POPULAR, INC.
Annual Report / Informe Anual
2008
1
3
4
5
6
8
17
Letter to Shareholders
Popular, Inc. At a Glance
Institutional Values
Year in Review and BPOP Stock Performance
25-Year Historical Financial Summary
Our Creed / Our People / Board of Directors
Executive Officers / Corporate Information
Financial Review and Supplementary Information
9
11
12
13
14
16
Carta a los Accionistas
Un Vistazo a Popular, Inc.
Valores Institucionales
Resumen del Año y Desempeño de la Acción BPOP
Resumen Financiero Histórico – 25 Años
Nuestro Credo / Nuestra Gente / Junta de Directores
Oficiales Ejecutivos / Información Corporativa
Popular, Inc. is a full service financial services provider based in Puerto
Popular, Inc. es un proveedor de servicios financieros con sede en Puerto
Rico with operations in Puerto Rico, the United States, the Caribbean and
Rico y operaciones en Puerto Rico, los Estados Unidos, el Caribe y América
Latin America. As the leading financial institution in Puerto Rico, with
Latina. Como institución financiera líder en Puerto Rico, con 240
240 branches and offices, the Corporation offers retail and commercial
sucursales y oficinas, la Corporación ofrece servicios bancarios comerciales
banking services through its principal banking subsidiary, Banco Popular
y de individuos a través de Banco Popular de Puerto Rico, así como
de Puerto Rico, as well as auto and equipment leasing and financing,
servicios de arrendamiento y financiamiento de vehículos y equipo,
mortgage loans, investment banking, broker-dealer and insurance services
préstamos hipotecarios, corretaje y banca de inversión y seguros, a través
through specialized subsidiaries.
de subsidiarias especializadas.
In the United States, the Corporation operates Banco Popular North
En los Estados Unidos, la Corporación opera Banco Popular North America
America (BPNA), including its wholly-owned subsidiary E-LOAN. BPNA
(BPNA), que incluye su subsidiaria E-LOAN. BPNA es un banco comunitario
is a community bank providing a broad range of financial services and
que provee una amplia gama de servicios y productos financieros en
products to the communities it serves. BPNA operates branches in New
las comunidades que sirve. BPNA opera sucursales en Nueva York,
York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit
California, Illinois, Nueva Jersey y Florida. E-LOAN mercadea cuentas de
accounts under its name for the benefit of BPNA and offers loan customers
depósito bajo su nombre para el beneficio de BPNA y ofrece a los clientes
the option of being referred to a trusted consumer lending partner.
de préstamos la opción de ser referidos a un socio confiable.
The Corporation, through its transaction processing company, EVERTEC,
La Corporación, a través de su compañía de procesamiento de
continues to use its expertise in technology as a competitive advantage
transacciones financieras EVERTEC, utiliza su experiencia en tecnología
in its expansion throughout the Caribbean and Latin America, as well
como una ventaja competitiva para su expansión en el Caribe y América
as internally servicing many of its subsidiaries’ system infrastructures and
Latina, e internamente presta servicios a las infraestructuras de sistemas
transactional processing businesses. The Corporation is exporting its
así como procesamiento a las subsidiarias de la Corporación. La
115 years of experience through these regions while continuing its
Corporación exporta sus 115 años de experiencia a estas regiones
commitment to meet the needs of retail and business clients through
mientras continúa su compromiso con satisfacer las necesidades de
innovation, and to foster growth in the communities it serves.
clientes individuales y comerciales por medio de la innovación, y con
fomentar el crecimiento en las comunidades a las que sirve.
Dear Shareholders
Popular reported a net loss of
> In August, we announced a 50% reduction in the quarterly
$1.2 billion in 2008, compared
dividend from $0.16 to $0.08 per common share, effective in
to a net loss of $64.5 million in
October 2008. This was an extremely difficult decision, given
the previous year. These results
its impact on our shareholders, but in light of the deteriorating
represent a negative return on
financial and economic scenario, it was the prudent action to
assets (ROA) of 3.04% and a
take. This reduction helps preserve approximately $90 million
negative return on common
of capital annually.
equity (ROE) of 44.47%. Our
> In September, we sold PFH’s manufactured housing loan assets
results were significantly
to 21st Mortgage Corporation and Vanderbilt Mortgage and
impacted by losses from the
Finance, Inc. for a purchase price of $198 million in cash.
sale and discontinuance of
> During the months of September and October, we issued $350
Popular Financial Holding’s
million of fixed and floating rate notes in a private offering.
(PFH) operations, an increase
> In November, PFH sold approximately $1.1 billion in loans
of 191% in the provision for loan losses and a full valuation
and servicing-related assets to Goldman Sachs affiliates for
allowance of the deferred tax assets related to our operations
a purchase price of $731 million in cash.
in the United States. Our stock price closed at $5.16 on
> Finally, in December, Popular received $935 million as part of
December 31, 2008, 51% below the 2007 closing price, and
the Capital Purchase Program of the U.S. Treasury Department’s
it has declined sharply in the first months of 2009.
Troubled Asset Relief Program (TARP), in exchange for senior
Clearly, these results are extremely disappointing. While we
preferred stock and a warrant.
anticipated challenging conditions for the year, the crisis in the
financial industry worsened beyond anyone’s expectations and
spread throughout the U.S. economy. Meanwhile, Puerto Rico’s
economy continued mired in a recession, which is now entering
its fourth year.
Against this backdrop of a deteriorating financial and
economic environment, we executed a series of actions
throughout the year designed to improve capital, enhance
liquidity and reduce risk exposures.
These actions helped us weather the economic storm with
greater financial flexibility and allowed us to meet all obligations
and other operational needs. We also closed the year 2008 with
solid regulatory capital ratios. However, foreseeing another
extremely challenging year, in February 2009 we announced
another reduction in the quarterly dividend, from $0.08 to $0.02
per common share, which will preserve an additional $68 million
in capital annually. We are also implementing additional cost-
reduction measures.
> In March, we sold the assets of Equity One (a subsidiary
Our organizational structure has also undergone important
of PFH) to American General for a purchase price of
changes. David H. Chafey, Jr., President of Banco Popular de
$1.47 billion in cash.
Puerto Rico (BPPR), also assumed the position of President of
> In May, we issued $400 million of 8.25% Non-Cumulative
Banco Popular North America (BPNA) after the retirement of
Monthly Income Preferred Stock, Series B at a price of $25 per
Roberto R. Herencia. More recently, David was also named
share. The issue was oversubscribed and sold entirely in the
President and Chief Operating Officer of Popular, Inc. He is
Puerto Rico market.
spearheading the execution of the integration of both banks
under one management group, creating efficiencies to better
face current challenges and laying the groundwork for future
growth.
Against a backdrop of a deteriorating financial and economic environment,
we executed a series of actions throughout the year designed to I M P R O V E C A P I TA L ,
E N H A N C E L I Q U I D I T Y A N D R E D U C E R I S K E X P O S U R E S .
P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
1
Dear Shareholders
U N I T E D S TAT E S
for the benefit of BPNA. As part of the plan, all operational and
The year 2008 was one of dramatic changes in our operations in
support functions will be transferred to BPNA and EVERTEC,
the United States. Our U.S. operations suffered substantial losses
entailing a reduction of 100% of E-LOAN’s employees. Total
due primarily to the sale of assets and a significantly higher
annualized savings are expected to reach $37 million. Restructuring
provision for loan losses as a result of deteriorating credit quality.
charges, including impairments, will amount to approximately
In addition, reflecting the negative income results for the last
$24 million.
three years, during 2008 we recorded a full valuation allowance
Management is currently evaluating additional alternatives to
of $861 million on the deferred tax assets related to our U.S.
improve the financial performance of these operations. The strategic
operations. This valuation allowance could be reduced once these
direction is clear – we are focusing on core banking activities in
operations begin to show positive results.
regions where we believe we have a distinct competitive advantage,
B A N C O P O P U L A R N O RT H A M E R I C A
and we will leverage the infrastructure in Puerto Rico to reduce
operational costs in the U.S. We are confident that a leaner, more
Banco Popular North America (BPNA), which includes E-LOAN,
agile organization will contribute positively to the results and
reported a net loss of $524.8 million, $233.9 million of which are
growth of Popular.
related to E-LOAN.
The performance of BPNA’s banking operations was severely
P O P U L A R F I N A N C I A L H O L D I N G S
impacted by an increase in the provision for loan losses from
During 2008, we discontinued all Popular Financial Holdings (PFH)
$77.8 million in 2007 to $346 million in 2008. The 345% increase
operations. The discontinued operations of PFH reflected a net loss
was driven by higher delinquencies in the commercial, residential
of $563.4 million.
mortgage and consumer portfolios, reflecting the continuing
PFH started the year with a significantly reduced balance sheet
downturn of the real estate market and the economy in general.
due to the recharacterization completed in December 2007 of certain
E-LOAN faced similar credit quality issues, particularly in its
on-balance sheet securitizations – amounting to approximately
HELOC and closed-end second mortgage portfolios, with its
$3.2 billion – that allowed us to recognize these transactions as sales.
provision increasing from $17.7 million in 2007 to $126.3 million
In March, we completed the sale of approximately $1.42 billion
in 2008. The rapid deterioration of this portfolio reflects a
of Equity One’s assets for $1.47 billion, thus exiting PFH’s consumer
substantial number of debtors falling behind in their first and
finance business.
second mortgages with little or no equity remaining to cover
Most of PFH’s $1.5 billion portfolio, which was accounted for
the principal of the junior lien, due principally to the significant
at fair value based on Statement of Financial Accounting Standards
decline in housing prices.
(SFAS) No. 159 beginning on January 1st, 2008, was subsequently
In response to these difficult conditions, we embarked on
sold during the year in a series of transactions. In November, we
a major restructuring plan for BPNA’s banking operations and
completed the sale of approximately $1.1 billion of PFH’s loans
E-LOAN. In the case of the banking operations, we will close,
and mortgage servicing assets to several Goldman Sachs affiliates.
consolidate or sell approximately 40 underperforming branches,
In addition, we completed the sale of PFH’s manufactured
exit lending businesses that do not generate deposits or fee
housing loan assets to 21st Mortgage Corp. and Vanderbilt
income, and reduce expenses. This plan entails a 30% headcount
Mortgage and Finance, Inc. These transactions generated
reduction and approximately $33 million in restructuring charges
combined losses of $440 million, but generated $929 million in
and impairments, and is expected to generate $50 million in
additional liquidity and substantially reduced Popular’s exposure
annual savings.
to subprime assets in the U.S. mainland.
As of December, E-LOAN ceased the origination of mortgages
to focus exclusively on marketing deposit accounts under its name
THE STRATEGIC DIRECTION IS CLEAR – we are focusing on core banking activities
in regions where we believe we have a distinct competitive advantage, and we will
leverage the infrastructure in Puerto Rico to reduce operational costs in the U.S.
2 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
P U E RT O R I C O
Our banking operations in Puerto Rico continued feeling the pressure
of the island’s prolonged economic recession. Banco Popular de
Puerto Rico (BPPR) reported a net income of $239.1 million in 2008,
compared with $327.3 million in 2007.
Despite the challenging economic conditions, BPPR was able to
grow its revenues by 9% when compared with the previous year, due
to an expansion in the net interest margin and higher non-interest
income, a testament to the bank’s revenue-generating capacity.
However, the provision for loan losses more than doubled from
the previous year, totaling $519 million in 2008. This dramatic
increase responded to a deterioration of credit quality, particularly
in the commercial and construction portfolios. Delinquencies and
losses in consumer portfolios, though higher than the year before,
remained substantially in line with our expectations. Without any
doubt, the proactive and intensive management of credit quality
was the key focus during the year.
The commercial banking group restructured and strengthened
several areas to ensure the quality of incoming loans as well as to
detect and manage potentially problematic loans early on by
focusing efforts on portfolio management and loan modification.
The consumer lending area also invested in analytical tools to
enhance collection practices, redesigned operational processes and
improved workforce productivity through training and revision of
incentive programs.
The changes, both in the commercial and individual credit areas,
have placed us in a stronger position to manage what looks to be
another difficult year in terms of credit quality.
Expenses grew by approximately 6% due to several factors such as
the absorption of Citibank’s retail banking operations and higher
insurance premiums from the Federal Deposit Insurance Corporation
(FDIC). The increase was partially offset by a series of cost-control
initiatives like headcount reduction, lower advertising spending and
disciplined spending on technology projects.
We continuously analyze the performance and long-term prospects
of the lines of business in which we compete, and take actions to
either scale back or strengthen activities. An important decision this
year involved the closing of Popular Finance, our consumer finance
subsidiary on the island. The continued contraction of this market,
the industry’s lack of profitability and our financial results led us to
conclude that it was prudent to exit this line of business. Another
P O P U L A R , I N C.
At a Glance
B A N C O P O P U L A R D E P U E RT O R I C O
> Approximately 1.4 million clients
> 187 branches and 62 offices throughout
Puerto Rico and the Virgin Islands
> 6,244 full-time equivalent employees (FTEs) as
of 12/31/08
> 605 ATMs and 27,162 POS throughout
Puerto Rico and the Virgin Islands
> No. 1 market share in total deposits (36.3% –
9/30/08) and total loans (22.8% – 9/30/08)
> $25.9 billion in assets, $16.0 billion in loans
and $18.4 billion in deposits as of 12/31/08
B A N C O P O P U L A R N O RT H A M E R I C A
> 139 branches throughout five states (Florida,
California, New York, New Jersey and Illinois)
> 2,100 FTEs as of 12/31/08
> $1.5 billion in deposits captured by E-LOAN
as of 12/31/08
> $12.4 billion in assets, $10.2 billion in loans
and $9.7 billion in total deposits as of 12/31/08
E V E RT E C
> 12 offices throughout Puerto Rico and Latin
America serving 16 countries
> 1,766 FTEs as of 12/31/08
> Processed over 1.1 billion transactions in 2008,
of which more than 557 million corresponded
to the ATH® Network
> 5,096 ATMs and 95,617 POS throughout
Puerto Rico, United States and Latin America
2008
3
Dear Shareholders
important action was the acquisition of the mortgage servicing
EVERTEC’s expansion in Latin America continued in 2008,
rights to a $5 billion mortgage loan portfolio owned by Freddie
showing strong revenue and net income growth from their
Mac and Ginnie Mae and previously serviced by R&G Mortgage.
activities in the region. We strengthened business relationships in
The benefits of this acquisition include the opportunity to
markets where we already had a presence and entered new ones,
create cost synergies by adding volume to our servicing
such as Mexico, where we are targeting smaller players that are
infrastructure, service an attractive client base and fortify BPPR’s
often overlooked by larger processors.
leading position in the mortgage industry.
EVERTEC has proven that by identifying niches and delivering
Our acquisition of Citibank’s local retail banking operations and
superior service, it can successfully compete in the transaction-
Smith Barney in 2007 proved to be a great addition to BPPR’s
processing business and provide a more diverse source of revenues
operations. In the case of the retail banking operations, we have
for Popular.
retained most of the clients and deposits acquired and have been
able to sell additional products to these clients. The Smith Barney
A D D R E S S I N G C H A L L E N G E S
transaction was well received by the local market, repositioned
The outlook for 2009 points to another difficult year. We are living
Popular Securities as an important player in the brokerage business,
through unprecedented times, and we are making the necessary
and has produced financial results that exceeded our projections.
adjustments to weather this difficult period. While we believe
It is difficult to predict how long or deep the economic
actions by both the U.S. and Puerto Rican governments could help
recession in Puerto Rico will be. We will manage our business to
stabilize the financial system and stimulate the economy, we have
ensure that, notwithstanding the challenging environment, BPPR
put comprehensive plans in place to navigate the difficult waters
continues solidifying its position as the leading financial institution
that lie ahead.
in Puerto Rico.
E V E RT E C
Looking back, we deployed too much of our capital and
resources in our U.S. operations without reaching appropriate
profitability levels, and that has impacted our performance in
EVERTEC had a strong year, delivering a net income of $43.6
recent years. We are determined to improve the profitability of
million in 2008, 40% higher than 2007. These results were
these operations by focusing on our core banking business while
primarily driven by business-process outsourcing services, ATH®
we continue to build the formidable franchise we have in Puerto
Network and point-of-sale (POS) transactions, and the sale of
Rico. Our Board of Directors continues to provide invaluable
VISA shares. These results were achieved in spite of the fact that
guidance, our management team is focused and our people are
EVERTEC’s main clients, which include financial institutions,
highly committed to the success of this organization. We thank
government and businesses from other economic sectors, have
you, our shareholders, and we will continue to work tirelessly to
also been impacted by the financial and economic crises. To
reward your continued support.
mitigate the impact of lower business volume from these sources,
during 2008 EVERTEC focused on pursuing new sources of
revenues, expanding into new geographical markets, attracting
new clients and controlling expenses.
In Puerto Rico, EVERTEC continued initiatives to enhance
the competitiveness of the ATH® Network, which remains the
most secure and cost effective payment method in Puerto Rico,
Richard L. Carrión
and attracted new clients to its hosting and outsourcing services.
Chairman and Chief Executive Officer
I N S T I T U T I O N A L
Values
S O C I A L C O M M I T M E N T
We are committed to work
actively in promoting the social
and economic well-being of the
communities we serve.
C U S T O M E R
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.
I N T E G R I T Y
We are guided by the highest
standards of ethics, integrity
and morality. Our customers’
trust is of utmost importance
to our institution.
4 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
Year in Review and BPOP Stock Performance
q
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
BA
C
u i
t
y
w
e
r
D
F
E
G
H
I
o a
s
KBW Bank
Index
fd
g
BPOP
h
The KBW Bank Index is
a modified cap-weighted
index consisting of 24
exchange-listed and
National Market System
stocks, representing
national money center
banks and leading
regional institutions.
1
07
2
07
3
07
4
07
5
07
6
07
7
07
8
07
9
07
10
07
11
07
12
07
1
08
2
08
3
08
4
08
5
08
6
08
7
08
8
08
9
08
10
08
11
08
12
08
Market Events*
A Bank of America acquires Countrywide Financial.
B British government temporarily nationalizes Northern Rock.
C J.P. Morgan Chase acquires Bear Stearns in government-assisted deal.
D Government places Fannie Mae, Freddie Mac in conservatorship.
E Lehman Brothers files for bankruptcy. Bank of America agrees to
acquire Merrill Lynch.
F U.S. government approves $85 billion loan to American
International Group.
G J.P. Morgan Chase acquires operations of Washington Mutual.
H U.S. government says it will provide $700 billion to stabilize
U.S. financial markets. FDIC increases deposit insurance to
$250,000 per depositor.
I Wells Fargo receives regulatory approval to acquire Wachovia Co.
*Information and dates compiled from related official web sites.
BPOP Actions
q Popular restructures Popular Financial Holdings (PFH) and E-LOAN; exits wholesale
subprime mortgage origination; consolidates Banco Popular North America
(BPNA) functions.
w Popular acquires Citibank’s retail banking and broker-dealer operations in Puerto Rico.
e Recharacterization of PFH securitizations results in removal of $3.2 billion in loans from
PFH’s balance sheet.
r E-LOAN restructures business model, focuses on conforming first mortgages.
t Popular adopts fair-value option (SFAS 159) for $1.5 billion in loans held by PFH.
y BPNA sells six branches, $125 million in deposits in Texas for $12.8 million.
u Popular sells approximately $1.42 billion of Equity One’s assets for $1.47 billion, exits
consumer-finance business.
i Popular issues $400 million of preferred shares in Puerto Rico at 8.25%.
o Popular reduces quarterly dividend per common share by 50% to $0.08. The dividend
reduction will help preserve approximately $90 million of capital annually.
a Popular issues approximately $350 million of fixed and floating rate notes in a
private offering.
s Popular sells $260 million in manufactured housing loan assets of PFH for $198 million
to enhance liquidity and reduce risk exposure.
d Popular announces plan to reduce size of BPNA franchise; focus on branch-based
banking. E-LOAN ceases loan originations.
f Popular sells approximately $1.1 billion in loans and servicing-related assets to Goldman
Sachs affiliates for $731 million to enhance liquidity and reduce risk exposure.
1$ Popular acquires mortgage servicing rights to a $5 billion mortgage loan portfolio in
Puerto Rico (owned by Ginnie Mae and Freddie Mac) for $38.2 million.
1% Popular issues $935 million in preferred stock and a warrant to the U.S. Department of
the Treasury under the TARP Capital Purchase Program.
E X C E L L E N C E
We believe there is only one way
to do things: the right way.
I N N O VAT I O N
We foster a constant search
for new solutions as a strategy
to enhance our competitive
advantage.
O U R P E O P L E
We strive to attract, develop, compensate
and retain the most qualified people
in a work environment characterized by
discipline and affection.
S H A R E H O L D E R VA L U E
Our goal is to produce high
and consistent financial returns
for our shareholders, based on a
long-term view.
5
P O P U L A R , I N C.
25-Year Historical Financial Summary
(Dollars in millions, except per share data)
Selected Financial Information
Net Income (Loss)
Assets
Net Loans
Deposits
Stockholders’ Equity
Market Capitalization
Return on Assets (ROA)
Return on Equity (ROE)
Per Common Share1
Net Income (Loss) – Basic
Net Income (Loss) – 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.
E-LOAN
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)
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
$
$
$
$
$
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
$
$
$
$
$
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
$
$
$
$
$
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
$
$
$
$
$
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%
126
3
9
138
$
$
$
$
$
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%
126
3
10
139
14
17
14
152
136
3
139
55
55
194
125
127
136
113
113
51
51
164
78
78
6
6
84
4.4
110.3
4,110
94
94
36
36
130
7.0
123.8
4,314
8.3
134.0
4,400
12.7
139.1
4,699
17
156
153
3
156
68
68
224
14.9
159.8
5,131
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
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
166
8
34
208
73
28
10
111
319
262
8
26
296
88
88
384
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
43.0
174.5
7,606
1 Per common share data adjusted for stock splits.
2 Does not include host-to-host ATMs (2,223 in 2008) 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.
6 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$
$
$
$
$
$
146.4
15,675.5
8,677.5
9,876.7
1,141.7
$ 1,276.8
$
185.2
16,764.1
9,779.0
10,763.3
1,262.5
$ 2,230.5
$
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
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
56.6
175.0
7,815
78.0
173.7
7,996
111.2
171.9
8,854
$
$
$
$
$
232.3
23,160.4
13,078.8
13,672.2
1,709.1
4,611.7
$
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
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
276.1
28,057.1
16,057.1
14,804.9
1,993.6
3,578.1
$
304.5
30,744.7
18,168.6
16,370.0
2,272.8
$ 3,965.4
$
351.9
33,660.4
19,582.1
17,614.7
2,410.9
$ 4,476.4
$
470.9
36,434.7
22,602.2
18,097.8
2,754.4
$ 5,960.2
$
489.9
44,401.6
28,742.3
20,593.2
3,104.6
$ 7,685.6
$
540.7
48,623.7
31,710.2
22,638.0
3,449.2
$ 5,836.5
$
357.7
47,404.0
32,736.9
24,438.3
3,620.3
$ 5,003.4
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%
$
$
$
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
68%
30%
2%
100%
66%
32%
2%
100%
62%
36%
2%
100%
55%
43%
2%
100%
53%
45%
2%
100%
52%
45%
3%
100%
$
$
$
$
$
(64.5)
44,411.4
29,911.0
28,334.4
3,581.9
2,968.3
-0.14%
-2.08%
$ (1,243.9)
38,882.8
26,276.1
27,550.2
3,268.4
1,455.1
-3.04%
-44.47%
$
(0.27)
(0.27)
0.64
12.12
10.60
59%
38%
3%
100%
$
$
$
(4.55)
(4.55)
0.48
6.33
5.16
65%
32%
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
212
4
49
17
14
33
12
2
1
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
158
52
15
11
32
12
2
1
1
1
12
297
638
605
65
192
862
226
1,360
1,586
2,448
690.2
150.0
12,508
196
8
147
351
134
51
12
24
32
13
2
1
1
1
11
282
633
615
69
187
871
433
1,454
1,887
2,758
772.7
175.2
12,303
179
8
139
326
2
9
12
22
32
7
1
1
1
1
12
100
426
605
74
176
855
462
1,560
2,022
2,877
849.4
202.2
10,587
7
Our Creed
Our People
O U R C R E E D
B O A R D O F D I R E C T O R S
EXECUTIVE OFFICERS
Richard L. Carrión
Chairman
Chief Executive Officer
Popular, Inc.
