193
(46,897)
(39,995)
768,262
$768,378
(5,317)
629,843
$4,770,906
(12,458)
4,232,224
$49,356,150
57,770
(5,630,329)
($14,782,383)
$818,825
1,006,712
767,955
8,515,135
484,466
216,584
1,889,546
28,203,566
182,110
548,832
27,472,624
588,163
81,410
216,114
196,645
1,456,994
630,761
69,503
$44,411,437
$4,510,789
23,823,689
28,334,478
5,437,265
1,501,979
4,621,352
934,372
40,829,446
109
186,875
1,761,908
568,184
1,319,467
(207,740)
(46,812)
3,581,882
$44,411,437
2007 Annual Report 143
2007
2007
Popular, Inc. 2007
2007
Condensed Consolidating Statement of Condition
At December 31, 2006
(In thousands)
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
All other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
ASSETS
Cash and due from banks
Money market investments
Trading account securities, at fair value
Investment securities
available-for-sale, at fair value
Investment securities
held-to-maturity, at amortized cost
Other investment securities, at lower of cost or
realizable value
Investment in subsidiaries
Loans held-for-sale, at lower of cost or market value
Loans held-in-portfolio
Less - Unearned income
Allowance for loan losses
Premises and equipment, net
Other real estate
Accrued income receivable
Other assets
Goodwill
Other intangible assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and assets sold under
agreements to repurchase
Other short-term borrowings
Notes payable
Subordinated notes
Other liabilities
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Preferred stock
Common stock
Surplus
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive loss,
net of tax
$2
8,700
430,000
143,469
3,177,371
467,649
40
467,609
25,628
1,058
60,430
554
$4,314,821
$150,787
484,406
59,322
694,515
186,875
1,753,146
521,855
1,599,145
(206,987)
(233,728)
3,620,306
$4,314,821
$157
1,075
71,262
2,157
5,001
1,135,808
12
42,883
26,152
2,062,710
2,958,559
2,958,559
134
11,581
28,125
$1,258,355
$5,090,136
$159,829
894,959
2,835,595
78,988
3,969,371
2
734,964
406,811
$60
60
3,961
851,193
458,922
$322
2,553
$1,015,470
508,424
382,325
($65,793)
(219,044)
$950,158
301,708
382,325
9,782,815
(3,215)
9,850,862
89,183
(430,000)
122,772
816,684
719,922
35,467,096
308,347
522,192
34,636,557
569,545
84,816
264,089
1,528,398
667,853
107,000
$51,295,853
$4,287,868
20,283,441
24,571,309
5,739,416
5,297,595
9,651,217
430,000
758,613
46,448,150
110
(7,192,573)
(6,567,940)
(6,567,940)
(167)
(28,500)
(47,946)
($14,555,178)
($65,735)
(67,243)
(132,978)
(136,800)
(2,309,216)
(4,233,972)
(430,000)
(85,559)
(7,328,525)
70,421
3,182,285
1,804,476
(2,146)
(74,384)
(4,763,441)
(2,675,210)
2,146
91,340
297,394
719,922
32,325,364
308,347
522,232
31,494,785
595,140
84,816
248,240
1,611,890
667,853
107,554
$47,403,987
$4,222,133
20,216,198
24,438,331
5,762,445
4,034,125
8,737,246
811,424
43,783,571
110
186,875
1,753,146
526,856
1,594,144
(206,987)
(233,728)
3,620,306
$47,403,987
(55,781)
1,258,295
$1,258,355
(21,012)
1,120,765
$5,090,136
(207,443)
4,847,593
$51,295,853
284,236
(7,226,653)
($14,555,178)
144
Condensed Consolidating Statement of Operations
Year ended December 31, 2007
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
(In thousands)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading securities
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term debt
Net interest income (loss)
Provision for loan losses
Net interest income (loss) after provision
for loan losses
Service charges on deposit accounts
Other service fees
Net gain (loss) on sale and valuation adjustment
of investment securities
Trading account loss
Loss on sale of loans and valuation adjustments