David H. Chafey Jr.
President
Chief Operating Officer
Popular, Inc.
Jorge A. Junquera
Senior Executive Vice President
Chief Financial Officer
Popular, Inc.
Brunilda Santos de Álvarez, Esq.
Executive Vice President
Chief Legal Officer
Popular, Inc.
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 requirements 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. in all its markets.
O U R P E O P L E
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.
Richard L. Carrión
Chairman
Chief Executive Officer
Popular, Inc.
Juan J. Bermúdez
Retired Partner, Bermúdez & Longo, S.E.
María Luisa Ferré
President and Chief Executive Officer
Grupo Ferré Rangel
Michael Masin
Private Investor
Manuel Morales Jr.
President, Parkview Realty, Inc.
Francisco M. Rexach Jr.
President, Capital Assets, Inc.
Frederic V. Salerno
Private 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.
C O R P O R AT E I N F O R M AT I O N
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
Annual Meeting
The 2009 Annual Stockholders’ Meeting
of Popular, Inc. will be held on Friday,
May 1, 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
8 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
Estimados Accionistas
Popular registró una pérdida
> En agosto, anunciamos una reducción de 50% en el dividendo
neta de $1,200 millones en el
trimestral, de $0.16 a $0.08 por acción común, efectivo en octubre
2008, comparada con una
de 2008. Esta decisión fue extremadamente difícil, dado su
pérdida neta de $64.5 millones
impacto sobre nuestros accionistas, pero a la luz del deteriorado
el año anterior. Estos resultados
panorama financiero y económico, era la decisión más prudente.
representan un rendimiento
Esta reducción nos permite preservar aproximadamente $90
negativo sobre activos (ROA, por
millones anualmente en capital.
sus siglas en inglés) de 3.04% y
> En septiembre, vendimos los activos de préstamos de vivienda
un rendimiento negativo sobre
manufacturada de PFH a 21st Mortgage Corporation y Vanderbilt
capital (ROE, por sus siglas en
Mortgage & Finance, Inc. por un precio de compra de $198
inglés) de 44.47%.
millones en efectivo.
Nuestros resultados fueron
> Durante los meses de septiembre y octubre, emitimos $350 millones
afectados significativamente por
en títulos de renta fija y variable mediante una oferta privada.
las pérdidas en la venta y la
> En noviembre, PFH vendió aproximadamente $1,100 millones en
descontinuación de las operaciones de Popular Financial Holdings
préstamos y activos de servicio de hipotecas a afiliadas de Goldman
(PFH), por un aumento de 191% en la provisión para pérdidas en
Sachs, por un precio de compra de $731 millones en efectivo.
préstamos y una reserva total por revaluación de los activos por
> Finalmente, en diciembre, Popular recibió $935 millones como
impuestos diferidos de nuestras operaciones en los Estados Unidos.
parte del programa del Tesoro Federal, conocido en inglés como
El precio de nuestra acción cerró en $5.16 el 31 de diciembre de
el TARP Capital Purchase Program, a cambio de acciones
2008, un 51% por debajo de la cotización al cierre del año 2007, y
preferidas y derechos de suscripción de acciones a largo plazo.
ha caído marcadamente durante los primeros meses de 2009.
Claramente, estos resultados son extremadamente
decepcionantes. Aunque anticipábamos unas condiciones retadoras
para el año, la crisis en la industria financiera empeoró mucho más
de lo esperado con repercusiones a través de toda la economía de
los Estados Unidos. Mientras tanto, la economía de Puerto Rico
continuó estancada en una recesión, que entra ahora en su
cuarto año.
En un ambiente fiscal y económico en deterioro, implementamos
una serie de acciones durante el año diseñadas para fortalecer el
capital, aumentar la liquidez y reducir exposiciones al riesgo.
Estas acciones nos ayudaron a enfrentar la tormenta económica
con mayor flexibilidad financiera y nos permitieron cubrir todas las
obligaciones y necesidades operacionales. También cerramos el año
2008 con una sólida proporción de capital reglamentario. Sin
embargo, anticipando otro año de grandes retos, en febrero
de 2009 anunciamos otra reducción en el dividendo trimestral,
de $0.08 a $0.02 por acción común, lo cual preservará
aproximadamente $68 millones adicionales anualmente en capital.
Además, estamos implementando medidas adicionales de control
de costos.
Nuestra estructura organizacional experimentó cambios
> En marzo, vendimos los activos de Equity One (una filial de PFH)
importantes. David H. Chafey, Jr., Presidente de Banco Popular de
a American General por un precio de compra de $1,470 millones
Puerto Rico (BPPR), sumó a sus funciones el cargo de Presidente de
en efectivo.
Banco Popular North America (BPNA) después del retiro de Roberto
> En mayo, emitimos $400 millones en acciones preferidas de
R. Herencia. Más recientemente, David también fue nombrado
ingreso mensual no-acumulativo al 8.25% a un precio de $25
Presidente y Principal Oficial de Operaciones de Popular, Inc. Él
por acción. La demanda por la emisión excedió la oferta y fue
encabeza la integración de ambos bancos bajo un solo grupo
vendida completamente en el mercado de Puerto Rico.
gerencial, con el fin de crear eficiencias para enfrentar los desafíos
actuales y sentar las bases para el crecimiento futuro.
En un ambiente fiscal y económico en deterioro, implementamos una serie de
acciones durante el año diseñadas para fortalecer EL CAPITAL, AUMENTAR LA LIQUIDEZ
Y REDUCIR EXPOSICIONES AL RIESGO.
9
Estimados Accionistas
E S TA D O S U N I D O S
El año 2008 fue uno de cambios dramáticos en nuestras operaciones
Desde diciembre, E-LOAN dejó de originar hipotecas para
enfocarse exclusivamente en mercadear cuentas de depósito bajo
en los Estados Unidos. Dichas operaciones sufrieron pérdidas
su nombre, a beneficio de BPNA. Como parte del plan, todas las
sustanciales debido, principalmente, a la venta de activos y a una
funciones operacionales y de apoyo serán transferidas a BPNA y
provisión para pérdidas en préstamos significativamente mayor,
EVERTEC, lo cual reducirá en un 100% los empleados de E-LOAN.
como resultado del deterioro en la calidad crediticia.
Se espera que los ahorros totales anuales alcancen los $37 millones.
Además, para reflejar el ingreso negativo registrado durante
Los costos de reestructuración, incluyendo el deterioro de valor de
los últimos tres años, durante el 2008 registramos una reserva total
varios activos, sumarán aproximadamente $24 millones.
por revaluación de los activos por impuestos diferidos de nuestras
La gerencia evalúa alternativas adicionales para mejorar el
operaciones en los Estados Unidos por $861 millones. Esta reserva
desempeño financiero de estas operaciones. La dirección estratégica
podría reducirse una vez que estas operaciones comiencen a mostrar
es clara – enfocarnos en actividades bancarias tradicionales en
resultados positivos.
B A N C O P O P U L A R N O RT H A M E R I C A
Banco Popular North America (BPNA), que incluye E-LOAN, reportó
regiones donde tenemos una ventaja competitiva única y apalancar
la infraestructura en Puerto Rico para reducir gastos operacionales en
los Estados Unidos. Nos sentimos confiados en que una organización
más compacta y ágil contribuirá positivamente a los resultados y al
pérdidas netas de $524.8 millones, de los cuales $233.9 millones están
crecimiento de Popular.
relacionados con E-LOAN.
El rendimiento de las operaciones bancarias de BPNA se vio
afectado seriamente por un aumento en la provisión para pérdidas
P O P U L A R F I N A N C I A L H O L D I N G S
Durante el 2008, concluimos el cierre de todas las operaciones de
en préstamos, de $77.8 millones en 2007 a $346 millones en 2008.
Popular Financial Holdings (PFH). Las operaciones descontinuadas
El aumento de 345% fue impulsado por más delincuencias en
de PFH reflejaron una pérdida de $563.4 millones.
las carteras de hipotecas comerciales, residenciales y préstamos a
PFH comenzó el año con un estado de situación significativamente
individuos, como reflejo del continuo descenso del mercado
menor debido a que en diciembre de 2007 se recaracterizaron ciertas
inmobiliario y la economía en general.
titulizaciones, ascendentes a aproximadamente $3,200 millones, lo cual
E-LOAN enfrentó problemas similares de calidad de crédito,
nos permitió reconocer estas transacciones como ventas.
particularmente en sus carteras de líneas de crédito contra el capital
En marzo, completamos la venta de aproximadamente $1,420
de la vivienda (HELOC, por sus siglas en inglés) y de segundas
millones en activos de Equity One por $1,470 millones, saliendo así
hipotecas de terminación cerrada, por lo cual su provisión aumentó
del negocio de financiamiento al consumidor de PFH.
de $17.7 millones en 2007 a $126.3 millones en 2008. El rápido
deterioro de esta cartera refleja que un número sustancial de
La mayor parte de la cartera de $1,500 millones de PFH,
contabilizada al valor justo basado en SFAS 159 (“Fair Value Option
individuos se ha atrasado en los pagos de sus primeras y segundas
for Financial Assets and Financial Liabilities”) a partir del 1 de
hipotecas, con poco o ningún capital para cubrir el gravamen
enero de 2008, fue vendida posteriormente mediante una serie
subordinado de la hipoteca debido, principalmente, a la baja en
de transacciones. En noviembre, completamos la venta de
los valores de la vivienda.
aproximadamente $1,100 millones de los préstamos y activos
Como respuesta a estas condiciones difíciles, implantamos un
de servicios de hipoteca de PFH a varias afiliadas de Goldman Sachs.
plan de reestructuración abarcador para las operaciones de BPNA
Además, completamos la venta de los activos de préstamos de
y las operaciones de E-LOAN. En el caso de las operaciones bancarias,
vivienda manufacturada de PFH a 21st Mortgage Corporation y
cerraremos, consolidaremos o venderemos aproximadamente 40
Vanderbilt Mortgage & Finance, Inc. Estas transacciones generaron
sucursales de bajo rendimiento, saldremos de negocios que no
pérdidas combinadas de $440 millones, pero generaron $929 millones
generen depósitos o ingresos de cargos por servicio y reduciremos
en liquidez adicional y redujeron considerablemente la exposición de
gastos. Este plan conlleva una reducción de 30% del personal y
Popular al mercado de hipotecas de alto riesgo en los Estados Unidos.
aproximadamente $33 millones en cargos de reestructuración y de
deterioro de valor de varios activos, y se espera que genere
$50 millones en ahorros anualmente.
LA DIRECCIÓN ESTRATÉGICA ES CLARA – enfocarnos en actividades bancarias tradicionales
en regiones donde tenemos una ventaja competitiva única y apalancar la infraestructura
en Puerto Rico para reducir gastos operacionales en los Estados Unidos.
1 0 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
P U E R T O R I C O
Nuestras operaciones bancarias en Puerto Rico continuaron enfrentando
la presión de la prolongada recesión económica en la Isla. Banco Popular
de Puerto Rico (BPPR) reportó una ganancia neta de $239.1 millones
en el 2008, comparado con $327.3 millones en el 2007.
A pesar de las difíciles condiciones económicas, BPPR logró
aumentar sus ingresos en 9% en comparación con el año anterior,
debido a una ampliación en el margen de interés neto y un aumento
en los ingresos no procedentes de intereses, lo cual demuestra la
capacidad del Banco para generar ingresos.
Sin embargo, la provisión para pérdidas en préstamos aumentó
a más del doble en comparación con el año anterior, para un total
de $519 millones en 2008. Este dramático aumento respondió a un
deterioro en la calidad de crédito, en particular en la cartera comercial
y de construcción. La delincuencia y las pérdidas en las carteras de
préstamos a individuos, aunque mayores que el año anterior,
permanecieron considerablemente en línea con nuestras expectativas.
Indudablemente, el manejo proactivo e intenso de la calidad del crédito
fue nuestra prioridad durante el año.
El grupo de banca comercial reestructuró y reforzó varias áreas
para asegurar la calidad crediticia, así como detectar y manejar
temprano los préstamos que puedan ser potencialmente problemáticos,
enfocando sus esfuerzos en el manejo de carteras y en la modificación
de préstamos.
El área de préstamos a individuos también invirtió en instrumentos
analíticos para mejorar las prácticas de cobros, rediseñó los procesos
operacionales y mejoró la productividad laboral a través de
adiestramientos y la revisión de los programas de incentivos.
Los cambios en las áreas de crédito comercial e individual nos han
colocado en una posición más fuerte para poder manejar lo que
aparenta ser otro año de retos en términos de calidad de crédito.
Los gastos aumentaron por aproximadamente 6% debido a varios
factores como la absorción de las operaciones de banca individual de
Citibank y un aumento en las primas de seguros de la Corporación
Federal de Seguros de Depósitos (FDIC, por sus siglas en inglés). Este
aumento fue neutralizado parcialmente por una serie de iniciativas
de control de gastos como una reducción del personal, una disminución
de los gastos publicitarios y una mayor disciplina en gastos relacionados
con proyectos de tecnología.
Continuamente analizamos el funcionamiento y las perspectivas
a largo plazo de las líneas de negocio en las cuales competimos y
actuamos para reducir o reforzar actividades. Una decisión importante
este año fue el cierre de Popular Finance, nuestra subsidiaria de
préstamos de consumo en la Isla. La contracción continua de este
Un Vistazo a
P O P U L A R , I N C.
B A N C O P O P U L A R D E P U E RT O R I C O
> Aproximadamente 1.4 millones de clientes
> 187 sucursales y 62 oficinas a través de
Puerto Rico e Islas Vírgenes
> 6,244 empleados (equivalente a tiempo
completo) al 31/12/08
> 605 cajeros automáticos y 27,162 terminales
de punto de venta a través de Puerto Rico
y las Islas Vírgenes
> Primer lugar en participación de mercado
en total de depósitos (36.3% – 30/09/08) y
volumen de préstamos (22.8% – 30/09/08)
> $25,900 millones en activos, $16,000 millones
en préstamos y $18,400 millones en depósitos
al 31/12/08
B A N C O P O P U L A R N O RT H A M E R I C A
> 139 sucursales a través de cinco estados (Florida,
California, Nueva York, Nueva Jersey e Illinois)
> 2,100 empleados (equivalente a tiempo
completo) al 31/12/08
> $1,500 millones en depósitos captados por
E-LOAN al 31/12/08
> $12,400 millones en activos, $10,200 millones
en préstamos y $9,700 millones en total de
depósitos al 31/12/08
E V E RT E C
> 12 oficinas a través de Puerto Rico y
Latinoamérica, sirviendo a 16 países
> 1,766 empleados (equivalente a tiempo
completo) al 31/12/08
> Procesó más de 1,100 millones de transacciones
en 2008, de las cuales más de 557 millones
correspondieron a la Red ATH®
> 5,096 cajeros automáticos y 95,617 terminales
de punto de venta a través de Puerto Rico,
Estados Unidos y Latinoamérica
2008
1 1
Estimados Accionistas
mercado, la carencia de rentabilidad de la industria y nuestros
La expansión de EVERTEC en América Latina continuó en el 2008,
resultados financieros nos llevaron a concluir que era prudente cerrar
mostrando un fuerte crecimiento en los ingresos y ganancias netas
esta línea de negocio.
de sus negocios en la región. Reforzamos nuestras relaciones de
Otra acción importante fue la adquisición de los derechos de
negocio en lugares donde ya teníamos una presencia y entramos
servicio de una cartera de préstamos hipotecarios de $5,000 millones
en otros nuevos, como México, donde nos enfocamos en servir los
poseída por Freddie Mac y Ginnie Mae y administrada anteriormente
negocios más pequeños, un segmento que se encuentra desatendido
por R&G Mortgage. Las ventajas de esta adquisición incluyen la
por parte de los procesadores de mayor escala.
oportunidad de crear sinergias de costos al añadir volumen a nuestra
EVERTEC ha probado que, al identificar nichos y ofrecer un servicio
infraestructura de servicio, atender una base atractiva de clientes y
de calidad superior, puede competir exitosamente en el negocio de
fortalecer la posición de liderazgo de BPPR en la industria hipotecaria.
procesamiento de transacciones y proveer una fuente más diversa de
Nuestra adquisición del negocio de banca de individuos de
ingresos para Popular.
Citibank y de Smith Barney en 2007 demostró ser una gran adición a
las operaciones de BPPR. En el caso de la operación bancaria, hemos
conservado la mayor parte de los clientes y depósitos adquiridos y
E N F R E N TA N D O L O S R E T O S
La perspectiva para el 2009 apunta hacia otro año difícil. Vivimos
hemos podido venderles productos adicionales a estos clientes.
tiempos sin precedentes y estamos haciendo los ajustes necesarios
La transacción de Smith Barney fue bien recibida por el mercado
para enfrentar este período difícil. Aunque entendemos que las
local, reposicionando a Popular Securities como un jugador
acciones tanto del gobierno de Estados Unidos como el de Puerto
importante en el negocio de corretaje, y ha producido resultados
Rico podrían ayudar a estabilizar el sistema financiero y estimular
financieros que excedieron nuestras proyecciones.
la economía, hemos establecido planes abarcadores para poder
Es difícil predecir cuánto durará o cuán profunda será
navegar las aguas turbulentas que se avecinan.
la recesión económica en Puerto Rico. Seguiremos manejando
En retrospectiva, desplegamos demasiado capital y recursos
nuestro negocio para asegurar que, a pesar del ambiente
en nuestras operaciones estadounidenses sin alcanzar niveles de
desafiante, BPPR continúe fortaleciendo su posición como la
rentabilidad apropiados, y esto impactó nuestro desempeño en los
principal institución financiera en Puerto Rico.
últimos años. Estamos resueltos a mejorar la rentabilidad de estas
E V E R T E C
EVERTEC tuvo un año sólido, reportando una ganancia neta de
operaciones, enfocándonos en nuestro negocio de banca tradicional,
mientras seguimos construyendo la franquicia formidable que
tenemos en Puerto Rico.
$43.6 millones en el 2008, 40% más alta que en el 2007. Estos
Nuestra Junta de Directores continúa proporcionando
resultados se deben principalmente a los servicios de subcontratación
una dirección valiosa, nuestro equipo gerencial está enfocado
de procesos de negocio, las transacciones de la Red ATH® y de puntos
y nuestra gente está sumamente comprometida con el éxito
de venta, y la venta de acciones de VISA. Estos resultados se lograron
de esta organización. Les damos las gracias a ustedes, nuestros
a pesar de que los clientes principales de EVERTEC, que incluyen
accionistas, a la vez que nos comprometemos a seguir trabajando
instituciones financieras, gobierno y otros sectores de negocios,
incansablemente para recompensar su apoyo continuo.
también se vieron afectados por la crisis financiera y económica. Para
mitigar el impacto de un menor volumen de negocio en estas áreas,
durante el 2008 EVERTEC se concentró en obtener nuevas fuentes de
ingresos, entrar a nuevos mercados geográficos, atraer nuevos clientes
y controlar gastos.
En Puerto Rico, EVERTEC continuó iniciativas para aumentar la
competitividad de la Red ATH®, que sigue siendo el método de pago
más seguro y costo-efectivo en Puerto Rico, y atrajo nuevos clientes
Richard L. Carrión
a sus servicios de “hosting” y subcontratación.
Presidente de la Junta de Directores y
Principal Oficial Ejecutivo
Valores
I N S T I T U C I O N A L E S
COMPROMISO SOCIAL
Estamos comprometidos a trabajar
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.
1 2 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
Resumen del Año y Desempeño de la Acción BPOP
q
q
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
-50%
-50%
-60%
-60%
-70%
-70%
-80%
-80%
BA
BA
C
C
u i
u i
t
t
y
y
w
w
e
e
r
r
D
D
F
F
E
E
G
G
H
H
I
I
o a
o a
s d
s
fd
f
g
g
KBW Bank
Índice de
Bancos KBW
Index
BPOP
BPOP
h
h
El Índice de Bancos KBW
es un índice ponderado
por capitalización bursátil
modificada compuesto
por 24 acciones
registradas y del Sistema
Nacional de Mercados,
que representan a los
bancos en los principales
centros financieros e
instituciones regionales
líderes.
1
1
07
07
2
2
07
07
3
3
07
07
4
4
07
07
5
5
07
07
6
6
07
07
7
7
07
07
8
8
07
07
9
9
07
07
10
10
07
07
11
11
07
07
12
12
07
07
1
1
08
08
2
2
08
08
3
3
08
08
4
4
08
08
5
5
08
08
6
6
08
08
7
7
08
08
8
8
08
08
9
9
08
08
10
10
08
08
11
11
08
08
12
12
08
08
Acontecimientos del Mercado*
A Bank of America adquiere Countrywide Financial.
B Gobierno británico nacionaliza temporalmente Northern Rock.
C J.P. Morgan Chase adquiere Bear Stearns en una transacción apoyada
por el gobierno.
D El gobierno coloca a Fannie Mae y a Freddie Mac bajo su tutela.
E Lehman Brothers radica quiebra. Bank of America acuerda adquirir
Merrill Lynch.
F Gobierno de los EE.UU. aprueba un préstamo de $85,000 millones
para American International Group.
G J.P. Morgan Chase adquiere las operaciones de Washington Mutual.
H El gobierno de los EE.UU. dice que proveerá $700,000 millones para
estabilizar sus propios mercados financieros. La FDIC aumenta el
seguro de depósitos a $250,000 por depositante.
I Wells Fargo recibe aprobación regulatoria para adquirir Wachovia Co.
*Información y fechas compiladas de páginas oficiales relacionadas en la Web.
Acciones de BPOP
q Popular reestructura a Popular Financial Holdings (PFH) y E-LOAN; se retira del mercado
de originación de hipotecas de alto riesgo (“subprime”); consolida las funciones de Banco
Popular North America (BPNA).
w Popular adquiere el negocio de banca de individuos y las operaciones de corretaje de
Citibank en Puerto Rico.
e La recaracterización de las titulizaciones de PFH da paso al retiro de $3,200 millones en
préstamos del estado de situación de PFH.
r E-LOAN reestructura su modelo de negocio, enfocándose en primeras hipotecas.
t Popular adopta la opción de valor justo (SFAS 159) para $1,500 millones en préstamos
de PFH.
y BPNA vende seis sucursales, $125 millones en depósitos en Texas por $12.8 millones.
u Popular vende $1,420 millones de los activos de Equity One por $1,470 millones,
saliendo así del negocio de financiamiento al consumidor.
i Popular emite $400 millones de acciones preferidas en Puerto Rico al 8.25%.
o Popular reduce el dividendo trimestral por acción común en 50% a $0.08. La reducción
del dividendo ayudará a preservar aproximadamente $90 millones de capital anualmente.
a Popular emite aproximadamente $350 millones en títulos de renta fija y variable
mediante un ofrecimiento privado.
s Popular vende $260 millones en préstamos de vivienda manufacturada de PFH por
$198 millones para mejorar la liquidez y reducir la exposición al riesgo.
d Popular anuncia plan para reducir el tamaño de la franquicia de BPNA, enfocándose en
servicios bancarios a través de sucursales. E-LOAN deja de originar préstamos.
f Popular vende aproximadamente $1,100 millones en préstamos y activos de servicio de
hipotecas a varias afiliadas de Goldman Sachs por $731 millones para mejorar la
liquidez y reducir las exposiciones al riesgo.