on loans held-for-sale
Other operating income (loss)
OPERATING EXPENSES:
Personnel costs:
Salaries
Pension, profit sharing and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Impairment losses on long-lived assets
Other operating expenses
Impact of change in fiscal period at certain subsidiaries
Goodwill and trademark impairment losses
Amortization of intangibles
$20,640
1,147
37,408
59,195
3,644
33,451
37,095
22,100
2,007
20,093
$343
370
1,800
2,513
2,513
$158,510
52
894
159,456
59,801
149,461
209,262
(49,806)
2,513
(49,806)
115,567
(20,083)
9,862
145,522
15,410
(2,160)
(1,592)
(51,398)
389
69
458
29
20
21,062
5,878
26,940
2,327
1,755
1,557
12,103
518
2,768
75
(45,817)
(400)
3
3
47
1
446
500
(51,898)
(18,164)
(33,734)
(473,478)
($507,212)
$2,803,356
36,833
434,406
41,898
3,316,493
774,840
502,115
577,406
1,854,361
1,462,132
560,643
901,489
196,072
475,510
(40,325)
(2,343)
(30,823)
137,025
1,636,605
500,709
143,464
644,173
121,262
125,914
48,554
281,537
66,517
113,319
17,362
12,344
198,038
211,750
10,445
1,851,215
(214,610)
(71,315)
(143,295)
(499,018)
($367,535)
(13,212)
(28,739)
(409,486)
(9,047)
(117,388)
(295,502)
(421,937)
12,451
12,451
(112,253)
(121)
(8,147)
(39,443)
(147,513)
(2,637)
(745)
(3,382)
(200)
(143,853)
(158)
(699)
(1,205)
(149,497)
1,984
189
1,795
1,654,143
$2,615,314
25,190
445,769
41,898
3,128,171
765,793
448,172
464,816
1,678,781
1,449,390
562,650
886,740
196,072
363,257
55,159
(2,464)
(38,970)
121,262
1,581,056
519,523
148,666
668,189
123,621
127,472
50,111
149,854
66,877
115,388
17,438
12,344
151,062
211,750
10,445
1,704,551
(123,495)
(59,002)
(64,493)
($642,313)
$1,655,938
($64,493)
Income (loss) before income tax and equity in earnings
(losses) of subsidiaries
Income tax expense (benefit)
Income (loss) before equity in earnings (losses)
of subsidiaries
Equity in (losses) earnings of subsidiaries
NET (LOSS) INCOME
2,226
143,296
30,288
113,008
(177,501)
($64,493)
107
(2,267)
(2,267)
(504,146)
($506,413)
2007 Annual Report 145
2007
2007
Popular, Inc. 2007
2007
Condensed Consolidating Statement of Operations
Year ended December 31, 2006
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
(In thousands)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading securities
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term debt
$7,782
2,199
37,087
47,068
537
35,617
36,154
10,914
$143
1,397
1,540
1,238
1,238
302
$149,166
520
1,403
151,089
26,806
177,061
203,867
(52,778)
10,914
302
(52,778)
290
13,598
7,006
20,906
(271)
(53,049)
Net interest income (loss)
Provision for loan losses
Net interest income (loss) after provision
for loan losses
Service charges on deposit accounts
Other service fees
Net gain (loss) on sale and valuation adjustment
of investment securities
Trading account profit
Gain on sale of loans and valuation adjustments
on loans held-for-sale
Other operating income (loss)
OPERATING EXPENSES:
Personnel costs:
Salaries
Pension, profit sharing and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Impairment losses on long-lived assets
Other operating expenses
Impact of change in fiscal period at certain subsidiaries
Goodwill impairment losses
Amortization of intangibles
17,518
28,722
19,812
5,487
25,299
2,341
1,820
1,218
14,631
621
4,590
70
379
66
445
14
8
46
(49,533)
(399)
Income (loss) before income tax and equity in earnings
(losses) of subsidiaries
Income tax expense (benefit)
Income (loss) before equity in earnings (losses)
of subsidiaries
Equity in earnings (losses) of subsidiaries
NET INCOME (LOSS)
1,057
27,665
1,648
26,017
331,659
$357,676
114
20,792
20,792
(42,410)
($21,618)
2
12
225