1$ Popular adquiere los derechos de servicio de una cartera de préstamos hipotecarios en
Puerto Rico (poseída por Freddie Mac y Ginnie Mae) de $5,000 millones, por $38.2 millones.
1% Popular emite $935 millones en acciones preferidas y derechos de suscripción de
acciones a largo plazo al Tesoro Federal bajo el programa conocido en inglés como
TARP Capital Purchase Program.
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.
1 3
P O P U L A R , I N C.
Resumen Financiero Histórico – 25 Años
(Dólares en millones, excepto información por acción)
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Información Financiera Seleccionada
Ingreso Neto (Pérdida Neta)
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 (Pérdida Neta) – Básico
Ingreso Neto (Pérdida Neta) – 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.
E-LOAN
EVERTEC
Subtotal
Total
Sistema Electrónico de Distribución
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)
$
$
$
$
$
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
$
$
$
$
$
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
$
$
$
$
$
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
$
$
$
$
$
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%
126
3
9
138
$
$
$
$
$
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%
126
3
10
139
14
17
14
152
136
3
139
55
55
194
125
127
136
113
113
51
51
164
78
78
6
6
84
4.4
110.3
4,110
94
94
36
36
130
7.0
123.8
4,314
8.3
134.0
4,400
12.7
139.1
4,699
17
156
153
3
156
68
68
224
14.9
159.8
5,131
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
$
$
$
$
$
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%
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
166
8
34
208
73
28
10
111
319
262
8
26
296
88
88
384
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
43.0
174.5
7,606
1 Datos ajustados por las divisiones en acciones.
2 No incluyen cajeros automáticos que están conectados a la Red ATH® (2,223 en 2008) 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.
1 4 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$
$
$
$
$
$
146.4
15,675.5
8,677.5
9,876.7
1,141.7
$ 1,276.8
$
185.2
16,764.1
9,779.0
10,763.3
1,262.5
$ 2,230.5
$
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
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
56.6
175.0
7,815
78.0
173.7
7,996
111.2
171.9
8,854
$
$
$
$
$
232.3
23,160.4
13,078.8
13,672.2
1,709.1
4,611.7
$
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
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
276.1
28,057.1
16,057.1
14,804.9
1,993.6
3,578.1
$
304.5
30,744.7
18,168.6
16,370.0
2,272.8
$ 3,965.4
$
351.9
33,660.4
19,582.1
17,614.7
2,410.9
$ 4,476.4
$
470.9
36,434.7
22,602.2
18,097.8
2,754.4
$ 5,960.2
$
489.9
44,401.6
28,742.3
20,593.2
3,104.6
$ 7,685.6
$
540.7
48,623.7
31,710.2
22,638.0
3,449.2
$ 5,836.5
$
357.7
47,404.0
32,736.9
24,438.3
3,620.3
$ 5,003.4
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%
$
$
$
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
68%
30%
2%
100%
66%
32%
2%
100%
62%
36%
2%
100%
55%
43%
2%
100%
53%
45%
2%
100%
52%
45%
3%
100%
$
$
$
$
$
(64.5)
44,411.4
29,911.0
28,334.4
3,581.9
2,968.3
-0.14%
-2.08%
$ (1,243.9)
38,882.8
26,276.1
27,550.2
3,268.4
1,455.1
-3.04%
-44.47%
$
(0.27)
(0.27)
0.64
12.12
10.60
59%
38%
3%
100%
$
$
$
(4.55)
(4.55)
0.48
6.33
5.16
65%
32%
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
212
4
49
17
14
33
12
2
1
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
158
52
15
11
32
12
2
1
1
1
12
297
638
605
65
192
862
226
1,360
1,586
2,448
690.2
150.0
12,508
196
8
147
351
134
51
12
24
32
13
2
1
1
1
11
282
633
615
69
187
871
433
1,454
1,887
2,758
772.7
175.2
12,303
179
8
139
326
2
9
12
22
32
7
1
1
1
1
12
100
426
605
74
176
855
462
1,560
2,022
2,877
849.4
202.2
10,587
1 5
Nuestro Credo
Nuestra Gente
N U E S T R O C R E D O
J U N TA D E D I R E C T O R E S
O F I C I A L E S E J E C U T I V O S
Richard L. Carrión
Presidente de la Junta de Directores
Principal Oficial Ejecutivo
Popular, Inc.
David H. Chafey, Jr.
Presidente
Principal Oficial de Operaciones
Popular, Inc.
Jorge A. Junquera
Primer Vicepresidente Ejecutivo
Principal Oficial Financiero
Popular, Inc.
Lcda. Brunilda Santos de Álvarez
Vicepresidenta Ejecutiva
Principal Oficial Legal
Popular, Inc.
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.
N U E S T R A G E N T E
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 dedicación. 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.
Richard L. Carrión
Presidente de la Junta de Directores
Principal Oficial Ejecutivo
Popular, Inc.
Juan J. Bermúdez
Socio Retirado, Bermúdez & Longo, S.E.
María Luisa Ferré
Presidenta y Principal Oficial Ejecutiva
Grupo Ferré Rangel
Michael Masin
Inversionista Privado
Manuel Morales, Jr.
Presidente, Parkview Realty, Inc.
Francisco M. Rexach, Jr.
Presidente, Capital Assets, Inc.
Frederic V. Salerno
Inversionista Privado
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.
I N F O R M A C I Ó N C O R P O R AT I VA
Firma Registrada de Contabilidad Pública
Independiente
PricewaterhouseCoopers LLP
Reunión Anual
La reunión anual de accionistas del 2009
de Popular, Inc. se celebrará el viernes,
1 de mayo, 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
1 6 P O P U L A R ,
I N C . 2 0 0 8 A N N U A L R E P O RT
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, 2008 and 2007
Consolidated Statements of Operations
for the years ended December 31, 2008,
2007 and 2006
Consolidated Statements of Cash Flows
for the years ended December 31, 2008,
2007 and 2006
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Comprehensive
(Loss) Income for the years ended December
31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
3
78
83
84
86
87
88
89
90
91
2 POPULAR, INC. 2008 ANNUAL REPORT
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
3
Overview
Regulatory Initiatives
Critical Accounting Policies / Estimates
Fair Value Option
Statement of Operations Analysis
Net Interest Income
Provision for Loan Losses
Non-Interest Income
Operating Expenses
Income Taxes
Fourth Quarter Results
Reportable Segment Results
Discontinued Operations
Statement of Condition Analysis
Assets
Deposits, Borrowings and
Other Liabilities
Stockholders’ Equity
Risk Management
Market Risk
Liquidity Risk
Credit Risk Management and
Loan Quality
Operational Risk Management
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
6
8
17
19
22
23
25
28
30
31
35
39
42
43
46
47
53
62
71
71
75
78
79
80
82
3
Management’’’’’s Discussion and Analysis of Financial
Condition and Results of Operations
The following management’s discussion and analysis (“MD&A”)
provides information which 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
- 2008 Annual Report” (“the report”) should be considered an
integral part of this MD&A.
decisions to downsize, sell or close units or otherwise change the
business mix of the Corporation; and management’s ability to
identify and manage these and other risks.
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.
FORWARD-LOOKING STATEMENTS
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. Other
possible events or factors that could cause results or performance
to differ materially from those expressed in these forward-looking
statements include the following: negative economic conditions
that adversely affect the general economy, housing prices, the job
market, consumer confidence and spending habits which may
affect, among other things, the level of nonperforming assets,
charge-offs and provision expense; changes in interest rates and
market liquidity which may reduce interest margins, impact
funding sources and affect the ability to originate and distribute
financial products in the primary and secondary markets; adverse
movements and volatility in debt and equity capital markets;
changes in market rates and prices which may adversely impact
the value of financial assets and liabilities; liabilities resulting
from litigation and regulatory investigations; changes in
accounting standards, rules and interpretations; increased
competition; the Corporation’s ability to grow its core businesses;
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, 2008, 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.
OVERVIEW
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. The Corporation has 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. 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 markets deposit accounts under its name for
the benefit of BPNA and offers loan customers the option of being
referred to a trusted consumer lending partner for loan products.
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 35 to the consolidated
financial statements, as well as the Reportable Segments section
in this MD&A, presents further information about the
Corporation’s business segments. PFH, the Corporation’s
consumer and mortgage lending subsidiary in the U.S., carried a
maturing loan portfolio and operated a mortgage loan servicing
unit during 2008. The PFH operations were discontinued in the
later part of 2008. Refer to Note 2 and the Discontinued Operations
section of this MD&A for additional information.
During 2008, concerns about future economic growth, oil
prices, lower consumer confidence, tightening of credit
4 POPULAR, INC. 2008 ANNUAL REPORT
availability and lower corporate earnings continued to challenge
the economy. In the United States, market and economic
conditions were severely impacted when credit conditions rapidly
deteriorated and financial markets experienced widespread
illiquidity and volatility. As a result of these unprecedented market
conditions, federal government agencies, including the U.S.
Treasury Department (“U.S. Treasury”) and the Federal Reserve
Board, initiated several actions to boost the outlook of the U.S.
financial services industry and help institutions unfreeze lending
and spur economic growth. Meanwhile, Puerto Rico’s economy
continued mired in a recession, which is now entering its fourth
year.
Popular, Inc. suffered from this market turmoil. The
Corporation reported a net loss of $1.2 billion for the year ended
December 31, 2008, compared with a net loss of $64.5 million
for the year ended December 31, 2007. These financial results
represented a negative return on assets of 3.04% and a negative
return on common equity of 44.47%. While management
anticipated challenging conditions for the year, the crisis in the
financial industry worsened beyond expectations. The
Corporation’s financial results were significantly impacted by
losses from the sale and discontinuance of Popular Financial
Holding’s (“PFH”) operations, an increase of 191% in the
provision for loan losses and a valuation allowance of the entire
deferred tax asset related to the Corporation’s operations in the
United States.
During 2008, the Corporation executed a series of actions
designed to improve its capital and liquidity positions, which
included the following:
• Sale of six retail bank branches of BPNA in Texas in January
2008;
• Sale of certain assets of Equity One (a subsidiary of PFH)
to American General Financial in March 2008;
• Issuance of $400 million in preferred stock, which was
sold entirely in the Puerto Rico market in May 2008;
• Reduction of 50% in the quarterly dividend from $0.16 to
$0.08 per common share, effective in October 2008. This
will help preserve approximately $90 million of capital a
year in light of the difficult financial scenario. In February
2009, the Board of Directors reduced again the common
stock dividend to $0.02 per common share. This will
conserve an additional $68 million in capital per year.
The dividend payment is reviewed on a quarterly basis
and may be adjusted as circumstances warrant;
• Issuance of $350 million of senior unsecured notes in a
private offering during September and October 2008;
• Sale of the remaining PFH assets in September and
November 2008. These transactions, despite entailing
considerable losses, generated approximately $929 million
in additional liquidity to the Corporation;
• Receipt of $935 million in December 2008 from the U.S.
Treasury as part of the Troubled Asset Relief Program
(“TARP”) Capital Purchase Program in exchange for
preferred stock and warrants on common stock. Refer to
the subdivision of “Regulatory Initiatives” in this Overview
section of the MD&A.
Also, during 2008, management approved restructuring plans
at its U.S. mainland operations, BPNA and E-LOAN, with the
objective of establishing a leaner, more efficient U.S. business
model better suited to present economic conditions, improving
profitability in the short term, increasing liquidity, lowering
credit costs, and over time achieving a greater integration with
corporate functions in Puerto Rico. Refer to the Operating
Expenses section in this MD&A for further information on these
restructuring plans.
The Corporation’s continuing operations reported a net loss
of $680.5 million for the year ended December 31, 2008, compared
with net income of $202.5 million for the year ended December
31, 2007. The following principal items impacted these financial
results:
• Higher provision for loan losses by $650.2 million as a
result of higher credit losses and increased specific reserves
for impaired loans. The deteriorating economy continued
to negatively impact the credit quality of the Corporation’s
loan portfolios with more rapid deterioration occurring in
the latter part of 2008;
• Higher income tax expense, principally due to a valuation
allowance on the Corporation’s deferred tax assets related
to the U.S. operations recorded during the second half of
2008. Refer to the Income Taxes section in this MD&A for
further information;
• Lower goodwill and trademark impairment losses by $199.3
million due to $211.8 million in impairment losses related
to E-LOAN’s goodwill and trademark recognized in the
fourth quarter of 2007, compared to losses of $12.5 million
in the fourth quarter of 2008, consisting principally of
$10.9 million in losses related to E-LOAN’s trademark.
The trademark impairment losses recorded in 2008 resulted
from E-LOAN ceasing to operate as a direct lender in the
fourth quarter of 2008.
As announced during the third quarter of 2008, the Corporation
discontinued the operations of its U.S.-based subsidiary, PFH,
which was the result of a series of actions taken between 2007 and
2008 and included restructuring plans, exiting origination
channels, closure of unprofitable business units, consolidation of
support functions with BPNA and major loan portfolio sales. These
discontinued operations showed a net loss of $563.4 million for
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
Gain on sale of loans and valuation adjustments
on loans held-for-sale
Trading account profit
Other non-interest income
Operating expenses
(Loss) income from continuing operations before income tax and
cumulative effect of accounting change
Income tax
Cumulative effect of accounting change, net of tax
(Loss) income from continuing operations
(Loss) income from discontinued operations, net of tax
Net (loss) income
2008
3.13%
(2.42)
0.17
0.01
0.11
1.74
2.74
(3.27)
(0.53)
(1.13)
-
(1.66)
(1.38)
(3.04%)
For the Year
2007
2.77%
(0.72)
0.21
0.13
0.08
1.43
3.90
(3.28)
0.62
(0.19)
-
0.43
(0.57)
(0.14%)
2006
2.60%
(0.39)
0.04
0.16
0.08
1.32
3.81
(2.65)
1.16
(0.29)
-
0.87
(0.13)
0.74%
2005
2.64%
(0.26)
0.14
0.08
0.07
1.29
3.96
(2.51)
1.45
(0.31)
0.01
1.15
0.02
1.17%
5
2004
2.80%
(0.33)
0.04
0.08
-
1.35
3.94
(2.58)
1.36
(0.28)
-
1.08
0.15
1.23%
the year ended December 31, 2008, compared with a net loss of
$267.0 million for the previous year. Refer to the Discontinued
Operations section in this MD&A for details on the financial
results and major events of PFH for the years 2008 and 2007,
including restructuring plans, sale of assets, the impact of the
adoption of Statement of Financial Accounting Standards (“SFAS”)
No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities” in January 2008 and the recharacterization of certain
on-balance sheet securitizations as sales in 2007.
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 five years. A glossary of selected financial terms has been
included at the end of this MD&A.
Total assets at December 31, 2008 amounted to $38.9 billion,
a decrease of $5.5 billion, or 12%, compared with December 31,
2007. Total earning assets at December 31, 2008 decreased by
$4.8 billion, or 12%, compared with December 31, 2007. As of
December 31, 2008, loans, the primary interest-earning asset
category for the Corporation, totaled $26.3 billion, reflecting a
decline of $3.6 billion, or 12%, from December 31, 2007. The
decline in earning assets was principally associated with the
reduction in the loan portfolio of the discontinued operations of
PFH, which had total loans of $3.3 billion at December 31, 2007.
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 $0.9 billion of the decline in total assets
from December 31, 2007.
Assets at December 31, 2008 were funded principally through
deposits, primarily time deposits. Deposits supported
approximately 71% of the asset base at December 31, 2008, while
borrowings, other liabilities and stockholders’ equity accounted
for approximately 29%. This compares to 64% and 36% as of the
end of 2007. For additional data on funding sources, refer to the
Statement of Condition Analysis and Liquidity Risk sections of
this MD&A.
Stockholders’ equity totaled $3.3 billion at December 31,
2008, compared with $3.6 billion at December 31, 2007. The
reduction in stockholders’ equity from the end of 2007 to December
31, 2008 was principally the result of the net loss of $1.2 billion
recorded for 2008, dividends paid during the year and the $262
million negative after-tax adjustment to beginning retained
earnings due to the transitional adjustment for electing the fair
value option, partially offset by the $400 million preferred stock
offering in May 2008 and the $935 million of preferred stock
issued under the TARP in December 2008.
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, BPOPO and BPOPP. Table J shows the Corporation’s
6 POPULAR, INC. 2008 ANNUAL REPORT
Table B
Changes in Net (Loss) Income Applicable to Common Stock and (Losses) Earnings per Common Share
(In thousands, except per common share amounts)
Dollars
Per share
Dollars
Per share
Dollars
Per share
2008
2007
2006
Net (loss) income applicable to common stock
for prior year
Favorable (unfavorable) changes in:
Net interest income
Provision for loan losses
Sales and valuation adjustments of investment
securities
Trading account profit
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
(Loss) income from continuing operations
Loss from discontinued operations, net of tax
Net (loss) income before preferred stock dividends,
TARP preferred discount amortization and
change in average common shares
Change in preferred dividends and in TARP
preferred discount amortization
Change in average common shares**
($76,406)
($0.27)
$345,763
$1.24
$528,789
$1.98
(26,454)
(650,165)
(0.10)
(2.33)
50,927
(153,663)
(31,153)
6,448
(54,028)
35,012
(3,013)
199,270
(1,064)
13,541
(371,370)
-
(959,382)
(296,434)
(0.11)
0.02
(0.19)
0.13
(0.01)
0.71
-
0.05
(1.33)
-
(3.43)
(1.06)
78,749
939
(16,291)
39,789
(10,478)
(211,750)
1,576
(46,579)
49,530
-
128,512
(204,918)
0.18
(0.55)
0.28
-
(0.06)
0.14
(0.04)
(0.76)
0.01
(0.16)
0.18
-
0.46
(0.73)
31,866
(65,571)
(44,392)
6,207
38,995
37,087
-
-
(2,472)
(111,591)
3,016
(3,607)
418,327
(72,564)
0.12
(0.25)
(0.17)
0.02
0.15
0.14
-
-
(0.01)
(0.42)
0.01
(0.01)
1.56
(0.27)
(1,255,816)
(4.49)
(76,406)
(0.27)
345,763
1.29
(23,384)
-
(0.08)
0.02
-
-
-
-
-
-
-
(0.05)
Net (loss) income applicable to common stock
($1,279,200)
($4.55)
($76,406)
($0.27)
$345,763
$1.24
** 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.
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.
Further discussion of operating results, financial condition
and business risks is presented in the narrative and tables included
herein.
Regulatory Initiatives
On October 3, 2008, Congress passed the Emergency Economic
Stabilization Act of 2008 (“EESA”), which provides the U.S.
Secretary of the United States Treasury Department (“Treasury”)
with broad authority to deploy up to $700 billion into the financial
system to help restore stability and liquidity to U.S. markets. On
October 24, 2008, Treasury announced plans to direct $250 billion
Table C
Selected Financial Data
(Dollars in thousands, except per share data)
CONDENSED STATEMENTS OF OPERATIONS
Interest income
Interest expense
Net interest income
Provision for loan losses
Net gain on sale and valuation adjustment of investment securities
Trading account profit (loss)
Gain on sale of loans and valuation adjustments on
loans held-for-sale
Other non-interest income
Operating expenses
Income tax expense
Cumulative effect of accounting change, net of tax
(Loss) income from continuing operations
(Loss) income from discontinued operations, 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:
From continuing operations
From discontinued operations
Total
Diluted before cumulative effect of accounting change:
From continuing operations
From discontinued operations
Total
Basic after cumulative effect of accounting change:
From continuing operations
From discontinued operations
Total
Diluted after cumulative effect of accounting change:
From continuing operations
From discontinued operations
Total
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
7
2004
$1,662,101
543,267
1,118,834
133,366
15,254
(159)
30,097
539,945
1,028,552
110,343
-
431,710
58,198
$489,908
$477,995
$1.57
0.22
$1.79
$1.57
0.22
$1.79
$1.57
0.22
$1.79
$1.57
0.22
$1.79
$0.62
10.95
28.83
2008
$2,274,123
994,919
1,279,204
991,384
69,716
43,645
6,018
710,595
1,336,728
461,534
-
(680,468)
(563,435)
($1,243,903)
($1,279,200)
($2.55)
(2.00)
($4.55)
($2.55)
(2.00)
($4.55)
($2.55)
(2.00)
($4.55)
($2.55)
(2.00)
($4.55)
$0.48
6.33
5.16
Year ended December 31,
2006
2007
2005
$2,552,235
1,246,577
1,305,658
341,219
100,869
37,197
60,046
675,583
1,545,462
90,164
-
202,508
(267,001)
($64,493)
($76,406)
$2,455,239
1,200,508
1,254,731
187,556
22,120
36,258
76,337
635,794
1,278,231
139,694
-
419,759
(62,083)
$357,676
$345,763
$2,081,940
859,075
1,222,865
121,985
66,512
30,051
37,342
598,707
1,164,168
142,710
3,607
530,221
10,481
$540,702
$528,789
$0.68
(0.95)
($0.27)
$0.68
(0.95)
($0.27)
$0.68
(0.95)
($0.27)
$0.68
(0.95)
($0.27)
$0.64
12.12
10.60
$1.46
(0.22)
$1.24
$1.46
(0.22)
$1.24
$1.46
(0.22)
$1.24
$1.46
(0.22)
$1.24
$0.64
12.32
17.95
$1.93
0.04
$1.97
$1.92
0.04
$1.96
$1.94
0.04
$1.98
$1.93
0.04
$1.97
$0.64
11.82
21.15
281,079,201
281,079,201
282,004,713
279,494,150
279,494,150
280,029,215
278,468,552
278,703,924
278,741,547
267,334,606
267,839,018
275,955,391
266,302,105
266,674,856
266,582,103
$26,471,616
36,026,077
40,924,017
27,464,279
7,378,438
3,358,295
$26,268,931
882,807
36,146,389
38,882,769
27,550,205
6,943,305
3,268,364
$25,380,548
36,374,143
47,104,935
25,569,100
9,356,912
3,861,426
$24,123,315
36,895,536
48,294,566
23,264,132
12,498,004
3,741,273
$21,533,294
35,001,974
46,362,329
22,253,069
11,702,472
3,274,808
$17,529,795
29,994,201
39,898,775
19,409,055
9,369,211
2,903,137
$29,911,002
548,832
40,901,854
44,411,437
28,334,478
11,560,596
3,581,882
$32,736,939
522,232
43,660,568
47,403,987
24,438,331
18,533,816
3,620,306
$31,710,207
461,707
45,167,761
48,623,668
22,638,005
21,296,299
3,449,247
$28,742,261
437,081
41,812,475
44,401,576
20,593,160
19,882,202
3,104,621
SELECTED RATIOS
Net interest margin (taxable equivalent basis)
Return on average total assets
Return on average common stockholders’ equity
Tier I capital to risk-adjusted assets
Total capital to risk-adjusted assets
4.09%
1.23
17.60
11.82
13.21
* 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
3.81%
(3.04)
(44.47)
10.81
12.08
3.86%
1.17
17.12
11.17
12.44
3.72%
0.74
9.73
10.61
11.86
3.83%
(0.14)
(2.08)
10.12
11.38
at the end of the periods.
Includes loans held-for-sale.
**
8 POPULAR, INC. 2008 ANNUAL REPORT
of this authority into preferred stock investments by Treasury in
qualified financial institutions as part of the TARP.
The TARP requires an institution to comply with a number of
restrictions and provisions, including limits on executive
compensation, stock redemptions and declaration of dividends.
This program provides for a minimum investment of 1% of Risk-
Weighted Assets, with a maximum investment equal to the lesser
of 3% of Total Risk-Weighted Assets or $25 billion. The perpetual
preferred stock investment will have a dividend rate of 5% per
year, until the fifth anniversary of the Treasury investment, and a
dividend rate of 9%, thereafter. This program also requires the
Treasury to receive warrants for common stock equal to 15% of
the capital invested by the Treasury. As indicated earlier, on
December 5, 2008, the Corporation received $935 million as
part of the TARP Capital Purchase Program.
Furthermore, the EESA included a provision for an increase in
the amount of deposits insured by the Federal Deposit Insurance
Corporation (“FDIC”) to $250,000 until December 31, 2009.
Also, as part of the regulatory initiatives, the FDIC implemented
the Temporary Liquidity Guarantee Program (“TLGP”) to
strengthen confidence and encourage liquidity in the banking
system. The TLGP is comprised of the Debt Guarantee Program
(“DGP”) and the Transaction Account Guarantee Program
(“TAGP”). The DGP guarantees all newly issued senior unsecured
debt (e.g., promissory notes, unsubordinated unsecured notes
and commercial paper) up to prescribed limits issued by
participating entities beginning on October 14, 2008 and
continuing through October 31, 2009. For eligible debt issued
by that date, the FDIC provides the guarantee coverage until the
earlier of the maturity date of the debt or June 30, 2012. The TAGP
offers full guarantee for non-interest bearing deposit accounts
held at FDIC-insured depository institutions. The unlimited
deposit coverage is voluntary for eligible institutions and is in
addition to the $250,000 FDIC deposit insurance per account
that was included as part of the EESA. The TAGP coverage became
effective on October 14, 2008 and will continue for participating
institutions until December 31, 2009. Popular, Inc. opted to
become a participating entity on both of these programs and will
pay applicable fees for participation. Participants in the DGP
program have a fee structure based on a sliding scale, depending
on length of maturity. Shorter-term debt has a lower fee structure
and longer-term debt has a higher fee. The range will be 50 basis
points on debt of 180 days or less, and a maximum of 100 basis
points for debt with maturities of one year or longer on an
annualized basis. Any eligible entity that has not chosen to opt
out of the TAGP will be assessed, on a quarterly basis, an annualized
10 basis points fee on balances in non-interest bearing transaction
accounts that exceed the existing deposit insurance limit of
$250,000. Also, on February 27, 2009, the Board of Directors of
the FDIC voted to adopt an interim final rule to impose an
emergency special assessment of 20 cents per $100 of deposits on
June 30, 2009, and to allow the FDIC to impose emergency special
assessments after June 30, 2009 of 10 cents per $100 of deposits
if the reserve ratio of the Deposit Insurance Fund is estimated to
fall to a level that the FDIC believes would adversely affect public
confidence or to a level that is close to zero or negative at the end
of a calendar quarter.
CRITICAL ACCOUNTING POLICIES / ESTIMATES
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.
Fair Value Measurement of Financial Instruments
Effective January 1, 2008, the Corporation is required to determine
the fair values of its financial instruments based on the fair value
hierarchy established in SFAS No. 157. The SFAS No. 157
hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs
(Level 3 measurements). Assets and liabilities are classified in
their entirety based on the lowest level of input that is significant
to the fair value measurement. The fair value of a financial instrument
is the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date (the exit price).
In October 2008, the FASB issued FASB Staff Position No.
FAS 157-3, “Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active.” This statement
clarifies that determining fair value in an inactive or dislocated
market depends on facts and circumstances and requires
significant management judgment. This statement specifies that
it is acceptable to use inputs based on management estimates or
assumptions, or to make adjustments to observable inputs to
determine fair value when markets are not active and relevant
observable inputs are not available. The Corporation’s fair value
9
measurements are consistent with the guidance in FSP No. FAS
157-3.
Instruments that trade infrequently, such that the market has
become illiquid with no reliable pricing information available,
are classified within Level 3 of the fair value hierarchy. Instruments
classified as Level 3 are determined based on the valuation inputs
used and the results of the Corporation’s price verification process.
The Corporation categorizes its assets and liabilities measured
at fair value under the three-level hierarchy as required by SFAS
No. 157, and the level within the hierarchy is based on whether
the inputs to the valuation methodology used for fair value
measurement are observable or unobservable. Observable inputs
reflect the assumptions market participants would use in pricing
the asset or liability based on market data obtained from
independent sources. Unobservable inputs reflect the Corporation’s
estimates about assumptions that market participants would use
in pricing the asset or liability based on the best information
available. The hierarchy is broken down into three levels based on
the reliability of inputs as follows:
• Level 1- Unadjusted quoted prices in active markets for
identical assets or liabilities that the Corporation has the
ability to access at the measurement date. No significant
degree of judgment for these valuations is needed, as they
are based on quoted prices that are readily available in an
active market.
• Level 2- Quoted prices other than those included in Level 1
that are observable either directly or indirectly. Level 2
inputs include quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, and
other inputs that are observable or that can be corroborated
by observable market data for substantially the full term of
the financial instrument.
• Level 3- Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value
measurement of the financial asset or liability. Unobservable
inputs reflect the Corporation’s own assumptions about
what market participants would use to price the asset or
liability. The inputs are developed based on the best available
information, which might include the Corporation’s own
data such as internally developed models and discounted
cash flow analyses. Assessments with respect to assumptions
that market participants would use are inherently difficult
to determine and use of different assumptions could result
in material changes to these fair value measurements.
The Corporation currently measures at fair value on a recurring
basis its trading assets, available-for-sale securities, derivatives
and mortgage servicing rights. From time to time, the
Corporation may be required to record at fair value other assets on
a nonrecurring basis, such as loans held-for-sale, impaired loans
held-for-investment that are collateral dependent and certain other
assets. These nonrecurring fair value adjustments typically result
from the application of lower-of-cost-or-fair value accounting or
write-downs of individual assets. Also, during 2008, the
Corporation carried a substantial amount of loans and borrowings
at fair value upon the adoption of SFAS No. 159. These loans and
borrowings pertained to the PFH operations, most of which were
sold during 2008 and are not outstanding at December 31, 2008.
Refer to Note 31 to the consolidated financial statements for
information on the Corporation’s fair value measurement
disclosures required by SFAS No. 157. At December 31, 2008,
approximately $8.3 billion, or 94%, of the assets from continuing
operations measured at fair value on a recurring basis, used market-
based or market-derived valuation inputs in their valuation
methodology and, therefore, were classified as Level 1 or Level 2.
The remaining 6% were classified as Level 3 since their valuation
methodology considered significant unobservable inputs. The
assets from discontinued operations measured at fair value on a
recurring basis, amounting to $5 million, were all classified as
Level 3 in the hierarchy. Additionally, the Corporation’s
continuing operations reported $887 million of financial assets
that were measured at fair value on a nonrecurring basis as of
December 31, 2008, all of which were classified as Level 3 in the
hierarchy.
The Corporation requires the use of observable inputs when
available, in order to minimize the use of unobservable inputs to
determine fair value.
The estimate of fair value reflects the Corporation’s judgment
regarding appropriate valuation methods and assumptions. The
amount of judgment involved in estimating the fair value of a
financial instrument depends on a number of factors, such as type
of instrument, the liquidity of the market for the instrument,
transparency around the inputs to the valuation, as well as the
contractual characteristics of the instrument.
If listed prices or quotes are not available, the Corporation
employs valuation models that primarily use market-based inputs
including yield curves, interest rate curves, volatilities, credit
curves, and discount, prepayment and delinquency rates, among
other considerations. When market observable data is not
available, the valuation of financial instruments becomes more
subjective and involves substantial judgment. The need to use
unobservable inputs generally results from diminished
observability of both actual trades and assumptions resulting from
the lack of market liquidity for those types of loans or securities.
When fair values are estimated based on modeling techniques,
such as discounted cash flow models, the Corporation uses
assumptions such as interest rates, prepayment speeds, default
rates, loss severity rates and discount rates. Valuation adjustments
are limited to those necessary to ensure that the financial
10 POPULAR, INC. 2008 ANNUAL REPORT
instrument’s fair value is adequately representative of the price
that would be received or paid in the marketplace.
Fair values are volatile and are affected by factors such as
interest rates, liquidity of the instrument and market sentiment.
Notwithstanding the judgment required in determining the fair
value of the Corporation’s assets and liabilities, management
believes that fair values are reasonable based on the consistency of
the processes followed, which include obtaining external prices
when possible and validating a substantial share of the portfolio
against secondary pricing sources when available.
Following is a description of the Corporation’s valuation
methodologies used for the principal assets and liabilities
measured at fair value at December 31, 2008.
Trading Account Securities and Investment Securities
Available-for-Sale
At December 31, 2008, the Corporation’s portfolio of trading and
investment securities available-for-sale amounted to $8.6 billion
and represented 97% of the Corporation’s assets from continuing
operations measured at fair value on a recurring basis. At December
31, 2008, net unrealized gains on the trading and securities
available-for-sale portfolios approximated $9 million and $250
million, respectively. Fair values for most of the Corporation’s
trading and investment securities are classified under the Level 2
category. Trading and investment securities classified as Level
3, which are the securities that involved the highest degree of
judgment, represent only 4% of the Corporation’s total portfolio
of trading and investment securities. Refer to Note 31 to the
consolidated financial statements for information on the
breakdown of assets by hierarchy levels. Note 6 to the consolidated
financial statements provides a detail of the Corporation’s
investment securities available-for-sale, which represent a
significant share of the financial assets measured at fair value at
December 31, 2008.
Management assesses the fair value of its portfolio of investment
securities at least on a quarterly basis, which includes analyzing
changes in fair value that have resulted in losses that may be
considered other-than-temporary. 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.
A general description of the particular valuation methodologies
for trading and investment securities follows:
• U.S. Treasury securities: The fair value of U.S. Treasury
securities is based on yields that are interpolated from the
constant maturity treasury curve. These securities are
classified as Level 2.
• Obligations of U.S. Government sponsored entities: The
Obligations of U.S. Government sponsored entities include
U.S. agency securities. The fair value of U.S. agency
securities is based on an active exchange market and is
based on quoted market prices for similar securities. The
U.S. agency securities are classified as Level 2.
• Obligations of Puerto Rico, States and political
subdivisions: Obligations of Puerto Rico, States and
political subdivisions include municipal bonds. The bonds
are evaluated by aggregating them by sectors and other
similar characteristics. Market inputs used in the evaluation
process include all or some of the following: trades, bid
price or spread, two sided markets, quotes, benchmark
curves including but not limited to Treasury benchmarks,
LIBOR and swap curves, market data feeds such as MSRB,
discount and capital rates, and trustee reports. The
municipal bonds are classified as Level 2.
• Mortgage-backed securities: Certain agency mortgage-
backed securities (“MBS”) are priced based on a bond’s
theoretical value from similar bonds defined by credit quality
and market sector. Their fair value incorporates an option
adjusted spread. The agency MBS are classified as Level 2.
Other agency MBS such as GNMA Puerto Rico Serials are
priced using an internally-prepared pricing matrix with
quoted prices from local broker dealers. These particular
MBS are classified as Level 3.
• Collateralized mortgage obligations: Agency and private
collateralized mortgage obligations (“CMOs”) are priced
based on a bond’s theoretical value from similar bonds
defined by credit quality and market sector and for which
fair value incorporates an option adjusted spread. The option
adjusted spread model includes prepayment and volatility
assumptions, ratings (whole loans collateral) and spread
adjustments. These investment securities are classified as
Level 2.
• Equity securities: Equity securities with quoted market
prices obtained from an active exchange market are
classified as Level 1.
• Corporate securities and mutual funds: Quoted prices for
these security types are obtained from broker dealers. Given
that the quoted prices are for similar instruments or do not
trade in highly liquid markets, the corporate securities
and mutual funds are classified as Level 2. The important
variables in determining the prices of Puerto Rico tax-
exempt mutual fund shares are net asset value, dividend
yield and type of assets within the fund. All funds trade
11
based on a relevant dividend yield taking into consideration
the aforementioned variables. In addition, demand and
supply also affect the price. Corporate securities that trade
less frequently or are in distress are classified as Level 3.
Securities are classified in the fair value hierarchy according
to product type, characteristics and market liquidity. At the end
of each quarter, management assesses the valuation hierarchy for
each asset or liability measured. SFAS No. 157 quarterly analysis
performed by the Corporation includes validation procedures and
review of market changes, pricing methodology, assumption and
level hierarchy changes, and evaluation of distress transactions.
Most of the Corporation’s investment securities available-for-
sale are classified as Level 2 in the fair value hierarchy given that
the general investment strategy at the Corporation is principally
“buy and hold” with little trading activity. As such, the majority
of the values is obtained from third-party pricing service providers,
and, as indicated earlier, is validated with alternate pricing sources
when available. Securities not priced by a secondary pricing source
are documented and validated internally according to their
significance to the Corporation’s financial statements.
Management has established materiality thresholds according to
the investment class to monitor and investigate material
deviations in prices obtained from the primary pricing service
provider and the secondary pricing source used as support to the
valuation results.
Primary pricing sources were thoroughly evaluated for their
consideration of current market conditions, including the relative
liquidity of the market, and if pricing methodology rely, to the
extent possible, on observable market and trade data. When a
market quote for a specific security is not available, the pricing
service provider generally uses observable data to derive an exit
price for the instrument, such as benchmark yield curves and
trade data for similar products. To the extent trading data is not
available, pricing provider relies on specific information,
including dialogue with brokers, buy side clients, credit ratings,
spreads to established benchmarks and transactions on similar
securities, to draw correlations based on the characteristics of
the evaluated instrument.
The pricing methodology and approach of our primary pricing
service providers are consistent with general market convention.
When trade data is not available, pricing service providers rely
on available market quotes and on their models. If for any reason,
the pricing service provider cannot observe data required to feed
its model, it discontinues pricing the instrument. During the
year ended December 31, 2008, none of the Corporation’s
investment securities were subject to pricing discontinuance by
the pricing service providers. Substantially all investment
securities available-for-sale are priced with primary pricing service
providers and validated by an alternate pricing source with the
exception of GNMA Puerto Rico Serials, which are priced using a
local demand prices matrix prepared from local dealer quotes, and
of local investments, such as corporate securities and mutual
funds priced by local dealers. During 2008, the Corporation did
not adjust any prices obtained from pricing services providers or
broker dealers.
Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”), which amounted to $176
million at December 31, 2008, do not trade in an active, open
market with readily observable prices. Fair value is estimated
based upon discounted net cash flows calculated from a
combination of loan level data and market assumptions. The
valuation model combines loans with common characteristics
that impact servicing cash flows (e.g., investor, remittance cycle,
interest rate, product type, etc.) in order to project net cash flows.
Market valuation assumptions include prepayment speeds,
discount rate, cost to service, escrow account earnings, and
contractual servicing fee income, among other considerations.
Prepayment speeds are derived from market data that is more
relevant to U.S. mainland loan portfolios, and thus, are adjusted
for the Corporation’s loan characteristics and portfolio behavior
since prepayment rates in Puerto Rico have been historically lower.
Other assumptions are, in the most part, directly obtained from
third-party providers. Disclosure of two of the key economic
assumptions used to measure MSRs, which are prepayment speed
and discount rate, and a sensitivity analysis to adverse changes
to these assumptions, is included in Note 22 to the consolidated
financial statements.
Derivatives
Interest rate swaps, interest rate caps and index options are traded
in over-the-counter active markets. These derivatives are indexed
to an observable interest rate benchmark, such as LIBOR or equity
indexes, and are priced using an income approach based on present
value and option pricing models using observable inputs. Other
derivatives are exchange-traded, such as futures and options, or
are liquid and have quoted prices, such as forward contracts or
“to be announced securities” (“TBAs”). All of these derivatives are
classified as Level 2. Valuations of derivative assets and liabilities
reflect the value of the instrument including the values associated
with counterparty risk and the Corporation’s own credit standing.
The non-performance risk is determined using internally-developed
models that consider the collateral held, the remaining term, and
the creditworthiness of the entity that bears the risk, and uses
available public data or internally-developed data related to current
spreads that denote their probability of default. 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. The
credit risk of the counterparty resulted in a reduction of derivative
12 POPULAR, INC. 2008 ANNUAL REPORT
assets by $7.1 million at December 31, 2008. In the other hand,
the incorporation of the Corporation’s own credit risk resulted in
a reduction of derivative liabilities by $8.9 million at December
31, 2008.
Loans held-in-portfolio considered impaired under SFAS No.
114 that are collateral dependent
The impairment is measured based on the fair value of the collateral,
which is derived from appraisals that take into consideration
prices in observed transactions involving similar assets in similar
locations, size and supply and demand. Continued deterioration
of the housing markets and the economy in general have adversely
impacted and continue to affect the market activity related to real
estate properties. These collateral dependent impaired loans are
classified as Level 3 and are reported as a nonrecurring fair value
measurement.
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. Unsecured commercial loans are charged-off
at 180 days past due. The impaired portions on secured
commercial and construction loans are charged-off at 365 days
past due. 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. 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 borrowers with outstanding debt of $250,000
or more and with interest and /or principal 90 days or more past
due. Also, specific commercial borrowers with outstanding debt
of over $500,000 and over 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. Although
SFAS No. 114 excludes large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment
(e.g. mortgage loans), it specifically requires that loan
modifications considered trouble debt restructures be analyzed
under its provisions. An allowance for loan impairment is
recognized to the extent that the carrying value of an impaired
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.
Income Taxes
The calculation of 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
13
estimating taxes, management assesses the relative merits and
risks of the appropriate tax treatment of transactions taking into
consideration statutory, judicial and regulatory guidance.
Income taxes are accounted for in accordance with SFAS No.
109, “Accounting for Income Taxes” (“SFAS No. 109”). The
Corporation records income taxes under the asset and liability
method, whereby deferred tax assets and liabilities are recognized
based on the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis, and
attributable to operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which the temporary differences
are expected to be recovered or paid. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
earnings in the period when the changes are enacted.
SFAS No.109 states that a deferred tax asset should be reduced
by a valuation allowance if based on the weight of all available
evidence, it is more likely than not (a likelihood of more than
50%) that some portion or the entire deferred tax asset will not be
realized. The valuation allowance should be sufficient to reduce
the deferred tax asset to the amount that is more likely than not to
be realized. The determination of whether a deferred tax asset is
realizable is based on weighting all available evidence, including
both positive and negative evidence. SFAS No. 109 provides that
the realization of deferred tax assets, including carryforwards and
deductible temporary differences, depends upon the existence of
sufficient taxable income of the same character during the
carryback or carryforward period. SFAS No.109 requires the
consideration of all sources of taxable income available to realize
the deferred tax asset, including the future reversal of existing
temporary differences, future taxable income exclusive of reversing
temporary differences and carryforwards, taxable income in
carryback years and tax-planning strategies.
The Corporation’s U.S. mainland operations are in a cumulative
loss position for the three-year period ended December 31, 2008.
For purposes of assessing the realization of the deferred tax assets
in the U.S. mainland, this cumulative taxable loss position is
considered significant negative evidence and has caused us to
conclude that the Corporation will not be able to realize the deferred
tax assets in the future. As of December 31, 2008, the Corporation
recorded a full valuation allowance of $861 million on the deferred
tax assets of the Corporation’s U.S. operations. Management will
reassess the realization of the deferred tax assets based on the
criteria of SFAS No.109 each reporting period. To the extent that
the financial results of the U.S. operations improve and the deferred
tax asset becomes realizable, the Corporation will be able to reduce
the valuation allowance through earnings. Refer to the Income
Taxes section of this MD&A for additional disclosures on factors
considered by management in the establishment of the valuation
allowance on deferred tax assets during the last two quarters of
2008.
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 2008 has been paid during the year in accordance with
estimated tax payments rules. Any remaining payment will not
have any significant impact on liquidity and capital resources.
The valuation of deferred tax assets requires judgment in
assessing the likely future tax consequences of events that have
been recognized in the financial statements or tax returns and
future profitability. The accounting for deferred tax consequences
represents management’s best estimate of those future events.
Changes in management’s current estimates, due to unanticipated
events, could have a material impact on the Corporation’s financial
condition and results of operations.
In accounting for income taxes, the Corporation also considers
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. The amount of unrecognized
tax benefits, including accrued interest, as of December 31, 2008
amounted to $45 million. Refer to Note 28 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. 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
14 POPULAR, INC. 2008 ANNUAL REPORT
tax treatment is supportable and in accordance with SFAS No.
109 and FIN 48, 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 financial statement in the period
determined. Such differences could have an adverse effect on the
Corporation’s income tax provision or benefit, or other tax
reserves, in the reporting period in which such determination is
made and, consequently, on the Corporation’s results of operations,
financial position and / or cash flows for such period.
Goodwill and Trademark
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, 2008, goodwill totaled $606 million, while
other intangibles with indefinite useful lives, mostly associated
with E-LOAN’s trademark, amounted to $6 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 2008, the Corporation recorded $1.6 million in
goodwill impairment losses related to one of its Puerto Rico
subsidiaries, Popular Finance, which ceased originating loans
and closed its retail branch network during the fourth quarter of
2008. The goodwill assigned to this subsidiary was fully written-
off in 2008. The subsidiary, which is expected to be merged with
BPPR, continues to hold a running-off loan portfolio. During 2007,
the Corporation recorded $164.4 million in goodwill impairment
losses associated with the operations of E-LOAN. This resulted
from the decision during the fourth quarter of 2007 to restructure
the operations of E-LOAN.
The Corporation performed the annual goodwill impairment
evaluation for the entire organization during the third quarter of
2008 using July 31, 2008 as the annual evaluation date. 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, which basically are the legal
entities that compose the reportable segment. The Corporation
follows push-down accounting, as such all goodwill is assigned
to the reporting units when carrying out a business combination.
In accordance with SFAS No. 142, 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 2 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.
The first step of the goodwill impairment test performed during
2008 showed that the carrying amount of the following reporting
units exceeded their respective fair values: BPNA, Popular Auto
and Popular Mortgage. As a result, the second step of the goodwill
impairment test was performed for those reporting units. At
December 31, 2008, the goodwill of these reporting units
amounted to $404 million for BPNA, $7 million for Popular Auto
and $4 million for Popular Mortgage. Only BPNA pertains to the
Corporation’s U.S. mainland operations.
As previously indicated, the second step compares the implied
fair value of the reporting unit goodwill with the carrying amount
of that goodwill. The implied fair value of goodwill shall be
determined in the same manner as the amount of goodwill
recognized in a business combination is determined. That is, an
entity shall allocate the fair value of a reporting unit to all of the
assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was
the price paid to acquire the reporting unit. The excess of the fair
value of a reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of goodwill. The fair value
of the assets and liabilities reflects market conditions, thus
volatility in prices could have a material impact on the
determination of the implied fair value of the reporting unit
goodwill at the impairment test date. Based on the results of the
second step, management concluded that there was no goodwill
impairment to be recognized by those reporting units. The analysis
of the results for the second step indicates that the reduction in
the fair value of these reporting units was mainly attributed to the
deterioration of the loan portfolios’ fair value and not to the fair
value of the reporting unit as going concern entities.
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 transactions,
as well as discounted cash flow analysis.
15
The computations require management to make estimates and
assumptions. Critical assumptions that are used as part of these
evaluations include:
• a selection of comparable publicly traded companies, based
on nature of business, location and size;
• a selection of comparable acquisition and capital raising
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; and
• the market growth and new business assumptions.
For purposes of the market comparable approach, valuations
were determined by calculating average price multiples of relevant
value drivers from a group of companies that are comparable to
the reporting unit being analyzed and applying those price
multiples to the value 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 11.24% to 25.54% for the 2008
analysis.