1
436
3,495
4,171
(57,220)
(15,363)
(41,857)
(2,602)
($44,459)
$2,615,635
38,785
504,376
32,125
3,190,921
($286,130)
(12,021)
(28,026)
(326,177)
$2,486,453
29,626
516,237
32,125
3,064,441
583,850
559,750
585,618
1,729,218
1,461,703
287,760
1,173,943
190,079
429,805
(16,253)
18,346
122,853
157,896
2,076,669
500,209
146,832
647,041
114,385
134,150
43,325
264,672
67,764
126,604
17,670
7,232
169,125
4,109
14,239
12,377
1,622,693
453,976
116,867
337,109
(46,768)
$290,341
(3,756)
(69,371)
(260,819)
(333,946)
7,769
7,769
(108,930)
6,724
16,942
(5,432)
(40,686)
(123,613)
(3,222)
(892)
(4,114)
(113)
(138,040)
(102)
(1,229)
(1,501)
2,137
(142,962)
19,349
3,734
15,615
(239,879)
($224,264)
580,094
518,960
537,477
1,636,531
1,427,910
287,760
1,140,150
190,079
320,875
4,359
35,288
117,421
141,463
1,949,635
517,178
151,493
668,671
116,742
135,877
44,543
141,534
68,283
129,965
17,741
7,232
118,128
9,741
14,239
12,377
1,485,073
464,562
106,886
357,676
$357,676
146
Condensed Consolidating Statement of Operations
Year ended December 31, 2005
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
(In thousands)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading securities
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term debt
Net interest (loss) income
Provision for loan losses
Net interest (loss) income after provision
for loan losses
Service charges on deposit accounts
Other service fees
Net gain (loss) on sale and valuation adjustment
of investment securities
Trading account profit
Gain on sale of loans and valuation adjustment
on loans held-for-sale
Other operating income
OPERATING EXPENSES:
Personnel costs:
Salaries
Pension, profit sharing and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Other operating expenses
Amortization of intangibles
Income (loss) before income tax, cumulative effect
of accounting change and equity in earnings
of subsidiaries
Income tax expense (benefit)
Income (loss) before cumulative effect of accounting
change and equity in earnings of subsidiaries
Cumulative effect of accounting change, net of tax
Income (loss) before equity in earnings of subsidiaries
Equity in earnings of subsidiaries
NET INCOME
$2,122
3,955
30,304
36,381
256
43,594
43,850
(7,469)
14
(7,483)
$8
598
606
988
988
$142,050
90
1,264
143,404
17,488
154,508
171,996
(382)
(28,592)
(382)
(28,592)
50,469
9,236
11,771
54,757
5,971
14,825
(28,592)
367
58
425
14
2
16
32
489
14,336
14,336
691
15,027
84,018
$99,045
31
1,021
4,536
56
6,292
(10,556)
1,380
53,377
3,155
50,222
50,222
490,480
$540,702
10
80
486
576
(29,168)
(10,266)
(18,902)
(18,902)
101,512
$82,610
$2,207,183
45,350
484,345
30,010
2,766,888
439,269
387,362
488,839
1,315,470
1,451,418
195,258
1,256,160
181,749
435,505
(6,694)
16,625
106,598
127,680
2,117,623
478,118
149,092
627,210
108,372
124,294
38,176
249,558
63,412
94,142
18,378
134,136
9,579
1,467,257
650,366
156,797
493,569
4,494
498,063
62,055
($235,056)
(18,667)
(27,697)
(281,420)
(8,456)
(56,891)
(225,305)
(290,652)
9,232
9,232
(104,004)
(898)
13,426
(23,301)
(38,858)
(144,403)
(3,849)
(1,097)
(4,946)
(61)
(134,909)
(73)
(1,513)
(141,502)
(2,901)
(771)
(2,130)
(1,578)
(3,708)
(738,065)
$2,116,299
30,736
488,814
30,010
2,665,859
430,813
349,203
461,636
1,241,652
1,424,207
195,272
1,228,935
181,749
331,501
52,113
30,051
83,297
106,564
2,014,210
474,636
148,053
622,689
108,386
124,276
39,197
119,281
63,395
100,434
18,378
122,585
9,579
1,328,200
686,010
148,915
537,095
3,607
540,702
$560,118
($741,773)
$540,702
2007 Annual Report 147
2007
2007
Popular, Inc. 2007
2007
Condensed Consolidating Statement of Cash Flows
Popular, Inc.
Holding Co.