For BPNA, the most significant of the subsidiaries that had
failed the first step of SFAS No. 142, the Corporation determined
the fair value of Step 1 utilizing a market value approach based on
a combination of price multiples from comparable companies and
multiples from capital raising transactions of comparable
companies. Additionally, the Corporation determined the reporting
unit fair value using a discounted cash flow analysis (“DCF”)
based on BPNA’s financial projections. The Step 1 fair value for
BPNA under both valuation approaches (market and DCF) was
below the carrying amount of its equity book value as of the
valuation date (July 31st), requiring the completion of the second
step of SFAS No. 142. In accordance with SFAS No. 142, the
Corporation performed a valuation of all assets and liabilities of
BPNA, including any recognized and unrecognized intangible
assets, to determine the fair value of BPNA’s net assets. To complete
the second step of SFAS No. 142, the Corporation subtracted
from BPNA’s Step 1 fair values (determined based on the market
and DCF approaches) the determined fair value of the net assets to
arrive at the implied fair value of goodwill. The results of the Step
2 indicated that the implied fair value of goodwill exceeded the
goodwill carrying value of $404 million, resulting in no goodwill
impairment.
Furthermore, as part of the SFAS No. 142 analyses, management
performed a reconciliation of the aggregate fair values determined
for the reporting units to the market capitalization of Popular,
Inc. concluding that the fair value results determined for the
reporting units in the July 31, 2008 test were reasonable.
Management monitors events or changes in circumstances
between annual tests to determine if these events or changes in
circumstances would more likely than not reduce the fair value of
a reporting unit below its carrying amount. As previously
indicated, the annual test was performed during the third quarter
of 2008 using July 31, 2008 as the annual evaluation date. At that
time, the economic situation in the United States and Puerto
Rico continued its evolution into recessionary conditions,
including deterioration in the housing market and credit market.
These conditions have carried over to the end of the year.
Accordingly, management is closely monitoring the fair value of
the reporting units, particularly those units that failed the Step 1
test in the annual goodwill impairment evaluation. As part of the
monitoring process, management performed an assessment for
BPNA as of December 31, 2008. The Corporation determined
BPNA’s fair value utilizing the same valuation approaches (market
and DCF) used in the annual goodwill impairment test. The
determined fair value for BPNA as of December 31, 2008 continued
to be below its carrying amount under all valuation approaches.
The fair value determination of BPNA’s assets and liabilities was
updated as of December 31, 2008 utilizing valuation
methodologies consistent with the July 31, 2008 test. The results
of the assessment as of December 31, 2008 indicated that the
implied fair value of goodwill exceeded the goodwill carrying
amount, resulting in no goodwill impairment. The results obtained
in the December 31, 2008 assessment were consistent with the
results of the annual impairment test in that the reduction in the
fair value of BPNA was mainly attributable to a significant
reduction in the fair value of BPNA’s loan portfolio.
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. For the BPPR reporting
unit, had the estimated fair value calculated in Step 1 using the
market comparable companies approach been approximately 35%
lower, there would still be no requirement to perform a Step 2
analysis, thus there would be no indication of impairment on the
$138 million of goodwill recorded in BPPR. For the BPNA reporting
unit, had the implied fair value of goodwill calculated in Step 2
(assuming the lowest determined Step 1 fair value) been 84%
16 POPULAR, INC. 2008 ANNUAL REPORT
lower, there would still be no impairment of the $404 million of
goodwill recorded in BPNA as of December 31, 2008. The goodwill
balance of BPPR and BPNA represent approximately 89% of the
Corporation’s total goodwill balance.
It is possible that the assumptions and conclusions regarding
the valuation of the Corporation’s reporting units could change
adversely and could result in the recognition of goodwill
impairment. Such impairment could have a material adverse effect
on the Corporation’s financial condition and future results of
operations. Declines in the Corporation’s market capitalization
increase the risk of goodwill impairment in 2009.
The valuation of the E-LOAN trademark in 2008 and 2007 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 tests completed as of
December 31, 2008 and 2007, the Corporation recorded
impairment losses of $10.9 million and $47.4 million, respectively,
associated with E-LOAN’s trademark.
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 25 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 $361.5 million at
December 31, 2008. 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, 2009. 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, 9.1% for large / mid-cap stocks, 4.5% for
fixed income, 9.9% for small cap stocks and 1.8% inflation at
January 1, 2009. 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 2009 at
8.0%, similar to the expected rate assumed in 2008 and 2007.
The Corporation uses a long-term inflation estimate of 2.8% to
determine the pension benefit cost, which is higher than the
1.8% rate used in the actuary’s expected return forecast model.
The pension plan experienced a negative return in 2008. Since
the expected return assumption is on a long-term basis, it is not
materially impacted by the yearly fluctuations (either positive or
negative) in the actual return on assets. However, if the actual
return on assets continue to perform below management
expectations for a continued period of time, this could eventually
result in the reduction of the expected return on assets percentage
assumption.
Pension expense for the Banco Popular de Puerto Rico
Retirement Plan in 2008 amounted to $3.5 million. This included
a credit of $39.9 million for 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
2009 from 8.00% to 7.50% would increase the projected 2009
expense for the Banco Popular de Puerto Rico Retirement Plan by
approximately $1.8 million.
17
The Corporation accounts for the underfunded status of its
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 25 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 of the plans 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 6.10% to determine the benefit obligation at December 31,
2008, compared with 6.40% at December 31, 2007.
A 50 basis point decrease in the assumed discount rate of
6.10% as of the beginning of 2009 would increase the projected
2009 expense for the Banco Popular de Puerto Rico Retirement
Plan by approximately $3.9 million. The change would not affect
the minimum required contribution to the Plan.
In February 2009, BPPR’s non-contributory, defined benefit
retirement plan (“Pension Plan”) was frozen with regards to all
future benefit accruals after April 30, 2009. This action was taken
by the Corporation to generate significant cost savings in light
of the severe economic downturn and decline in the Corporation’s
financial performance; this measure will be reviewed periodically
as economic conditions and the Corporation’s financial situation
improve. The Pension Plan had previously been closed to new
hires and was frozen as of December 31, 2005 to employees who
were under 30 years of age or were credited with less than 10 years
of benefit service. The aforementioned Pension Plan freezes apply
to the Benefit Restoration Plans as well.
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, 2008. The
Corporation had an accrual for postretirement benefit costs of
$135.9 million at December 31, 2008. Assumed health care trend
rates may have significant effects on the amounts reported for the
health care plan. Note 25 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 on specified cost components
and postretirement benefit obligation of the Corporation. Assumed
health care trend rates were updated at December 31, 2008 to
lengthen the expected period of time it will take to ultimately
achieve a constant level of health care inflation.
FAIR VALUE OPTION
The Corporation adopted the provisions of SFAS No. 159 in
January 2008. SFAS No. 159 provides entities the option to
measure certain financial assets and financial liabilities at fair
value with changes in fair value recognized in earnings each
period. SFAS No. 159 permits the fair value option election on an
instrument-by-instrument basis at initial recognition of an asset
or liability or upon an event that gives rise to a new basis of
accounting for that instrument.
The Corporation elected to measure at fair value certain loans
and borrowings outstanding at January 1, 2008 pursuant to the
fair value option provided by SFAS No. 159. All of these financial
instruments pertained to the operations of PFH and, as of the
SFAS No. 159 adoption date, included:
• Approximately $1.2 billion of whole loans held-in-portfolio
outstanding as of December 31, 2007 at the PFH operations.
These whole loans consisted principally of first lien
residential mortgage loans and closed-end second lien loans
that were originated through the exited origination
channels of PFH (e.g. asset acquisition, broker and retail
channels), and home equity lines of credit that had been
originated by E-LOAN but sold to PFH. Also, to a lesser
extent, the loan portfolio included mixed-used multi-family
loans (small commercial category) and manufactured
housing loans.
• Approximately $287 million of “owned-in-trust” loans and
$287 million of bond certificates associated with PFH
securitization activities that were outstanding as of
December 31, 2007. The “owned-in-trust” loans were
pledged as collateral for the bond certificates as a financing
v e h i c l e t h r o u g h o n - 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
transactions. The “owned-in-trust” loans included first lien
residential mortgage loans, closed-end second lien loans,
mixed-used / multi-family loans (small commercial
category) and manufactured housing loans. The majority of
the portfolio was comprised of first lien residential mortgage
loans. Upon the adoption of SFAS No. 159, the securitized
loans and related bonds were both measured at fair value,
thus their net position better portrayed the credit risk that
was born by the Corporation.
Management believed upon adoption of the accounting standard
that accounting for these loans at fair value provided a more relevant
and transparent measurement of the realizable value of the assets
and differentiated the PFH portfolio from the loan portfolios that
the Corporation continued to originate through channels other
than PFH.
18 POPULAR, INC. 2008 ANNUAL REPORT
PFH, which held the SFAS No. 159 loan portfolio, was financed
primarily by advances from its holding company, Popular North
America (“PNA”). In turn, PNA depended completely on the capital
markets to raise financing to meet its financial obligations. Given
the mounting pressure to address PNA’s liquidity needs in the
second half of 2008 and the continuing problems with accessing
the U.S. capital markets given the current unprecedented market
conditions, management decided that the only viable option
available to permanently raise the liquidity required by PNA was
to sell PFH’s assets, which included the SFAS No. 159 financial
instruments.
As described further in the Discontinued Operations section
in this MD&A, during the third and fourth quarter of 2008, the
Corporation sold substantially all of PFH’s assets. The sale of
assets included the sale of the implied residual interest on the on-
balance sheet securitizations transferring all rights and obligations
to the third party with no continuing involvement whatsoever of
the Corporation with respect to the transferred assets. As such,
the Corporation achieved sale accounting with respect to those
securitizations and de-recognized the associated loans and the
bond certificates which had been measured at fair value pursuant
to the SFAS No. 159 election described before.
At December 31, 2008, there were only $5 million in loans
measured at fair value pursuant to SFAS No. 159, with unrealized
losses of $37 million. Non-performing loans measured pursuant
to SFAS No. 159 which are past due 90 days or more were fair
valued at $1 million at December 31, 2008, resulting in unrealized
losses of approximately $10 million, compared to an unpaid
principal balance of $11 million. As of December 31, 2008, there
was no debt outstanding measured at fair value.
During the year ended December 31, 2008, the Corporation
recognized $198.9 million in losses attributable to changes in
the fair value of loans and notes payable (bond certificates),
including net losses attributable to changes in instrument-specific
credit spreads. These losses were included in the caption “Loss
from discontinued operations, net of tax” in the consolidated
statement of operations.
Upon adoption of SFAS No. 159, the Corporation recognized
a negative after-tax adjustment to beginning retained earnings
due to the transitional adjustment for electing the fair value option,
as detailed in the following table.
January 1, 2008
(Carrying value)
prior to adoption)
$1,481,297
Cumulative effect
adjustment to
January 1, 2008
retained earnings -
Gain (Loss)
($494,180)
January 1, 2008
fair value
(Carrying value
after adoption)
$987,117
($286,611)
$85,625
($200,986)
($408,555)
146,724
($261,831)
(In thousands)
Loans
Notes payable
(bond certificates)
Pre-tax cumulative effect
of adopting fair value
option accounting
Net increase in deferred
tax asset
After-tax cumulative effect of
adopting fair value option
accounting
The fair value adjustments in the loan portfolios recorded upon
adoption of SFAS No. 159 on January 1, 2008 were mainly the
result of the following factors:
• The loan portfolio was, in the most part, considered
subprime and due to market conditions, considered
distressed assets in a very illiquid market.
• There was a significant deterioration in the delinquency
profile of the second lien closed-end mortgage loan portfolio.
• Property values obtained on subprime loans in foreclosure
were declining significantly. Since property values did not
justify initiating a foreclosure action, the loan in essence
behaved as an unsecured loan.
• A substantial share of PFH’s closed-end second lien portfolio
had combined loan-to-values greater than 90%.
• The consumer loans measured at fair value also included
home equity lines of credit that although were considered
prime based on FICO scores, they had deteriorated. Similar
to second lien closed-end loans, the home equity lines of
credit (“HELOCs”) were also behaving as an unsecured
loan as a result of falling home values.
• Certain of the loan portfolios were trading at distressed
levels based on the small trading activity available for the
products and the expected return by the investors rather
than the actual performance and fundamentals of these loans.
19
Similar factors and continuing disruptions in the capital
markets and credit deterioration contributed to the further decline
in value of the loan portfolio during 2008.
STATEMENT OF OPERATIONS ANALYSIS
Net Interest Income
Net interest income, the Corporation’s continuing operations
primary source of earnings, represented 61% of top line income
(defined as net interest income plus non-interest income) for 2008
and 60% for 2007. Several variables may cause the net interest
income to fluctuate from period to period, including 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 2008 and 2007 was 39%, as
compared to 43.5% for BPPR and 41.5% for all the other Puerto
Rico subsidiaries in 2006. The taxable equivalent computation
considers the interest expense disallowance required by the Puerto
Rico tax law.
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. Prepayment penalties, late fees collected and the amortization
of premiums / discounts on purchased loans are also included as
part of the loan yield. Interest income for the year ended December
31, 2008 included a favorable impact of $17.4 million related to
these loan fees, primarily in the commercial loans portfolio. In
addition, these amounts approximated favorable impacts of $25.3
million and $21.3 million, respectively, for the years ended
December 31, 2007 and 2006.
Table D presents the different components of the Corporation’s
net interest income, on a taxable equivalent basis, for the year
ended December 31, 2008, as compared with the same period in
2007, segregated by major categories of interest earning assets
and interest bearing liabilities.
The decrease in average earning assets was mainly due to the
Corporation’s strategy of not reinvesting maturities of low
yielding investments. Increases in both commercial loans and
consumer loans partially offset the reduction in the investments
category. Construction loans accounted for 51% of the increase
in the commercial loans category. This increase occurred mainly
in the Puerto Rico market as the Corporation continues to make
disbursements from prior commitments. The performance of these
loans is being closely monitored since the current economic
environment will continue to pressure this sector. The increase
in the consumer loans category was mainly due to a higher balance
of HELOCs and closed-end second mortgages from E-LOAN.
The market disruptions that took place in the second half of 2007
forced the Corporation to retain a higher balance of these loans.
As part of the E-LOAN Restructuring Plan, the origination of
these loans was discontinued. The Corporation’s funding mix
was also modified with a portion of borrowings being replaced by
brokered certificates of deposit entered into as part of the strategies
to address the liquidity crisis of the latter half of 2007.
The decrease in net interest income was mainly the result of
the following factors:
• The Federal Reserve (“FED”) lowered the federal funds target
rate from 4.25% at the beginning of 2008 to between 0%
and 0.25% at December 31, 2008. The reduction in market
rates impacted the yield of several of the Corporation’s
earning assets during that period. These assets included
commercial and construction loans, of which 67% have
floating or adjustable rates, floating rate collateralized
mortgage obligations, and HELOCs, as well as the
origination of loans in a low interest rate environment. In
addition, a higher proportion of closed-end second
mortgages from the U.S. mainland operations contributed
to the decrease in the yield of consumer loans since these
loans carry a lower rate than consumer loans generated in
the Puerto Rico market. Furthermore, the increase in non-
accruing loans, which is discussed in the Credit Risk and
Loan Quality section of this MD&A, had an unfavorable
impact in interest income.
• Liquidity concerns during the second half of 2007 prompted
the Corporation to enter into certain financing agreements
which limited the expected benefit of reduced market rates
in the overall cost of funds. These include brokered
certificates of deposit and certain long-term funding
agreements entered into during 2008.
• Partially offsetting the negative impacts was a reduction in
the cost of both short-term borrowings and interest bearing
deposits. These reductions were a combination of lower
market rates and management’s initiatives to reduce the
cost of certain interest bearing deposits reflecting the
20 POPULAR, INC. 2008 ANNUAL REPORT
Table D
Net Interest Income - Taxable Equivalent Basis
(Dollars in millions)
Year ended December 31,
Average Volume
2007
Variance
Average Yields / Costs
2007
2008
Variance
(In thousands)
Interest
Variance
Attributable to
2008
2007
Variance
Rate
Volume
2008
$700
8,189
665
9,554
$514
9,827
653
$186
(1,638)
12
10,994
(1,440)
15,775
14,917
1,114
4,722
4,861
26,472
$36,026
$4,948
5,600
12,796
23,344
5,115
2,263
1,178
4,748
4,537
25,380
$36,374
$4,429
5,698
11,399
21,526
8,316
1,041
858
(64)
(26)
324
1,092
($348)
$519
(98)
1,397
1,818
(3,201)
1,222
2.68%
5.17%
(2.49%)
Money market investments
$18,790
$26,565
($7,775)
($14,482)
$6,707
5.03
7.21
5.01
6.13
8.01
7.18
10.15
7.14
5.16
6.19
5.22
7.72
7.89
7.32
10.50
8.15
(0.13)
1.02
(0.21)
(1.59)
0.12
(0.14)
(0.35)
(1.01)
Investment securities
412,165
507,047
(94,882)
(12,538)
(82,344)
Trading securities
47,909
40,408
7,501
6,729
772
478,864
574,020
(95,156)
(20,291)
(74,865)
Loans:
Commercial and construction
967,019
1,151,602
(184,583)
(245,680)
61,097
Leasing
Mortgage
Consumer
89,155
92,940
339,019
347,302
(3,785)
(8,283)
1,345
(6,384)
493,593
476,234
17,359
(20,645)
1,888,786
2,068,078
(179,292)
(271,364)
(5,130)
(1,899)
38,004
92,072
$2,367,650 $2,642,098
($274,448)
($291,655)
$17,207
6.57%
7.26%
(0.69%)
Total earning assets
Interest bearing deposits:
1.89%
2.60%
(0.71%)
NOW and money market*
$93,523
$115,047
($21,524)
($34,997)
$13,473
1.50
4.08
3.00
3.29
5.60
1.96
4.73
3.56
5.11
5.40
(0.46)
(0.65)
(0.56)
(1.82)
0.20
Savings
Time deposits
Short-term borrowings
Medium and long-term debt
Total interest bearing
84,206
111,877
(27,671)
(19,242)
(8,429)
522,394
538,869
(16,475)
(83,055)
66,580
700,123
168,070
126,726
765,793
424,530
(65,670)
(256,460)
(137,294)
(131,385)
71,624
(125,075)
56,254
70,472
2,130
68,342
30,722
30,883
(161)
3.24
4.04
(0.80)
liabilities
994,919
1,246,577
(251,658)
(266,549)
14,891
4,120
1,184
4,043
1,448
$36,026
$36,374
77
(264)
($348)
2.76%
3.81%
3.43%
3.83%
(0.67%)
(0.02%)
Non-interest bearing
demand deposits
Other sources of funds
Net interest margin
Net interest income on
3.33%
3.22%
0.11%
Net interest spread
a taxable equivalent basis
1,372,731
1,395,521
(22,790)
($25,106)
$2,316
Taxable equivalent
adjustment
Net interest income
93,527
89,863
3,664
$1,279,204 $1,305,658
($26,454)
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.
21
(In thousands)
Interest
Variance
Attributable to
2007
2006
Variance
Rate
Volume
$26,565
507,047
40,408
$31,382
($4,817)
($1,824)
($2,993)
597,930
(90,883)
5,106
(95,989)
30,593
9,815
(186)
10,001
574,020
659,905
(85,885)
3,096
(88,981)
(Dollars in millions)
Average Volume
2006
Variance
Average Yields / Costs
2006
2007
Variance
2007
$514
9,827
653
10,994
14,917
1,178
4,748
4,537
25,380
$36,374
$4,429
5,698
11,399
21,526
8,316
1,041
$564
11,717
491
12,772
13,476
1,283
4,726
4,639
24,124
$36,896
$3,878
5,440
9,977
19,295
10,405
2,093
($50)
(1,890)
162
(1,778)
1,441
(105)
22
(102)
1,256
($522)
$551
258
1,422
2,231
(2,089)
(1,052)
5.17%
5.56%
(0.39%)
Money market investments
5.16
6.19
5.22
7.72
7.89
7.32
10.50
8.15
5.10
6.23
5.17
7.61
7.57
6.85
10.00
7.92
0.06
(0.04)
0.05
0.11
0.32
0.47
0.50
0.23
Investment securities
Trading securities
Loans:
Leasing
Mortgage
Consumer
7.26%
6.97%
0.29%
Total earning assets
Interest bearing deposits:
Commercial and construction
1,151,602
1,026,153
125,449
12,913
112,536
92,940
347,302
476,234
97,166
(4,226)
323,557
463,861
23,745
12,373
2,068,078
1,910,737
157,341
3,951
22,223
10,287
49,374
(8,177)
1,522
2,086
107,967
$2,642,098
$2,570,642
$71,456
$52,470
$18,986
2.60%
2.06%
0.54%
NOW and money market*
$115,047
$79,820
$35,227
$17,963
$17,264
1.96
4.73
3.56
5.11
5.40
1.43
4.24
3.01
4.88
5.36
0.53
0.49
0.55
0.23
0.04
Savings
Time deposits
Short-term borrowings
111,877
538,869
765,793
424,530
77,611
34,266
422,663
116,206
580,094
508,174
185,699
(83,644)
4,485
46,060
68,508
22,613
29,781
70,146
117,191
(106,257)
Medium and long-term debt
56,254
112,240
(55,986)
829
(56,815)
Total interest bearing
30,883
31,793
(910)
4.04
3.78
0.26
liabilities
1,246,577
1,200,508
46,069
91,950
(45,881)
4,043
1,448
3,970
1,133
73
315
$36,374
$36,896
($522)
3.43%
3.83%
3.25%
3.72%
0.18%
0.11%
Non-interest bearing
demand deposits
Other sources of funds
Net interest margin
Net interest income on
3.22%
3.19%
0.03%
Net interest spread
a taxable equivalent basis
1,395,521
1,370,134
25,387
($39,480)
$64,867
Taxable equivalent
adjustment
89,863
115,403
(25,540)
Net interest income
$1,305,658
$1,254,731
$50,927
22 POPULAR, INC. 2008 ANNUAL REPORT
prevailing low interest rate environment. The categories
impacted by these decreases include the internet deposits
generated through E-LOAN.
The average key index rates for the years 2006 through 2008
were as follows:
Prime rate
Fed funds rate
3-month LIBOR
3-month Treasury Bill
10-year Treasury
FNMA 30-year
2008
2007
2006
5.08%
2.08
2.93
1.45
3.64
5.79
8.05%
5.05
5.30
4.46
4.63
6.24
7.96%
4.96
5.20
4.84
4.79
6.32
The Corporation’s taxable equivalent adjustment presented an
increase, when compared to 2007, even though the total balance
of investments decreased as a result of the previously mentioned
strategy of not reinvesting maturities of low yielding assets. This
is in part the result of a lower cost of funds during 2008. 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 decreases at a
faster pace than the yield of earning assets, the net benefit will
increase.
Although the Corporation showed improvement in its net
interest margin in 2007, when compared to 2006, the year 2007
presented various challenges such as the liquidity crisis, internet-
based deposits with higher interest rates and the competitive
pressures in the deposits and loan markets. As shown in Table D,
the increase in the net interest margin from continued operations
for the year ended December 31, 2007, compared with the previous
year, was mainly attributed to a change in the funding mix between
total borrowings and interest bearing deposits. In addition, the
increase in the loan portfolio partially offset the decrease
experienced in the investments category. The rate differential
between loans and investments contributed to reduce the effect of
a higher cost of interest bearing deposits. The increase in the
cost of interest bearing deposits was mainly the 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 decrease in the taxable equivalent adjustment for 2007, as
compared to 2006, was the result of a lower income tax rate in
Puerto Rico in 2007, thus reducing the benefit calculated on
exempt assets.
Average tax-exempt earning assets approximated $7.9 billion
in 2008, of which 80% represented tax-exempt investment
securities, compared with $8.9 billion and 83% in 2007, and
$9.7 billion and 87% in 2006.
Provision for Loan Losses
The provision for loan losses in the continuing operations totaled
$991.4 million, or 165% of net charge-offs, for the year ended
December 31, 2008, compared with $341.2 million or 136%,
respectively, for 2007, and $187.6 million or 122%, respectively,
for 2006.
The provision for loan losses for the year ended December 31,
2008, when compared with the previous year, reflects higher net
charge-offs by $349.3 million mainly in construction loans by
$122.0 million, consumer loans by $93.4 million, commercial
loans by $92.7 million, and mortgage loans by $37.4 million.
During the year ended December 31, 2008, the Corporation
recorded $316.5 million in provision for loan losses for loans
classified as impaired under SFAS No. 114. Provision and net
charge-offs information for prior periods was retrospectively
adjusted to exclude discontinued operations from continuing
operations for comparative purposes.
General economic pressures, housing value declines, a
slowdown in consumer spending and the turmoil in the global
financial markets impacted the Corporation’s commercial and
construction loan portfolios, increasing charge-offs, non-
performing assets and loans judgmentally classified as impaired.
The stress consumers experienced from depreciating home prices,
rising unemployment and tighter credit conditions resulted in
higher levels of delinquencies and losses in the Corporation’s
mortgage and consumer loan portfolios. During 2008, the
Corporation increased the allowance for loan losses across all loan
portfolios.
The increase in the provision for loan losses for the year ended
December 31, 2007 when compared to the previous year was mainly
attributed to higher net charge-offs by $97.3 million mainly in
the consumer, commercial and mortgage loan portfolios, which
reflect higher delinquencies in the U.S. mainland and Puerto Rico
principally due to the downturn in the economy. Also, the increase
reflected probable losses inherent in the loan portfolio, as a result
of deteriorated economic conditions and market trends primarily
in the commercial and consumer loan sectors, which include
home equity lines and second lien mortgage loans.
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.
Non-Interest Income
Refer to Table E for a breakdown on non-interest income from
continuing operations by major categories for the past five years.
Non-interest income accounted for 39% of total revenues in 2008,
while it represented 40% of total revenues in the year 2007 and
38% in 2006.
Non-interest income for the year ended December 31, 2008,
compared with the previous year, was mostly impacted by:
• Lower gain on sales of loans and unfavorable valuation
adjustments on loans held-for-sale, which are broken down
as follows:
(In thousands)
Gain on sale of loans
Lower of cost or fair value
value adjustment on
loans held-for-sale
Total
Year ended December 31,
2007
$66,058
$ Variance
($41,097)
2008
$24,961
(18,943)
$6,018
(6,012)
$60,046
(12,931)
($54,028)
The decrease in this income statement category for the year
ended December 31, 2008, when compared to 2007, was primarily
related to E-LOAN, which experienced a reduction of $48.7
million. The reduction in the gain on sales of loans at E-LOAN
was associated with lower origination volumes and lower yields
due to the weakness in the U.S. mainland mortgage and housing
market and to the exiting of the loan origination business at this
subsidiary. Early in 2008, E-LOAN had ceased originating home
equity lines of credit, closed-end second lien mortgage loans and
auto loans. In late 2008, E-LOAN also ceased originating first-
lien mortgage loans. The reduction caused by E-LOAN was partially
offset by higher gains in the sale of lease financings by the
Corporation’s U.S. banking subsidiary of approximately $5.4
million. The increase in lower of cost or fair value adjustments
were mostly related to a lease financing portfolio fair valued at
$328 million that was reclassified from held-in-portfolio to held-
for-sale during December 2008, and which management plans to
sell in 2009.
• Lower net gain on sale and valuation adjustments of
investment securities, which consisted of the following:
(In thousands)
Net gain on sale of
investment securities
Other-than-temporary
valuation adjustments on
investment securities
available-for-sale
Total
Year ended December 31,
2007
$ Variance
2008
$78,863
$120,328
($41,465)
(9,147)
$69,716
(19,459)
$100,869
10,312
($31,153)
23
The decrease in the net gain on sale of investment securities
for the year ended December 31, 2008, compared with the same
period in 2007, was mostly related to $118.7 million in realized
g a i n s o n t h e s a l e o f t h e C o r p o r a t i o n ’ s i n t e r e s t i n
Telecomunicaciones de Puerto Rico, Inc. (“TELPRI”) during the
first quarter of 2007. This was partially offset by $49.3 million in
realized gains due to the redemption by Visa of shares of common
stock held by the Corporation during the first quarter of 2008 and
by $28.3 million in capital gains from the sale of $2.4 billion in
U.S. agency securities during the second quarter of 2008 as a
strategy to reduce the portfolio’s vulnerability to declining interest
rates.
The other-than-temporary valuation adjustments on investment
securities available-for-sale recorded during 2008 and 2007 were
principally related to equity investments in U.S. financial
institutions.
• There was a decrease in other operating income by $26.4
million mostly associated with the Corporation’s Corporate
group which recorded lower revenues from investments
accounted under the equity method, as well higher other-
than-temporary impairments on certain of these
investments. The other-than-temporary impairment
amounted to $26.9 million in 2008 and was principally
associated with private funds. There were also lower
revenues from escrow closing services by E-LOAN due to
the exiting of the loan origination business, as well as
lower referral income. This was partially offset by higher
gains on the sale of real estate properties by $13.7 million
mainly in the U.S. banking subsidiary, as well as the gain
of $12.8 million recorded in January 2008 related to the
sale of BPNA’s retail bank branches located in Texas.
These unfavorable variances in non-interest income were
partially offset by:
• Higher other service fees by $50.6 million mostly related
to higher debit card fees as a result of higher revenues from
merchants due to a change in the pricing structure for
transactions processed from a fixed charge per transaction
to a variable rate based on the amount of the transaction, as
well as higher surcharging income from the use of Popular’s
automated teller machine network. There were also higher
mortgage servicing fees due to an increase in the portfolio
of serviced loans. Refer to Note 22 to the consolidated
financial statements for information on the Corporation’s
servicing assets and serviced portfolio.
• Higher service charges on deposits by $10.9 million
primarily in BPPR due to higher account analysis fees in
commercial accounts which are impacted by transaction
volume, compensating deposit balances and earnings credit
given to the customer depending on the interest rates.
24 POPULAR, INC. 2008 ANNUAL REPORT
Table E
Non-Interest Income
Year ended December 31,
(In thousands)
2008
2007
2006
2005
2004
Service charges on deposit accounts
$206,957
$196,072
$190,079
$181,749
$165,241
Other service fees:
Debit card fees
Credit card fees and discounts
Processing fees
Insurance fees
Sale and administration of
investment products
Mortgage servicing fees, net of
amortization and fair value
adjustments
Trust fees
Check cashing fees
Other fees
108,274
107,713
51,731
50,417
76,573
102,176
47,476
53,097
61,643
89,827
44,050
52,045
52,675
82,062
42,773
49,021
51,256
69,702
40,169
36,679
34,373
30,453
27,873
28,419
22,386
25,987
12,099
512
25,057
17,981
11,157
387
26,311
5,215
9,316
737
27,153
4,115
8,290
17,122
33,857
5,848
8,872
21,680
30,596
Total other service fees
416,163
365,611
317,859
318,334
287,188
Net gain on sale and valuation
adjustments of investment securities
Trading account profit (loss)
Gain on sale of loans and valuation
adjustments on loans
held-for-sale
Other operating income
Total non-interest income
69,716
43,645
100,869
37,197
22,120
36,258
66,512
30,051
15,254
(159)
6,018
87,475
60,046
113,900
76,337
127,856
37,342
98,624
30,097
87,516
$829,974
$873,695
$770,509
$732,612
$585,137
For the year ended December 31, 2007, non-interest income
from continuing operations increased by $103.2 million, or 13%,
when compared with 2006. There were higher net gains on sale of
investment securities mainly as a result of $118.7 million in
gains from the sale of the Corporation’s interest in TELPRI during
the first quarter of 2007, compared principally to $13.6 million in
gains from the sale of marketable equity securities and FNMA
securities in 2006. This favorable variance on securities available-
in
for-sale was partially offset by $19.5 million
other-than-temporary impairments in certain equity securities
during 2007. Additionally, there were higher other service fees by
$47.8 million primarily as a result of higher debit card fees 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, and to higher surcharge revenues from non-BPPR users of
the ATM terminals. Also included in other service fees were higher
credit card fees 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. There was also an increase in mortgage
servicing fees related to higher servicing fees due to the growth
in the portfolio of loans serviced for others and to the adoption of
SFAS No. 156, in which the Corporation elected fair value
measurement and, as a result, the residential mortgage servicing
rights were positively adjusted to fair value. Other operating
income for 2007 decreased when compared to 2006 due to lower
gains on the sale of real estate properties by $12.2 million mainly
in the U.S. banking subsidiary. Also, there were lower gains on
sales of loans as a result of lower origination volume at E-LOAN
due to market conditions and the lack of liquidity in the private
secondary markets and lower gains on sale of Small Business
Administration (“SBA”) loans by the Corporation’s U.S. banking
subsidiary. This decrease in gains on sale of loans 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.
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 from continuing operations totaled $1.3
billion for the year ended December 31, 2008, a decrease of $208.7
million, or 14%, compared with the same period in 2007. The
operating expenses for 2007 and 2008 were impacted by numerous
restructuring charges and impairment losses. To facilitate the
comparative analysis, below are details on the restructuring plans
executed by the Corporation during 2008 and 2007 that pertained
to the continuing operations. Additional restructuring plans were
implemented by the Corporation in those years, but the
corresponding disclosures are included in the Discontinued
Operations section of this MD&A.
For the year ended
December 31, 2008
BPNA
E-LOAN
2008
Restructuring Restructuring Restructuring
Plan
E-LOAN
2007
Plan
Plan
(In millions)
Personnel costs
Net occupancy
expenses
Equipment
expenses
Professional fees
Other operating
expenses
Total
$5.3
8.9
-
-
-
restructuring
charges
Impairment losses
on long-lived
assets
$14.2
5.5
$3.0
-
-
-
0.1
$3.1
8.0
Goodwill and
trademark
impairment
losses
Total
-
$19.7
10.9
$22.0
($0.3)
0.1
-
-
-
($0.2)
-
-
($0.2)
For the year ended
December 31, 2007
E-LOAN
2007
Restructuring
Plan
$4.6
4.2
0.4
0.4
-
$9.6
10.5
211.8
$231.9
The accelerated downturn of the U.S. economy requires a leaner,
more efficient U.S. business model. As such, the Corporation
determined to reduce the size of its banking operations in the
U.S. mainland to a level better suited to present economic
conditions and focus on core banking activities. On October 17,
2008, the Board of Directors of Popular, Inc. approved two
restructuring plans for the BPNA reportable segment. The
objective of the restructuring plans is to improve profitability in
the short term, increase liquidity and lower credit costs and, over
time, achieve a greater integration with corporate functions in
Puerto Rico.
25
BPNA Restructuring Plan
The BPNA Restructuring Plan consists mainly of a number of
initiatives grouped into three work streams: (1) branch network
actions, (2) balance sheet initiatives, and (3) general expense
reductions.
As part of the branch network actions, management expects
that approximately 40 underperforming branches, out of a total of
139, will be sold, closed, or consolidated in 2009. These branches
were selected based on the fact that they rank lowest within BPNA’s
network in both current profitability and potential for growth.
Branch actions are distributed across all regions, including
California, New Jersey, New York, Florida, Illinois and Texas.
The Corporation will close or consolidate those branches for
which it is unable to reach an agreement with a potential buyer.
The branches that were identified for divesture held approximately
$720 million in deposits at December 31, 2008. BPNA’s deposits
totaled $9.7 billion as of such date.
The balance sheet initiatives aim to significantly downsize or
exit asset-generating businesses that are not relationship-based
and / or whose profitability is being severely impacted by the
current credit and economic conditions. As part of this initiative,
the Corporation exited certain businesses including, among the
principal ones, those related to the origination of non-
conventional mortgages, equipment lease financing, business
loans to professionals, multifamily lending, mixed-used
commercial loans and credit cards. These business lines held a
loan portfolio of approximately $2.1 billion at December 31, 2008.
At December 31, 2008, BPNA had already stopped originating
loans in these portfolios. The Corporation holds the existing
portfolios of the exited businesses in a runoff mode. The existing
equipment lease financing portfolio was primarily held-for-sale at
December 31, 2008 and a significant portion was sold in February
2009. Also, the BPNA Restructuring Plan contemplated downsizing
the following businesses: business banking, SBA lending, and
consumer / mortgage lending. These latter efforts were also
completed. The downsizing in SBA lending contemplates a
migration from a nation-wide and broker-based business model to
a significant smaller regional and branch-based model.
The general expense reduction initiative looks to capture cost
savings in the support functions directly related with the
reductions in the branch network and lending businesses, as well
as identifying additional opportunities to cut discretionary
expenses such as professional fees, traveling and others. The BPNA
Restructuring Plan also contemplates greater integration with
corporate functions in Puerto Rico.
All restructuring efforts at BPNA are expected to result in
approximately $50 million in recurrent annual cost savings. The
majority of the savings are related to personnel costs since the
restructuring plan incorporates a headcount reduction of
approximately 640 full-time equivalent employees (“FTEs”), or
26 POPULAR, INC. 2008 ANNUAL REPORT
Table F
Operating Expenses
(Dollars in thousands)
Salaries
Pension, profit sharing and other benefits
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
FDIC assessments
OREO expenses
All other*
Goodwill and trademark
impairment losses
Amortization of intangibles
Subtotal
Total
Personnel costs to average assets
Operating expenses to average assets
Employees (full-time equivalent)
Average assets per employee (in millions)
* Includes insurance expenses and sundry losses, among others.
Year ended December 31,
2008
$485,720
122,745
608,465
120,456
111,478
52,799
121,145
51,386
62,731
14,450
13,491
43,326
12,751
15,037
12,158
73,066
12,480
11,509
728,263
2007
$485,178
135,582
620,760
109,344
117,082
48,489
119,523
58,092
109,909
15,603
10,478
39,811
14,239
2,858
2,905
54,174
211,750
10,445
924,702
2006
$458,977
132,998
591,975
99,599
120,445
43,313
117,502
56,932
118,682
15,040
-
30,141
13,600
2,843
994
55,144
-
12,021
2005
$417,060
129,526
2004
$380,216
125,375
546,586
96,929
112,167
37,811
98,015
52,904
92,173
15,545
-
28,113
14,925
3,026
162
56,263
-
9,549
505,591
80,073
100,567
39,021
77,343
51,346
68,553
15,771
-
25,654
11,677
2,747
(307)
42,672
-
7,844
686,256
617,582
522,961
$1,336,728
1.54%
3.39
10,387
$3.80
$1,545,462
$1,278,231
$1,164,168
$1,028,552
1.57%
3.92
11,374
$3.47
1.49%
3.21
11,025
$3.62
1.45%
3.08
11,330
$3.33
1.58%
3.21
10,557
$3.03
30% of BPNA’s workforce. Management expects the headcount
reduction to be achieved by the third quarter of 2009.
At December 31, 2008, the accrual for restructuring costs
associated with the BPNA Restructuring Plan amounted to $10.9
million. During 2008, restructuring charges and impairment
losses associated to the BPNA Restructuring Plan amounted to
$19.7 million. An additional $12.9 million in associated costs are
expected to be incurred in 2009. FTEs at BPNA, excluding E-
LOAN, were 1,831 at December 31, 2008, compared to 2,157 at
the same date in the previous year.
E-LOAN 2007 and 2008 Restructuring Plan
As indicated in the 2007 Annual Report, in November 2007, the
Corporation approved an initial restructuring plan for E-LOAN
(the “E-LOAN 2007 Restructuring Plan”). This plan included a
substantial reduction of marketing and personnel costs at E-LOAN
and changes in E-LOAN’s business model. At that time, the
changes included 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 and lower liquidity in the
secondary markets for mortgage related products, in the fourth
quarter of 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 Corporation does not expect to incur additional
restructuring charges related to the 2007 E-LOAN Restructuring
Plan. At December 31, 2008, the accrual for restructuring costs
associated with the E-LOAN 2007 Restructuring Plan amounted
to $2.2 million. This reserve was related principally to lease
terminations.
These efforts implemented during early 2008 proved not to be
sufficient given the unprecedented market conditions and
disappointing financial results. As previously explained, the
Corporation’s Board of Directors approved in October 2008 a
new restructuring plan for E-LOAN (the “E-LOAN 2008
Restructuring Plan”). This plan involved E-LOAN ceasing to
operate as a direct lender, an event that occurred in late 2008. E-
LOAN will continue to market deposit accounts under its name
for the benefit of BPNA and offer loan customers the option of
being referred to a trusted consumer lending partner. As part of
the 2008 plan, all operational and support functions will be
transferred to BPNA and EVERTEC. Total annualized savings are
expected to reach $37 million. It is anticipated that the E-LOAN
2008 Restructuring Plan will result in estimated combined charges,
including restructuring costs and impairment losses, of
approximately $24 million between 2008 and 2009. At December
31, 2008, the accrual for restructuring costs associated with the
E-LOAN 2008 Restructuring Plan amounted to $3.0 million.
At December 31, 2008, E-LOAN’s workforce totaled 270 FTEs,
compared to 767 FTEs at December 31, 2007. Management
expects the headcount reduction to be completed by the third
quarter of 2009.
Refer to Note 35 to the consolidated financial statements for
further information on the results of operations of E-LOAN, which
are part of BPNA’s reportable segment. At December 31, 2008, E-
LOAN’s assets consisted primarily of a running-off portfolio of
loans held-for-investment totaling $801 million with an allowance
for loan losses of $76 million. This loan portfolio consisted
primarily of $76 million in mortgage loans and $725 million in
consumer loans, including approximately $457 million in home
equity lines of credit. Also, E-LOAN had $6 million in loans
classified as held-for-sale, which consisted primarily of first lien
mortgage loans originated during 2008. The ratio of allowance
for loan losses to loans for E-LOAN approximated 9.49% at
December 31, 2008. The assets of E-LOAN are funded primarily
through intercompany long-term borrowings. Deposits originated
through E-LOAN’s internet platform for the benefit of BPNA
approximated $1.5 billion at December 31, 2008.
27
Operating expenses, isolating restructuring charges
and related impairments
Isolating the impact of these restructuring related costs described
above, operating expenses totaled $1.3 billion for the year ended
December 31, 2008 and 2007. The increases (decreases) by
operating expense category, isolating the restructuring related
charges, were as follows:
Operating Expenses
2008, excluding
charges related to
restructuring
plans
2007, excluding
charges related to
restructuring
plans
$600.5
111.5
111.5
52.8
121.1
51.4
62.7
14.5
156.2
1.6
11.5
$616.2
105.1
116.7
48.5
119.5
57.7
109.9
15.6
114.0
-
10.4
Variance
($15.7)
6.4
(5.2)
4.3
1.6
(6.3)
(47.2)
(1.1)
42.2
1.6
1.1
(In millions)
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Other operating expenses
Goodwill and trademark
impairment losses
Amortization of intangibles
Total
$1,295.3
$1,313.6
($18.3)
The decrease was principally due to lower business promotion
expenses and personnel costs, including the impact of the
downsizing of E-LOAN’s operations in early 2008 that contributed
to a reduction in headcount, and lower compensation tied to
financial performance.
The decrease in personnel costs for 2008, compared to 2007,
was principally due to lower headcount, principally at E-LOAN,
due to a reduction in FTEs in early 2008 because of the downsizing
associated to the E-LOAN 2007 Restructuring Plan. Also, the
additional layoffs at E-LOAN and BPNA in the fourth quarter of
2008 contributed to the reduction in personnel costs.
Furthermore, given the net loss for the year and not attaining
performance measures required under certain employee benefit
plans, there was lower compensation tied to financial performance,
including incentives and profit sharing during 2008. These
reductions were principally offset by lower deferred costs in 2008
given the reduction in loan originations. Also, these reductions
were partially offset by the impact of the integration to BPPR of
the employees from the retail branches of Citibank – Puerto Rico,
an acquisition done in December 2007. Also, there were higher
severance payments related to key executive officers and pension
costs.
Excluding PFH, the Corporation’s FTEs were 10,387 as of
December 31, 2008, compared with 11,374 at December 31,
28 POPULAR, INC. 2008 ANNUAL REPORT
2007. The BPNA reportable segment contributed with a decrease
of 823 FTEs.
primarily at E-LOAN, partially offset by higher costs related to
the loyalty reward program in the Puerto Rico operations.
The decrease in business promotion for 2008, compared to
2007, was principally related to the BPNA reportable segment by
$35.1 million, including $31.0 million of E-LOAN principally
related to the downsizing of the operations. The BPPR reportable
segment contributed with a reduction in business promotion of
$10.9 million, which was the result of cost control initiatives.
The increase in other operating expenses was mainly attributed
to higher FDIC insurance assessments mainly in BPPR and BPNA
by $12.2 million and higher other real estate expenses by $9.3
million. The latter was mainly due to losses on the sale, or write
downs in the collateral value of repossessed real estate properties,
as well as higher foreclosure costs in the U.S. mainland operations.
Also, the increase in other operating expenses was due to the
recording of $15.5 million in reserves for unfunded loan
commitments during 2008, primarily related to commercial and
consumer lines of credit. In addition, there were higher credit
card interchange and processing costs and higher sundry losses.
For the year ended December 31, 2007, operating expenses
from continuing operations increased by $267.2 million, or 21%,
compared with the same period in 2006. As indicated earlier,
2007 was impacted by $231.9 million in charges related to the E-
LOAN 2007 Restructuring Plan. Isolating the impact of the
restructuring related costs, operating expenses totaled $1.3 billion
for the year ended December 31, 2007, representing an increase of
only $35.4 million, or 3%, when compared to same period in
2006.
The increases in personnel costs from 2006 to 2007 were
principally the result 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. Net occupancy expenses
increased mainly as a result of additional leased locations, tax
escalations, and new leases on leased back properties in the U.S.
banking subsidiary. Other taxes increased as a result of higher
municipal license taxes, personal property taxes, examination
banking fees and the new sales tax implemented in Puerto Rico
during the later part of 2006. There were also increased other
operating expenses due to higher credit card processing and
interchange costs primarily due to higher credit card processing
and interchange expenses. Also, the results for 2007 included the
impairment losses related to E-LOAN’s goodwill, trademark and
long-lived assets. Partially offsetting these increases were decreases
in business promotion as a result of cost control measures on
marketing expenditures on the U.S. mainland operations,
Income Taxes
Income tax expense from continuing operations amounted to
$461.5 million for the year December 31, 2008, compared with
$90.2 million for previous year. During the year ended December
31, 2008, the Corporation recorded a valuation allowance on
deferred tax assets of its U.S. mainland operations of $861 million.
The recording of this valuation increased income tax expense by
$643.0 million on the continuing operations and $209.0 million
on the discontinued operations for the year ended December 31,
2008. The income tax impact of the discontinued operations is
reflected as part of “Net loss from discontinued operations, net of
tax” in the consolidated statement of income as of December 31,
2008. The deferred tax assets and full valuation allowance pertains
to the continuing operations for statement of condition purposes.