Year ended December 31, 2007
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in undistributed losses of subsidiaries
Depreciation and amortization of
premises and equipment
Provision for loan losses
Goodwill and trademark impairment losses
Impairment losses on long-lived assets
Amortization of intangibles
Amortization and fair value adjustment of servicing assets
Net (gain) loss on sale and valuation
adjustment of investment securities
Net loss (gain) on disposition of premises and equipment
Loss on sale of loans and valuation adjustments on loans
held-for-sale
Net amortization of premiums and accretion
of discounts on investments
Net amortization of premiums on loans and deferred loan
origination fees and costs
Earnings from investments under the equity method
Stock options expense
Net disbursements on loans held-for-sale
Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net decrease in trading securities
Net (increase) decrease in accrued income receivable
Net decrease (increase) in other assets
Net increase (decrease) in interest payable
Deferred income taxes
Net increase in postretirement benefit obligation
Net increase in other liabilities
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Net (increase) decrease in money market investments
Purchases of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from calls, paydowns, maturities and
redemptions of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from sales of investment securities available-for-sale
Proceeds from sale of other investment securities
Net disbursements on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Capital contribution to subsidiary
Net liabilities assumed, net of cash
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Dividends received from subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase (decrease) in federal funds purchased and
assets sold under agreements to repurchase
Net increase (decrease) in other short-term borrowings
Payments of notes payable
Proceeds from issuance of notes payable
Dividends paid to parent company
Dividends paid
Proceeds from issuance of common stock
Treasury stock acquired
Capital contribution from parent
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
($64,493)
($506,413)
($507,212)
($642,313)
$1,655,938
($64,493)
177,501
2,365
2,007
(115,567)
1
(8,244)
(4,612)
568
(617)
26,591
1,508
1,156
4,354
87,011
22,518
(37,700)
(6,808)
(4,087,972)
3,900,087
5,783
245,484
(259,763)
(522)
11
383,100
141,700
14,213
(5,000)
397
(190,617)
20,414
(2,236)
(162,829)
1,389
2
$1,391
504,146
473,478
3
20,083
7
(15,410)
1,592
(2,690)
(8,339)
(7,762)
(18,164)
8,180
446,298
(60,914)
2,402
(928)
865
(129,969)
(51)
4,005
55
512,835
6,422
775
(2)
900
17,572
2
(25,150)
(300)
499,018
76,271
560,643
211,750
12,344
10,445
61,110
40,325
(12,297)
30,823
28,508
100,153
(1,293)
1,195
(4,803,927)
(550,392)
4,127,794
1,220,842
10,786
(123,355)
15,617
(237,455)
2,388
95,369
1,376,662
734,349
(706,347)
(886,267)
(25,232,314)
(111,180)
2,344,225
25,034,574
44,185
34,812
1
(2,904,713)
415,256
(22,312)
(111,025)
719,604
(26,507)
(104,386)
63,444
175,974
(6,203)
(127,630)
(1,272,976)
(1,654,143)
(76)
8,147
(33)
(9,642)
(1,624)
1,743
4,404
6,883
(4,350)
30,723
(36,383)
(1,654,351)
1,587
102,302
732,365
(735,548)
1,861,670
111,325
42
(383,100)
1,689,056
78,563
562,650
211,750
12,344
10,445
61,110
(55,159)
(12,296)
38,970
20,238
90,511
(21,347)
1,763
(4,803,927)
(550,392)
4,127,794
1,222,585
11,832
(94,215)
5,013
(223,740)
2,388
71,575
768,455
703,962
(638,568)
(160,712)
(29,320,286)
(112,108)
1,608,677
28,935,561
44,185
58,167
246,352
(1,457,925)
415,256
(22,312)
719,604
(26,507)
(104,866)
63,455
175,974
423,947
9,063
260,815
(444,583)
363,327
188,622
78
322
$400
3,041,881
(152,357)
2,889,524
(348,143)
(2,292,160)
(3,913,642)
4,217,588
(383,100)
(289)
111,325
433,460
(105,167)
1,015,470
$910,303
13,900
(595,669)
1,899,948
(3,156,092)
383,100
(111,325)
(1,718,495)
(27,852)
(65,793)
($93,645)
(325,180)
(2,612,801)
(2,463,277)
1,425,220
(190,617)
20,414
(2,525)
(1,259,242)
(131,333)
950,158
$818,825
219
157
$376
148
Condensed Consolidating Statement of Cash Flows
(290)
4
(427)
(54)
(2,507)
684
(527)
(11,002)
647
(569)
10,158
(333,209)
24,467
221,300
(269,683)
269,683
2,646
17,781
(441,941)
(In thousands)
Cash flows from operating activities:
Net income (loss)
Less: Impact of change in fiscal period of certain
subsidiaries, net of tax
Net income (loss) before impact of change in fiscal period
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries
Depreciation and amortization of
premises and equipment
Provision for loan losses
Goodwill and trademark impairment losses
Amortization of intangibles
Impairment losses on long-lived assets
Amortization of servicing assets
Net (gain) loss on sale and valuation
adjustment of investment securities
Net loss (gain) on disposition of premises and equipment
Net gain on sale of loans
Net amortization of premiums and accretion
of discounts on investments
Net amortization of premiums on loans and deferred loan
origination fees and costs
Earnings from investments under the equity method
Stock options expense
Net disbursements on loans held-for-sale
Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net decrease in trading securities
Net (increase) decrease in accrued income receivable
Net (increase) decrease in other assets
Net increase (decrease) in interest payable
Deferred income taxes
Net increase in postretirement benefit obligation
Net increase (decrease) in other liabilities
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Net decrease (increase) in money market investments
Purchases of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from calls, paydowns, maturities and
redemptions of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from sales of investment securities available-for-sale
Net disbursements on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Capital contribution to subsidiary
Assets acquired, net of cash
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Dividends received from subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase (decrease) in federal funds purchased and
assets sold under agreements to repurchase
Net increase (decrease) in other short-term borrowings
Payments of notes payable
Proceeds from issuance of notes payable
Dividends paid to parent company
Dividends paid
Proceeds from issuance of common stock
Treasury stock acquired
Capital contribution from parent
Net cash (used in) provided by financing activities
Cash effect of change in fiscal period
Net (decrease) increase in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Popular, Inc.