The increase in income tax expense for 2008, when compared
to 2007, was primarily due to the impact on the recording of the
valuation allowance previously indicated, partially offset by pre-
tax losses in 2008, when compared to pre-tax earnings in the
previous year. The components of the income tax expense for the
continuing operations for the year ended December 31, 2008 and
2007 were as follows:
Amount
(62,600)
($85,384)
(In thousands)
Computed income tax at
statutory rates
Benefits of net tax exempt
interest income
Effect of income subject to
preferential tax rate
Non-deductible goodwill
impairment
Difference in tax rates due to
multiple jurisdictions
16,398
Deferred tax valuation allowance 643,011
(31,986)
State taxes and others
$461,534
Income tax expense
(17,905)
-
2008
2007
% of pre-tax
loss
Amount
% of pre-tax
loss
39%
$114,142
39%
29
8
-
(8)
(294)
15
(211%)
(60,304)
(21)
(24,555)
57,544
10,391
-
(7,054)
$90,164
(9)
20
4
-
(2)
31%
Income tax expense for the continuing operations for the year
ended December 31, 2007 was $90.2 million, compared with an
income tax expense of $139.7 million for 2006. This variance
was primarily due to lower pre-tax earnings, a reduction in the
income tax expense in the Puerto Rico operations due to a reduction
in the statutory tax rate for Puerto Rico corporations as described
in the Net Interest Income section of this MD&A and higher
income subject to a preferential tax rate on capital gains in Puerto
Rico when compared to 2006. This was partially offset by the fact
that goodwill impairment losses taken in 2007 were non-deductible
for taxes.
29
The Corporation’s net deferred tax assets at December 31,
2008 amounted to $357 million (net of the valuation allowance of
$861 million) compared to $520 million at December 31, 2007.
Note 28 to the consolidated financial statements provides the
composition of the net deferred tax assets as of such dates. All of
the net deferred tax assets at December 31, 2008 pertain to the
Puerto Rico operations and only carry a valuation allowance of
$39 thousand. Of the amount related to the U.S. operations,
without considering the valuation allowance, $666 million is
attributable to net operating losses of such operations.
This full valuation allowance in the Corporation’s U.S.
operations was recorded in consideration of the requirements of
SFAS No.109. Refer to the Critical Accounting Policies / Estimates
section of this MD&A for information on the requirements of
SFAS No. 109. As previously indicated, the Corporation’s U.S.
mainland operations are in a cumulative loss position for the
three-year period ended December 31, 2008. For purposes of
assessing the realization of the deferred tax assets in the U.S.
mainland, this cumulative taxable loss position, along with the
evaluation of all sources of taxable income available to realize the
deferred tax asset, has caused management to conclude that the
Corporation will not be able to fully realize the deferred tax assets
in the future, considering solely the criteria of SFAS No. 109.
At September 30, 2008, the Corporation’s U.S. mainland
operations’ deferred tax assets amounted to $683 million with a
valuation allowance of $360 million. At that time, the Corporation
assessed the realization of the deferred tax assets by weighting all
available negative and positive evidence, including future
profitability, taxable income on carryback years and tax planning
strategies. The Corporation’s U.S. mainland operations were also
in a cumulative loss position for the three-year period ended
September 30, 2008. For purposes of assessing the realization of
the deferred tax assets in the U.S. mainland, this cumulative taxable
loss position was considered significant negative evidence and
caused management to conclude that at September 30, 2008, the
Corporation would not be able to fully realize the deferred tax
assets in the future. However, at that time, management also
concluded that $322 million of the U.S. deferred tax assets would
be realized. In making this analysis, management evaluated the
factors that contributed to these losses in order to assess whether
these factors were temporary or indicative of a permanent decline
in the earnings of the U.S. mainland operations. Based on the
analysis performed, management determined that the cumulative
loss position was caused primarily by a significant increase in
credit losses in two of its main businesses due to the unprecedented
current credit market conditions, losses related to the PFH
discontinued business, and restructuring charges. In assessing
the realization of the deferred tax assets, management considered
all four sources of taxable income mentioned in SFAS No. 109 and
described in the Critical Accounting Policies / Estimates section
of this MD&A, including its forecast of future taxable income,
which included assumptions about the unprecedented deterioration
in the economy and in credit quality. The forecast included cost
reductions initiated in connection with the reorganization of the
U.S. mainland operations, future earnings projections for BPNA
and two tax-planning strategies. The two strategies considered
in management’s analysis at September 30, 2008 included reducing
the level of interest expense in the U.S. operations by transferring
such debt to the Puerto Rico operations and the transfer of a
profitable line of business from the Puerto Rico operations to the
U.S. mainland operations. Also, management’s analyses considered
the past earnings history of BPNA and the discontinuance of one
of the subsidiaries causing significant operating losses.
Furthermore, management considered the long carryforward
period for use of the net operating losses, which extends up to 20
years. At September 30, 2008, management concluded that it was
more likely than not that the Corporation would not be able to
fully realize the benefit of these deferred tax assets and thus, a
valuation allowance for $360 million was recorded during that
period, which was supported by specific computations based on
factors such as financial projections and expected benefits derived
from tax planning strategies as described above.
As indicated in the Critical Accounting Policies / Estimates
section of this MD&A, the valuation of deferred tax assets requires
judgment based on the weight of all available evidence. Certain
events transpired in the fourth quarter of 2008 that led management
to reassess its expectations of the realization of the deferred tax
assets of the U.S. mainland operations and to conclude that a full
valuation allowance was necessary. These circumstances included
a significant increase in the provision for loan losses for the PNA
operations. The provision for loans losses for PNA consolidated
amounted to $208.9 million for the fourth quarter of 2008,
compared with $133.8 million for the third quarter of 2008. Actual
loan net charge-offs were $105.7 million for the fourth quarter of
2008, compared with $70.2 million in the third quarter. This
sharp increase has triggered an increase in the estimated provision
for loan losses for 2009. Management had also considered during
the third quarter further actions expected from the U.S.
Government with respect to the acquisition of troubled assets
under the TARP, that did not materialize in the fourth quarter of
2008.
Additional uncertainty in an expected rebound in the economy
and banking industry, based on most recent economic outlooks,
forced management to place no reliance on forecasted income. A
tax strategy considered in the September 30, 2008 analysis
included the transfer of borrowings from PNA holding company
to the Puerto Rico operations, particularly the parent holding
company Popular, Inc. This tax planning strategy continues to
be prudent and feasible but its benefit has been reduced after the
credit rating agencies downgraded Popular, Inc.’s debt, which
30 POPULAR, INC. 2008 ANNUAL REPORT
was expected to occur since the end of 2008 and was confirmed in
January 2009. The rating downgrade would increase the cost of
making any debt transfer and, accordingly, reduce the benefit of
such action. The other tax strategy was the transfer of a profitable
line of business from BPPR to BPNA. Although that strategy is
still feasible, given the reduced profitability levels in the BPPR
operations, which were reduced in the fourth quarter due to
significant increased credit losses, management is less certain as
to whether it is prudent to transfer a profitable business to the U.S.
operations at this time.
Management will reassess the realization of the deferred tax
assets based on the criteria of SFAS No. 109 each reporting period.
To the extent that the financial results of the U.S. operations
improve and the deferred tax asset becomes realizable, the
Corporation will be able to reduce the valuation allowance through
earnings.
Refer to Note 28 to the consolidated financial statements for
additional information on income taxes.
Fourth Quarter Results
The Corporation reported a net loss of $702.9 million for the
quarter ended December 31, 2008, compared with a net loss of
$294.1 million for the same quarter of 2007. The Corporation’s
continuing operations reported a net loss of $627.7 million for
the quarter ended December 31, 2008, compared with a net loss of
$150.5 million for the same quarter of 2007.
Net interest income in the continuing operations for the fourth
quarter of 2008 was $288.9 million, compared with $337.3 million
for the fourth quarter of 2007. The decrease was due to a decline of
$1.3 billion in average earning assets, together with a reduction
of 39 basis points in the net interest margin. The decline in
average earning assets was due mostly to the runoff of investment
securities as part of a strategy of delevering the balance sheet.
The reduction in the average balance of investment securities
was used to repay short-term borrowings, including repurchase
agreements and other short-term borrowings. In the loan portfolio,
an increase in average commercial loans outstanding was offset
in part by declines in mortgage and auto loans. The decline in the
net interest yield was driven by a reduction in the yield of earning
assets. This was caused primarily by the decline in the yield of
commercial loans, which have a significant amount of floating
rate loans whose yield decreased as the FED cut the funds rate in
2008. The FED lowered the federal funds target rate between 400
and 425 basis points from December 31, 2007 to December 31,
2008. Also contributing to the reduction in the yield of commercial
loans was the substantial increase in non-performing loans as
described in the Credit Risk Management and Loan Quality
section in this MD&A. The Corporation’s average cost of funds
decreased driven by a reduction in the cost of deposits and short-
term borrowings. Offsetting partially the decline in the cost of
deposits and short-term borrowings was an increase in the cost of
long-term borrowings. During 2008, certain medium-term notes,
which had been issued in previous years at relatively low rates,
matured and some were replaced with more expensive term funds
whose cost reflects the current distressed conditions of the credit
markets. Also contributing to the reduction in the net interest
yield was the net loss for the year, which reduced available funds
obtained through capital.
The provision for loan losses in the continuing operations
totaled $388.8 million, or 174% of net charge-offs, for the quarter
ended December 31, 2008, compared with $121.7 million or
157%, respectively, for the same quarter in 2007, and $252.2
million, or 148%, respectively, for the quarter ended September
30, 2008. The provision for loan losses for the quarter ended
December 31, 2008, when compared with the same quarter in
2007, reflects higher net charge-offs by $146.2 million, mainly in
construction loans by $63.0 million, consumer loans by $28.8
million, commercial loans by $37.0 million, and mortgage loans
by $15.1 million. Provision and net charge-offs information for
prior periods was retrospectively adjusted to exclude discontinued
operations for comparative purposes. The higher level of provision
for the quarter ended December 31, 2008 was mainly attributable
to the continuing deterioration in the commercial and
construction loan portfolios due to current economic conditions
in Puerto Rico and the U.S. mainland. The allowance for loan
losses for commercial and construction credits has increased,
particularly the specific reserves for loans considered impaired.
Also, deteriorating economic conditions in the U.S. mainland
housing market have impacted the delinquency rates of the
residential mortgage portfolios. In addition, the Corporation has
recorded a higher provision for loan losses in the fourth quarter of
2008 to cover for inherent losses in the mortgage portfolio of the
Corporation’s U.S. mainland operations as a result of higher
delinquencies and net charge-offs, and consideration of troubled
debt restructurings in the mortgage portfolio, principally from
the non-conventional business of BPNA. Furthermore, consumer
loans net charge-offs rose principally due to higher losses on
home equity lines of credit and second lien mortgage loans of the
Corporation’s U.S. mainland operations, which are categorized
by the Corporation as consumer loans. The deterioration in the
delinquency profile and the declines in property values have
negatively impacted charge-offs.
Non-interest income from continuing operations totaled
$141.5 million for the quarter ended December 31, 2008, compared
with $190.6 million for the same quarter in 2007. The unfavorable
variance in non-interest income was principally the result of an
increase in lower of cost or fair value adjustments in loans
reclassified to held-for-sale, primarily related to a lease portfolio
from the U.S. mainland operations, lower gains on the sale of SBA
31
commercial loans due to lower volume sold, and higher
impairments on investments accounted under the equity method.
Operating expenses for the continuing operations totaled
$360.2 million for the quarter ended December 31, 2008, a decrease
of $211.9 million, or 37%, compared with $572.1 million for the
same quarter of 2007. As indicated earlier, E-LOAN and BPNA
commenced further restructuring of its operations during the
fourth quarter of 2008. For the quarter ended December 31, 2008,
operating expenses for the continuing operations included
approximately $42.8 million in costs associated with the
restructuring plans in place at the subsidiaries, including
impairments on E-LOAN’s trademark and other long-lived assets,
compared to approximately $231.9 million in 2007, which also
included impairment losses associated to E-LOAN’s goodwill.
Isolating the impact of these restructuring related costs,
operating expenses totaled $317.4 million for the quarter ended
December 31, 2008, compared to $340.2 million for the quarter
ended December 31, 2007. The decrease was principally due to
lower business promotion expenses and personnel costs, including
the impact of the downsizing of E-LOAN’s operations in early
2008 as well as lower compensation tied to financial performance.
Income tax expense from continuing operations amounted to
$309.1 million for the quarter ended December 31, 2008, compared
with an income tax benefit of $15.4 million for the same quarter of
2007. The variance was primarily due to the establishment of a full
valuation allowance on the deferred tax assets of the U.S. mainland
operations, as well as the impact of higher operating losses.
REPORTABLE SEGMENT RESULTS
The Corporation’s reportable segments for managerial reporting
purposes consist of Banco Popular de Puerto Rico, EVERTEC
and Banco Popular North America. These reportable segments
pertain only to the continuing operations of Popular, Inc. As
previously indicated, the operations of PFH, which were previously
considered a reportable segment, were discontinued in the third
quarter of 2008. Also, a Corporate group has been defined to
support the reportable segments. For managerial reporting
purposes, the costs incurred by the Corporate group are not
allocated to the reportable segments. For a description of the
Corporation’s reportable segments, including additional financial
information and the underlying management accounting process,
refer to Note 35 to the consolidated financial statements. Financial
information for periods prior to 2008 was restated to conform to
the 2008 presentation.
The Corporate group had a net loss of $435.4 million in 2008,
compared with net income of $41.8 million in 2007 and a net loss
of $28.4 million in 2006. The Corporate group’s financial results
for the year ended December 31, 2008 included an unfavorable
impact to income taxes due to an allocation (for segment
reporting purposes) of $357.4 million of the $861 million
valuation allowance on the deferred tax assets of the U.S. mainland
operations to Popular North America (“PNA”), holding company
of the U.S. operations. PNA files a consolidated tax return for its
operations. The Corporate group recorded non-interest losses
amounting to $32.6 million for the year ended December 31,
2008, compared to non-interest income of $118.0 million in the
previous year. In 2008, the Corporation’s holding companies
within the Corporate group realized other-than-temporary
impairment losses on investment securities available-for-sale and
investments accounted under the equity method of $36.0 million,
which was previously explained in the Non-Interest Income section
of this MD&A. In 2007, the Corporate group realized a gain of
$118.7 million on the sale of its TELPRI shares in the first quarter
of 2007.
For segment reporting purposes, the impact of recording the
valuation allowance on deferred tax assets of the U.S. operations
was assigned to each legal entity within PNA (including PNA
holding company as an entity) based on each entity’s net deferred
tax asset at December 31, 2008, except for PFH. The impact of
recording the valuation allowance at PFH was allocated among
continuing and discontinued operations. The portion attributed
to the continuing operations was based on PFH’s net deferred tax
asset balance at January 1, 2008. The valuation allowance on
deferred taxes as it relates to the operating losses of PFH for the
year 2008 was assigned to the discontinued operations.
The tax impact in results of operations for PFH attributed to
the recording of the valuation allowance assigned to continuing
operations was included as part of the Corporate group for segment
reporting purposes since it does not relate to any of the legal
entities of the BPNA reportable segment. PFH is no longer
considered a reportable segment.
Highlights on the earnings results for the reportable segments
are discussed below.
Banco Popular de Puerto Rico
The Corporation’s banking operations in Puerto Rico were
adversely impacted by the prolonged economic recession being
experienced by the Puerto Rico economy. The provision for loan
losses significantly increased during 2008 as a response to
deteriorating credit quality, particularly in the commercial and
construction loan portfolios. Delinquencies and losses in consumer
portfolios, though higher than the year before, remained
substantially in line with management’s expectations. Despite
the challenging economic conditions, during 2008, the BPPR
reportable segment was able to grow its top line income by over
9%, when compared to the previous year. Despite the impact of
the unprecedented market conditions, this reportable segment
was able to maintain a healthy net interest margin and increase
32 POPULAR, INC. 2008 ANNUAL REPORT
other service fees and service charges on deposits accounts by
16%. Although operating expenses grew by approximately 6%,
the increase was offset by a series of cost control initiatives such
as limiting new recruitment to achieve headcount reduction
through attrition, lower advertising spending and more
disciplined spending on technology projects.
During the later part of 2008, the Corporation closed Popular
Finance, one of its subsidiaries in Puerto Rico, which provided
lending in the form of small consumer loans, primarily unsecured
loans and mortgage loans to a subprime sector. The continued
contraction of this small consumer loan market, the industry’s
lack of profitability and the Corporation’s financial results led
management to conclude that it was prudent to exit this line of
business. The company ceased originating loans but continues
to hold a $222 million loan portfolio at December 31, 2008. Popular
Finance reported a net loss of $3.4 million in 2008, including the
impact of goodwill impairment losses of $1.6 million. An
important accomplishment for the BPPR reportable segment during
2008 was the acquisition of the mortgage servicing rights to a
$5.1 billion mortgage loan portfolio. The benefits of this
acquisition include the opportunity to create cost synergies,
service an attractive client base and fortify BPPR’s position in the
mortgage industry.
The Banco Popular de Puerto Rico reportable segment reported
net income of $239.1 million in 2008, a decrease of $88.2 million,
or 27%, when compared with the previous year, primarily due to
the significant increase in the provision for loan losses. Net income
for the BPPR reportable segment amounted to $355.9 million for
2006.
The main factors that contributed to the variance in the
financial results for the year ended December 31, 2008, when
compared to 2007, included:
• Higher net interest income by $1.4 million, or less than
1%. The increase in net interest income was primarily due
to a change in the mix of earning assets with a greater
proportion of loans that had yields higher than those of
investment securities which had matured and were not
replaced due to deleveraging of the balance sheet. The
favorable variance in net interest income was also associated
with lower cost of funds in short-term debt, certificates of
deposit and non-maturity deposits. This was partially offset
by lower interest income derived from loans and investment
securities mainly due to lower interest rates in the current
environment and an increase in non-accruing loans. The
lower market rates had a negative impact in the average
yield of commercial and construction loans, as well as on
the yield of floating rate collateralized mortgage
obligations. Furthermore, the acquisition of brokered
certificates of deposit during the latter part of 2007
prevented the Corporation’s cost of funds from fully
benefiting from the decreases in market rates. The net
interest margin for the BPPR reportable segment was 3.94%
for the year ended December 31, 2008, compared with
3.89% for the previous year;
• Higher provision for loan losses by $275.3 million, or
113%, primarily related to the commercial, construction
and consumer loan portfolios. These three portfolios
experienced higher net charge-offs in 2008 compared to
2007 by $68.6 million, $65.6 million and $22.5 million,
respectively. Also, during 2008, the Corporation increased
its specific reserves for loans classified as impaired under
SFAS No. 114. At December 31, 2008, there were $639
million of SFAS No. 114 impaired loans in the BPPR
reportable segment with a related specific allowance for
loan losses of $137 million, compared to $232 million and
$46 million, respectively, at December 31, 2007. The ratio
of allowance for loan losses to loans held-in-portfolio for the
Banco Popular de Puerto Rico reportable segment was 3.44%
at December 31, 2008, compared with 2.31% at December
31, 2007. The provision for loan losses represented 148%
of net charge-offs for 2008, compared with 127% of net
charge-offs for 2007. The net charge-offs to average loans
held-in-portfolio for the Banco Popular de Puerto Rico
reportable segment was 2.18% for the year ended December
31, 2008, compared with 1.22% in the previous year;
• Higher non-interest income by $135.1 million, or 28%,
mainly due to a favorable variance in the caption of gain on
sale of investment securities as a result of the gain on
redemption of Visa stock in the first quarter of 2008
amounting to approximately $40.9 million and a gain of
$28.3 million on the sale of $2.4 billion in U.S. agency
securities during the second quarter of 2008. Another major
contributor to this variance were higher other service fees
by $52.8 million, principally related to an increase in fee
income from debit and credit cards and higher mortgage
servicing fees. Also, there were higher service charges on
deposit accounts by $11.1 million and higher trading
account profit by $6.4 million. The latter was related to
higher gains on the sale of mortgage-backed securities;
• Higher operating expenses by $42.3 million, or 6%,
primarily associated with the provision for unused credit
line commitments, FDIC insurance premiums, other real
estate expenses, credit card interchange expenses,
collection services, other professional fees, personnel costs,
net occupancy expenses, among others. These expenses
were partially offset by lower business promotion expenses;
and
• Lower income taxes by $92.9 million, or 81%, primarily
due to lower taxable income, an increase in net exempt
interest income due to a lower disallowance of expenses
33
related to exempt income, higher income subject to a
preferential tax rate on capital gains, and tax benefits from
the purchase of tax credits during 2008.
of $12.3 million, or 40%, compared with $31.3 million for 2007.
Net income amounted to $26.0 million for 2006.
Factors that contributed to the variance in results for 2008,
The principal factors that contributed to the variance in
financial results for the year ended December 31, 2007, when
compared 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
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; and
• Lower income tax expense by $11.7 million, or 9%,
primarily due to lower taxable income in 2007 than in the
previous year.
EVERTEC
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’s
main clients include financial institutions, businesses and various
levels of government. During 2008, EVERTEC continued
initiatives to enhance the competitiveness of the ATH® debit
payment method and attracted new clients to its hosting and
outsourcing services. EVERTEC’s operations in Latin America
showed revenue and net income growth during 2008.
For the year ended December 31, 2008, net income for the
reportable segment of EVERTEC totaled $43.6 million, an increase
when compared to 2007, included:
• Higher non-interest income by $21.6 million, or 9%,
primarily due to higher transaction processing fees mainly
related to the automated teller machine (“ATM”) network
and point-of-sale (“POS”) terminals, and higher business
process outsourcing. Also, there were higher payment, cash
and item processing fees and information technology (“IT”)
consulting services, among others. Furthermore, there were
gains on sale of securities mostly as a result of a $7.6
million gain on the redemption of Visa stock held by ATH
Costa Rica during the first quarter of 2008;
• Higher operating expenses by $7.5 million, or 4%,
primarily due to higher other operating expenses,
professional fees, personnel costs, and net occupancy
expenses. These variances were offset by lower equipment
and communication expenses; and
• Higher income tax expense by $1.9 million, or 11%,
primarily due to higher taxable income.
Variances by major categories, when comparing the financial
results for 2007 versus 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
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 the
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; and
• 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
As previously indicated, in response to difficult economic
conditions and a business structure that was not delivering
profitable results or an adequate return on capital, management
executed a series of major actions to reduce the size of the BPNA
reportable segment to achieve a learner, more efficient business
34 POPULAR, INC. 2008 ANNUAL REPORT
model and to focus on core banking operations. Refer to the
Operating Expenses section of this MD&A for a description of
the restructuring plans implemented for the BPNA banking
operations and E-LOAN during 2008. Both restructuring plans
are expected to be completed in 2009. Besides those measures
being taken, which were described in the Operating Expenses
section, management is currently evaluating additional
alternatives to improve the financial performance of the BPNA
operations, which may include exiting other business lines in
the U.S. operations to focus on core banking activities and selling
loan portfolios. Management is also committed to leverage the
infrastructure in Puerto Rico to reduce operational costs in the
U.S. mainland operations. A new senior management team has
been appointed to lead these efforts.
For the year ended December 31, 2008, the reportable segment
of Banco Popular North America, which includes the operations
of E-LOAN, had a net loss of $524.8 million, compared to a net
loss of $195.4 million for 2007 and a net income of $67.5 million
for 2006. E-LOAN’s net loss for the year ended December 31,
2008 amounted to $233.9 million, compared to net losses of
$245.7 million in 2007 and $33.0 million in 2006.
The main factors that contributed to the variance in financial
results for 2008 when compared to 2007 for the Banco Popular
North America reportable segment included:
• Lower net interest income by $19.1 million, or 5%. The
unfavorable variances were mainly due to lower loan yields,
offset in part by a reduction in the cost of interest bearing
deposits, mainly time deposits and internet-based deposits
gathered through the E-LOAN deposit platform.
Furthermore, BPNA incurred a penalty of $6.9 million on
the cancellation of FHLB advances in December 2008. The
variance due to a lower net interest yield was partially offset
by an increase in the average volume of loans, which was
funded through borrowings;
• Higher provision for loan losses by $376.8 million, or
395%, primarily due to higher net charge-offs, specific
reserves for commercial, construction and mortgage loans,
as well as the impact of the continuing deterioration of the
U.S. residential housing market and the economy in general.