Holding Co.
Year ended December 31, 2006
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
$357,676
($21,618)
($44,459)
$290,341
($224,264)
$357,676
357,676
(21,618)
(2,271)
(42,188)
(2,638)
292,979
(1,220)
(223,044)
(6,129)
363,805
(331,659)
2,333
42,410
2,602
2
(13,598)
14
(118)
24,648
(6,995)
21
4,636
(23)
6
26,471
4,853
(775)
(20,574)
963
24,566
2,828
(15,471)
30,341
45,713
3,525
(2,407)
(13,010)
10,360
28,662
(127,083)
46,768
82,126
287,760
14,239
12,377
7,232
62,849
16,253
(25,933)
(122,853)
135,974
(1,286)
2,322
(6,580,246)
(1,547,800)
6,826,864
1,369,462
(11,612)
25,715
35,984
(48,800)
4,112
(86,169)
529,986
822,965
239,879
(73)
(30)
(6,724)
5,432
(199)
(5,829)
(1,482)
44,783
(44,783)
(487)
6,946
5,793
(6,959)
38,632
(37,880)
237,019
13,975
84,388
287,760
14,239
12,377
7,232
62,819
(4,359)
(25,929)
(117,421)
23,918
130,091
(12,270)
3,006
(6,580,246)
(1,503,017)
6,782,081
1,368,975
(4,209)
49,708
32,477
(26,208)
4,112
(83,544)
505,980
869,785
485,269
(321,966)
381,421
(708,142)
(20,593,684)
(53,016)
473,786
(254,930)
(20,863,367)
(66,026)
2,338,309
20,656,164
85,668
154,426
(1,881,055)
938,862
(448,708)
(30,084)
(3,034)
(23,769)
(102,971)
91,230
138,604
60,763
1,104,832
1,724,205
(3,328,993)
1,128,136
(3,464,344)
2,318,236
(308,662)
3,300
(274)
34,104
(1,894,292)
19,570
53,075
962,395
$1,015,470
(472,211)
7,933
862,753
74,211
3,317
(3,317)
(308,662)
315,844
1,876,458
20,925,847
88,314
208,802
(1,587,326)
938,862
(448,708)
(3,034)
(23,769)
(104,593)
87,913
138,703
1,294,567
65,457
1,789,662
257,697
(541,695)
952,427
(1,297,945)
308,662
(3,132)
(70,104)
(328,633)
(7,734)
(6,548)
(59,245)
($65,793)
(3,053,167)
1,226,973
(3,469,429)
1,506,298
(188,321)
55,846
(367)
(2,132,505)
11,914
43,761
906,397
$950,158
(36,000)
(4,000)
(4,127)
(4,939)
99
247,899
6,845
150,787
(50,450)
393
(188,321)
55,678
(93)
(32,006)
(694)
696
$2
3,313
(136,267)
(46,112)
36,000
(10,112)
(1,946)
2,103
$157
18,129
535,857
(907,062)
485,614
132,538
78
(126)
448
$322
2007 Annual Report 149
2007
2007
Popular, Inc. 2007
2007
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2005
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
$99,045
691
98,354
$82,610
82,610
$560,118
4,494
555,624
($741,773)
(1,578)
(740,195)
$540,702
3,607
537,095
(84,018)
(101,512)
(62,055)
738,065
Popular, Inc.
Holding Co.
(490,480)
$540,702
1,511
14
(In thousands)
Cash flows from operating activities:
Net income
Less: Cumulative effect of accounting change, net of tax
Net income before cumulative effect of accounting change 540,702
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries
Depreciation and amortization of
premises and equipment
Provision for loan losses
Amortization of intangibles
Amortization of servicing assets
Net (gain) loss on sale and valuation
adjustment of investment securities
Net gain on disposition of premises and equipment
Net gain on sale of loans
Net amortization of premiums and accretion
of discounts on investments
Net amortization of premiums on loans and deferred loan
origination fees and costs
Earnings from investments under the equity method
Stock options expense
Net disbursements on loans held-for-sale
Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net decrease in trading securities
Net increase in accrued income receivable
Net decrease (increase) in other assets
Net increase in interest payable
Deferred income taxes
Net increase in postretirement benefit obligation
Net increase (decrease) in other liabilities
5,722
(347)
5,777
1,349
(182)
(99)
(3,097)
305
(50,469)
(546)
(530,542)
10,160
(181,500)
(127,628)
(445)
110,432
150,000
500
57,458
15,785
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Net ( increase) decrease in money market investments
Purchases of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from calls, paydowns, maturities and
redemptions of investment securities:
Available-for-sale
Held-to-maturity
Other
Proceeds from sales of investment securities available-for-sale
Net repayments (disbursements) on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Capital contribution to subsidiary
Assets acquired, net of cash
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Dividends received from subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposits
Net (decrease) increase in federal funds purchased and
assets sold under agreements to repurchase
Net (decrease) increase in other short-term borrowings
Payments of notes payable
Proceeds from issuance of notes payable
Dividends paid to parent company
Dividends paid
Proceeds from issuance of common stock
Treasury stock acquired
Capital contribution from parent
Net cash (used in) provided by financing activities
Cash effect of change in accounting principle
Net increase in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
(9,236)
10
(5,518)
(33)
2,613
3
(21)
(96,200)
2,154
(71,293)
(2,431)
250
32,111
(1,146)
2,856
323
(10,266)
7,010
(102,735)
(20,125)
(31)
(770)
4,978
(156,327)
(75,000)
(75,000)
(478,510)
(3)
297
171,000
120,896
(6,690)
(4,501)
(135,763)
5,383
(182,751)
193,679
(130,643)
413
283
$696
(116,363)
41,286
75,000
116,286
(28)
2,049
54
$2,103
150,000
(480,660)
45,926
382,213
(15,808)
13,518
75,000
500,849
64
384
$448
80,508
195,258
9,579
25,813
6,694
(29,079)
(106,598)
36,518
134,452
(790)
4,887
(4,321,658)
(733,536)
4,127,381
1,161,956
(32,159)
(159,492)
36,421
7,097
5,451
7,627
394,275
949,899
209,122
(4,954,363)
(33,577,371)
(76,501)
4,115,508
33,637,018
60,553
299,027
(568,155)
297,805
(2,650,540)
(306,868)
(411,782)
(5,039)
(159,163)
71,053
116,862
52,500
(3,850,334)
(72)
(47)
898
23,301
(694)
(7,118)
(1,577)
34
(976)
2,877
(24,633)
(2,878)
(328)
93
726,945
(13,250)
132,470
910,122
(913,720)
365,604
935,378
(373,500)
1,056,354
81,947
195,272
9,579
25,766
(52,113)
(29,079)
(83,297)
35,288
127,235
(10,982)
5,226
(4,321,658)
(733,536)
4,127,381
1,160,980
(30,808)
(172,879)
35,218
(3,679)
5,451
20,431
391,743
928,838
160,061
(4,243,162)
(33,579,802)
(77,716)
3,317,198
33,787,268
61,053
388,596
(343,093)
297,805
(2,650,540)
(411,782)
(5,039)
(159,166)
71,053
117,159
(3,270,107)
1,261,945
109,723
1,371,668
2,438,448
(817,323)
(3,558,141)
3,362,405
(373,500)
(1,467)
784,915
3,097,282
(1,544)
195,303
767,092
$962,395
(249,796)
(367,952)
1,058,740
(1,040,295)
373,500
(934,915)
(1,050,995)
(7,891)
(51,354)
($59,245)
2,227,888
(766,277)
(2,650,972)
2,341,011
(182,751)
193,679
(1,467)
2,532,779
(1,572)
189,938
716,459
$906,397
P.O. Box 362708
San Juan, Puerto Rico
00936-2708