The ratio of allowance for loan losses to loans held-in-
portfolio for the Banco Popular North America reportable
segment was 3.42% at December 31, 2008, compared with
1.26% at December 31, 2007. The provision for loan losses
represented 190% of net charge-offs for 2008, compared
with 168% in 2007. The net charge-offs to average loans
held-in-portfolio for the Banco Popular North America
reportable segment was 2.45% for the year ended December
31, 2008, compared with 0.61% in the previous year;
• Lower non-interest income by $45.0 million, or 24%,
mainly due to lower gains on sale of loans by $62.0 million,
as well as lower revenues derived from escrow closing
services and referral income, all of which were primarily
associated to E-LOAN’s downsizing. This was partially
offset by higher gains on the sale of real estate properties by
the U.S. banking subsidiary, as well as the gain recorded in
early 2008 related to the sale of BPNA’s retail bank branches
located in Texas;
• Lower operating expenses by $255.6 million, or 37%,
mainly due to the goodwill impairment losses recorded in
2007 by E-LOAN, as well as a reduction in personnel and
business promotion expenses for 2008 due to the
downsizing of E-LOAN early that year. Also, refer to the
Operating Expenses section of this MD&A for information
on BPNA and E-LOAN’s restructuring plans; and
• Income tax expense of $114.7 million in 2008, compared
with income tax benefit of $29.5 million in 2007. This
variance was mainly due to the establishment of the valuation
allowance on the deferred tax assets of the U.S. mainland
continuing operations. The valuation allowance on deferred
tax assets corresponding to the BPNA reportable segment
amounted to $294.5 million at December 31, 2008.
The principal factors that contributed to the variance in
financial results for the BPNA reportable segment for the year
ended December 31, 2007, when compared 2006, 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 168% of net charge-offs for 2007,
compared with 117% of net charge-offs in 2006;
• 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 mostly 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.
DISCONTINUED OPERATIONS
During the third and fourth quarters of 2008, the Corporation
executed a series of asset sale transactions and a restructuring
plan that led to the discontinuance of the Corporation’s PFH
operations (including Popular, FS), which prior to September 30,
2008, was defined as a reportable segment for managerial reporting
purposes. The discontinuance included the sale of a substantial
portion of PFH’s assets and exiting all business activities
conducted at PFH, including loan servicing functions to non-
affiliated parties. For financial reporting purposes, the results of
the discontinued operations of PFH are presented as “Assets /
Liabilities from discontinued operations” in the consolidated
statement of condition and “Loss from discontinued operations,
net of tax” in the consolidated statement of operations. Prior
periods presented in the consolidated statement of operations, as
well as certain disclosures included in this MD&A and notes to
the financial statements, were retrospectively adjusted to present
in a separate line item the results of discontinued operations for
comparative purposes. The consolidated statement of condition
for periods prior to 2008 does not reflect the reclassification to
discontinued operations.
Total assets from PFH’s discontinued operations amounted to
$13 million at December 31, 2008 and are classified as “Assets
from discontinued operations” in the consolidated statement of
condition. PFH’s assets approximated $3.9 billion at December
31, 2007 and $8.4 billion at December 31, 2006.
35
Assets and liabilities of the PFH discontinued operations at
December 31, 2008 are detailed in the table below. These assets
are mostly held-for-sale.
(In millions)
Loans held-for-sale at lower of cost or fair value
Loans measured pursuant to SFAS No. 159
Other assets
Other
Total assets
Other liabilities
Total liabilities
Net liabilities
2008
$2.3
4.9
4.2
1.2
$12.6
$24.6
$24.6
$12.0
The Corporation reported a net loss for the discontinued
operations of $563.4 million for the year ended December 31,
2008, compared with a net loss of $267.0 million for the previous
year. The loss included write-downs of assets held-for-sale to fair
value, net losses on the sale of loans, restructuring charges and
the recording of a valuation allowance on deferred tax assets of
$209.0 million.
The following table provides financial information for the
discontinued operations for the year ended December 31, 2008
and 2007.
(In millions)
Net interest income
Provision for loan losses
Non-interest loss, including fair value
adjustments on loans and MSRs
Lower of cost or market adjustments on
reclassification of loans to held-for-sale
prior to recharacterization
Gain upon completion of recharacterization
Operating expenses, including reductions
in value of servicing advances and other
real estate, and restructuring costs
Loss on disposition during the period (1)
Pre-tax loss from discontinued operations
Income tax expense (benefit)
Loss from discontinued operations, net of tax
2008
$30.8
19.0
2007
$143.7
221.4
(266.9)
(89.3)
-
-
(506.2)
416.1
213.5
(79.9)
($548.5)
14.9
($563.4)
159.1
-
($416.2)
(149.2)
($267.0)
(1) Loss on disposition was associated to the sale of manufactured housing loans in September 2008,
including lower of cost or market adjustments at reclassification from loans held-in-portfolio to
loans held-for-sale, and to the loss on the sale of assets in November 2008.
In 2007, PFH began downsizing its operations and shutting
down certain loan origination channels, which included, among
others, the wholesale subprime mortgage origination business,
wholesale broker, retail and call center business units. PFH began
2008 with a significantly reduced asset base due to the shutting
down of those origination channels and the recharacterization, in
36 POPULAR, INC. 2008 ANNUAL REPORT
December 2007, of certain on-balance sheet securitizations as
sales, which involved approximately $3.2 billion in unpaid
principal balance (“UPB”) of loans. This recharacterization
transaction is discussed in a subdivision included in this section
of the MD&A.
In March 2008, the Corporation sold approximately $1.4 billion
of consumer and mortgage loans that were originated through
Equity One’s (a subsidiary of PFH) consumer branch network
and recognized a gain upon sale of approximately $54.5 million.
The loan portfolio buyer retained certain branch locations. Equity
One closed all consumer service branches not assumed by the
buyer, thus exiting PFH’s consumer finance business in early
2008.
In September 2008, the Corporation sold PFH’s portfolio of
manufactured housing loans with a UPB of approximately $309
million for cash proceeds of $198 million. The Corporation
recognized a loss on disposition of $53.5 million.
During the third quarter of 2008, the Corporation also entered
into an agreement to sell substantially all of PFH’s outstanding
loan portfolio, residual interests and servicing related assets. This
transaction, which consummated in November 2008, involved
the sale of approximately $748 million in assets, which for the
most part were measured at fair value. The Corporation recognized
a loss of approximately $26.4 million in the fourth quarter of 2008
related to this disposition. Proceeds from this sale amounted to
$731 million. During the third quarter of 2008, the Corporation
recognized fair value adjustments on these assets held-for-sale of
approximately $360 million.
Also, in conjunction with the November 2008 sale, the
Corporation sold the implied residual interests associated to
certain on-balance sheet securitizations, thus transferring all rights
and obligations to the third party with no continuing involvement
whatsoever of Popular with the transferred assets. The Corporation
reduced the secured debt related to these securitizations of
approximately $164 million, as well as the loans that served as
collateral for approximately $158 million. The on-balance sheet
secured debt as well as the related loans were measured at fair value
pursuant to SFAS No. 159.
As part of the actions to exit PFH’s business, the Corporation
executed two restructuring plans during 2008 related to the PFH
operations: the “PFH Branch Network Restructuring Plan” and
the “PFH Discontinuance Restructuring Plan”. Also, in 2007 the
Corporation implemented the “PFH Restructuring and Integration
Plan”. The following section provides information on these
restructuring plans. The restructuring costs are included in the
line item “Loss from discontinued operations, net of tax” in the
consolidated statements of operations for 2008 and 2007.
PFH Restructuring and Integration Plan
In January 2007, the Corporation adopted a Restructuring and
Integration Plan at PFH, the holding company of Equity One (the
“PFH Restructuring and Integration Plan”). This particular plan
called for PFH to exit the wholesale subprime mortgage loan
origination business early in the 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 following table details the expenses recorded by the
Corporation that were associated with this particular restructuring
plan.
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
(In millions)
Personnel costs
Net occupancy expenses
Equipment expenses
Professional fees
Other operating expenses
Total restructuring costs
Impairment losses on long-lived assets
Goodwill impairment losses
Total
(a) Severance, retention bonuses and other benefits
(b) Lease terminations
(c) Outplacement and service contract terminations
(d) Software and leasehold improvements
(e) Attributable to business exited at PFH
At December 31, 2007, the accrual for restructuring costs
associated with the PFH Restructuring and Integration Plan
amounted to $3.2 million. There was no accrual outstanding at
December 31, 2008 associated with this plan.
PFH Branch Network Restructuring Plan
Given the 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 was difficult to
generate an adequate return on the capital invested at Equity
One’s consumer service branches. As indicated earlier, the
Corporation closed Equity One’s consumer service branches
during the first quarter of 2008 as part of the initiatives to exit
the subprime loan origination operations at PFH. Restructuring
charges and impairment losses on long-lived assets, which resulted
from the PFH Branch Network Restructuring Plan, are detailed in
the table below.
(In millions)
Personnel costs
Net occupancy expenses
Equipment expenses
Communications
Other operating expenses
Total restructuring costs
Impairment losses on long-lived assets
(a) Severance, retention bonuses and other benefits
(b) Lease terminations
(c) Leasehold improvements, furniture and equipment
December 31,
2008
$8.9 (a)
6.7 (b)
0.7
0.2
0.9
$17.4
-
$17.4
2007
-
-
-
-
-
-
$1.9 (c)
$1.9
At December 31, 2008, the accrual for restructuring costs
associated with the PFH Branch Network Restructuring Plan
amounted to $1.9 million. The Corporation does not expect to
incur additional restructuring costs related to the PFH Branch
Network Restructuring Plan.
The PFH Branch Network Restructuring Plan charges are
included in the line item “Loss from discontinued operations, net
of tax” in the consolidated statements of operations for 2008 and
2007.
37
PFH Discontinuance Restructuring Plan
In August 2008, the Corporation entered into an additional
restructuring plan for its PFH operations to eliminate employment
positions, terminate contracts and incur other costs associated
with the discontinuance of PFH’s operations.
Restructuring charges and impairment losses on long-lived
assets, which resulted from the PFH Discontinuance Restructuring
Plan, are detailed in the table below.
(In millions)
Personnel costs
Total restructuring costs
Impairment losses on long-lived assets
December 31,
2008
$4.1 (a)
$4.1
3.9 (b)
$8.0
(a) Severance, retention bonuses and other benefits
(b) Leasehold improvements, furniture, equipment and prepaid expenses
At December 31, 2008, the accrual for restructuring costs
associated with the PFH Discontinuance Restructuring Plan
amounted to $3.4 million.
Restructuring costs and impairment losses on long-lived assets
for both plans described above are included in the line item “Loss
from discontinued operations, net of tax” in the consolidated
statements of operations for 2008 and 2007.
Full-time equivalent employees at the PFH discontinued
operations decreased from 930 at December 31, 2007 to 200 at
December 31, 2008. The employees that remain at PFH are expected
to depart by mid-2009 or transferred to other of the Corporation’s
U.S. mainland subsidiaries for support functions.
Recharacterization of Certain On-Balance Sheet
Securitizations as Sales under FASB Statement No.
140
From 2001 through 2006, the Corporation, particularly PFH or
its subsidiary Equity One, 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 statements of 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
38 POPULAR, INC. 2008 ANNUAL REPORT
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 (PFH) “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 “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) was 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.
The net impact of the recharacterization transaction was a pre-
tax loss of $90.1 million, which was included in the caption
“(Loss) gain on sale of loans and valuation adjustments on loans
held-for-sale” in the consolidated statement of operations of the
2007 Annual Report. This amount is included as part of “Net loss
from discontinued operations, net of tax” in the 2007 comparative
financial information of this 2008 Annual Report. The net loss on
the recharacterization included the following:
(In millions)
Lower of cost or market adjustment
at reclassification from loans held-in-
portfolio to loans held-for-sale
Gain upon completion of recharacterization
Total impact, pre-tax
For the year ended
December 31, 2007
($506.2)
416.1
($90.1)
The recharacterization involved a series of steps, which
included the following:
(i) reclassifying the loans as held-for-sale with the
corresponding lower of cost or market adjustment as of
the date of the transfer;
(ii) removing from the Corporation’s books approximately
$2.6 billion in mortgage loans recognized at fair value
after reclassification to the held-for-sale category (UPB of
$3.2 billion) and $3.1 billion in related liabilities
representing secured borrowings;
(iii)recognizing 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) recognizing mortgage servicing rights, which represent
the fair value of PFH’s right to continue to service the
mortgage loans transferred to the securitization trusts.
At the date of reclassification of the loans as held-for-sale,
which was simultaneous with the date in which the pooling and
servicing agreements were amended, management assessed the
adequacy of the allowance for loan losses related to the loan portfolio
at hand, which amounted to $74 million and represented
approximately 2.3% of the subprime mortgage loan portfolio.
The allowance for loan losses was based on expectations of the
inherent losses in the loan portfolio for a 12-month period.
Furthermore, management determined the fair value of the loans
at the date of reclassification using a new securitization capital
structure methodology. Given that historically PFH relied on
securitization transactions to dispose of assets originated,
management believed that the securitization market was PFH’s
principal market for purposes of determining fair value. The
classes of securities created under the capital structure were valued
based on expected yields required by investors for each bond and
residual class created. In order to value each class of securities,
the valuation considered estimated credit spreads required by
investors to purchase the different classes of bonds created in the
securitization and prepayment curves, loss estimates, and loss
timing curves to derive bond cash flows.
The fair value analysis indicated an estimated fair value of the
loan portfolio of $2.6 billion which, compared to the carrying
value of the loans, after considering the allowance for loan losses,
resulted in the $506.2 million loss. The significant unfavorable
fair value adjustment in the loan portfolio was in part associated
to adverse market and liquidity conditions in the subprime market
at the time and the weakness in the housing sector. These factors
resulted in a higher discount rate; that is, a higher rate of return
expected by an investor in a securitization’s market. Market
liquidity for subprime assets declined considerably during 2007.
During 2007, the subprime sector in general was experiencing
(1) deteriorating credit performance trends, (2) continued turmoil
with subprime lenders (increases in losses, bankruptcies,
downgrades), (3) lower levels of home price appreciation, and (4)
a general tightening of credit standards that may had adversely
affected the ability of borrowers to refinance their existing
39
mortgages. Given the very uncertain conditions in the subprime
market and lack of trading activity, price level indications were
reflective of relatively low values with high internal rates of return.
The fair value measurement also considers cumulative losses
expected throughout the life of the loans, which exceeded the
inherent losses in the portfolio considered for the allowance for
loan losses determination. Lower levels of home price appreciation,
declining demand for housing units leading to rising inventories,
housing affordability challenges and general tightening of
underwriting standards were expected to lead to higher cumulative
credit losses.
After reclassifying the loans to held-for-sale at fair value, the
Corporation proceeded to simultaneously account for the transfers
as sales upon recharacterization. The accounting entries at
recharacterization entailed the removal from the Corporation’s
books of the $2.6 billion in mortgage loans measured at fair value,
the $3.1 billion in secured borrowings (which represent the bond
certificates due to investors in the securitizations that are
collateralized by the mortgage loans), and other assets and
liabilities related to the securitization including, for example,
accrued interest. Upon sale accounting, the Corporation also
recognized residual interests of $38 million and MSRs of $18
million, which represented the Corporation’s retained interests.
T h e r e s i d u a l i n t e r e s t s r e p r e s e n t e d t h e f a i r v a l u e a t
recharacterization date of residual interest certificates that were
issued by the securitization trusts and retained by PFH, and the
MSRs represented the fair value of PFH’s right to continue to
service the mortgage loans transferred to the securitization trusts.
At the recharacterization date, the secured borrowings carrying
amount was in excess of the mortgage loans de-recognized
principally due to the fact that the accounting basis for the secured
borrowings was amortized cost and the mortgage loans de-
recognized were accounted at the lower of cost or market as
described above. This fact and the recognition of the residual
interests and MSRs led to the $416.1 million gain upon
recharacterization. Under generally accepted accounting
principles, the secured borrowings related to the on-balance sheet
securitizations were recognized as a liability measured at
“amortized cost”. The balance of these “secured borrowings” was
reduced monthly only by the amounts remitted by the servicer to
the trustee for distribution to the certificateholders. These amounts
consisted principally of collections on the securitized mortgage
loans, proceeds from the sale of other real estate properties and
servicing advances.
On the closing date for each of the subject securitizations, the
Corporation, through its subsidiaries, received cash for the sold
loans (legally the securitization qualified as a sale since inception).
Upon the recharacterization, the Corporation retained the residual
beneficial interests, de-recognized the loans and was not obligated
to return to the related trust funds any of the cash proceeds
previously received at the related closings. In addition, from an
accounting perspective, the recharacterization had the effect of
releasing the Corporation from its securitization related liabilities
to the related trust funds.
As indicated earlier, before the recharacterization, the
underlying loans and secured borrowings were included as assets
and liabilities of the Corporation. However, the maximum risk to
the Corporation was limited to the amount of overcollateralization
in each subject transaction (effectively, the value of the residual
beneficial interest retained by the Corporation). After a subject
transaction’s overcollaterization reduces to zero, the risk of loss
on the securitized mortgage loans is entirely borne by the non-
residual certificateholders. However, by reflecting the loans as
“owned” by the Corporation, investors could have viewed the
Corporation’s credit exposure to this portfolio as significantly
larger than it actually was. Recharacterization of these transactions
as sales eliminated the loans from the Corporation’s books and,
therefore, better portrayed the Corporation’s legal rights and
obligations in these transactions. Besides the servicing rights
and related assets associated with servicing the trust assets, such
as servicing and escrow advances, after the recharacterization
transaction, the Corporation only retained in its accounting
records the residual interests that were accounted at fair value and
which represented the maximum risk of loss to the Corporation.
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.
In November 2008, the Corporation sold all residual interests
and mortgage servicing rights related to all securitization
transactions completed by PFH. Therefore, the Corporation does
not retain any interest on the securitization’s trust assets from a
legal or accounting standpoint as of December 31, 2008.
STATEMENT OF CONDITION ANALYSIS
Assets
Refer to the consolidated financial statements included in this
2008 Annual Report for the Corporation’s consolidated statements
of condition as of December 31, 2008 and 2007. Also, refer to the
Statistical Summary 2004-2008 in this MD&A for condensed
statements of condition for the past five years. At December 31,
2008, total assets were $38.9 billion, which included $12.6
million from the discontinued operations. Total assets at December
31, 2007 were $44.4 billion. The decline of $5.5 billion, or 12%,
was primarily due to the sale during 2008 of substantially all
assets of PFH, as described in the Discontinued Operations section
40 POPULAR, INC. 2008 ANNUAL REPORT
in this MD&A, and to a reduction in the volume of investment
securities, mainly due to maturities.
Investment securities
The Corporation holds investment securities primarily for
liquidity, yield enhancement and interest rate risk management.
The portfolio mainly includes very liquid, high quality debt
securities. The following table provides a breakdown of the
Corporation’s investment securities available-for-sale and held-
to-maturity on a combined basis at December 31, 2008 and 2007.
(In millions)
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
Other
Total
2008
$502.1
4,808.5
385.7
1,656.0
848.5
10.1
8.3
$8,219.2
2007
$471.1
5,893.1
178.0
1,396.8
1,010.1
34.0
16.5
$8,999.6
Notes 6 and 7 to the consolidated financial statements provide
additional information by contractual maturity categories and
gross unrealized gains / losses with respect to the Corporation’s
available-for-sale and held-to-maturity investment securities
portfolio.
The vast majority of these investment securities, or
approximately 97%, are rated the equivalent of AAA by the major
rating agencies. The mortgage-backed securities (“MBS”) and
collateralized mortgage obligations (“CMOs”) are investment
grade securities, all of which are rated AAA by at least one of the
three major rating agencies as of December 31, 2008. All MBS
held by the Corporation and approximately 91% of the CMOs
held as of December 31, 2008 are guaranteed by government
sponsored entities.
At December 31, 2008, there were investment securities
available-for-sale with a market value of $1.4 billion in an unrealized
loss position. The unrealized losses on this particular portfolio
approximated $88.0 million at December 31, 2008 and
corresponded principally to CMOs. Management believes that the
unrealized losses in the Corporation’s portfolio of securities
available-for-sale at December 31, 2008 were temporary and were
substantially related to widening credit spreads and general lack
of liquidity in the marketplace.
The CMOs accounted for approximately $71 million, or 81%,
of the total unrealized losses in the portfolio of securities available-
for-sale at year-end 2008. Federal agency CMOs and private label
CMOs represented 91% and 9%, respectively, of the CMOs
portfolio available-for-sale at December 31, 2008.
The securities that made up the private label component of the
CMO portfolio available-for-sale are each rated AAA by either
Moody’s and / or Standard & Poor’s rating agencies. None of the
securities are on negative watch or outlook or have their ratings
changed from their respective issuance dates. Their carrying value
at December 31, 2008 was about $149 million, net of unrealized
losses of $41 million and are primarily from adjustable rate
mortgages with lower coupons. In addition to verifying the credit
ratings for the private label CMOs, management analyzed the
underlying mortgage loan collateral for these securities. Various
statistics or metrics were reviewed for each private label CMO,
including among others the weighted average loan-to-value, FICO
score, and delinquency and foreclosure rates. All of these CMOs
securities were found to be in good credit condition.
Since no observable credit quality issues were present in the
Corporation’s CMOs at December 31, 2008, and management
has the intent and ability to hold the CMOs for a reasonable period
of time for a forecasted recovery of fair value up to (or beyond) the
cost of these investments, management considered the unrealized
losses to be temporary.
Loan portfolio
A breakdown of the loan portfolio, the principal category of earning
assets, is presented in Table G. In general terms, the decline in
the Corporation’s loan portfolio was mostly reflected in mortgage
and consumer loans, and relates principally to the sale of PFH’s
loan portfolio as described in the Discontinued Operations section
of this MD&A. Included in Table G are $536 million of loans held-
for-sale at December 31, 2008, compared to $1.9 billion at
December 31, 2007. The discontinued operations of PFH
accounted for $1.4 billion of the loans held-for-sale at December
31, 2007.
The commercial loan portfolio remained stable at December
31, 2008, when compared to December 31, 2007. The
discontinued operations had a commercial loan portfolio of $186
million at December 31, 2007. This portfolio was substantially
sold during 2008. Excluding the impact of the commercial loan
portfolio of PFH, the continuing operations experienced an
increase of $187 million from December 31, 2007, primarily at
the U.S. banking operations, principally in commercial loans in
the areas of income producing property and mixed use real estate.
The commercial loan portfolio did not attain the growth levels
experienced in prior years in part due to the impact of tightened
underwriting standards, deteriorated general economic conditions
which have caused business stagnation and closures, and the
impact to the Corporation of the increase in commercial loan net
charge-offs of $93 million.
The growth in the construction loan portfolio from December
31, 2007 to the same date in 2008 of 14% corresponded principally
Table G
Loans Ending Balances (including Loans Held-for-Sale)
As of December 31,
(Dollars in thousands)
Commercial
Construction
Lease financing
Mortgage*
Consumer
Total
*Includes residential construction.
2008
$13,687,060
2,212,813
1,080,810
4,639,464
4,648,784
$26,268,931
2007
$13,685,791
1,941,372
1,164,439
7,434,800
5,684,600
$29,911,002
2006
$13,115,442
1,421,395
1,226,490
11,695,156
5,278,456
$32,736,939
2005
$11,921,908
835,978
1,308,091
12,872,452
4,771,778
$31,710,207
2004
$10,396,732
501,015
1,164,606
12,641,329
4,038,579
$28,742,261
41
Five-Year
C.G.R.
10.69%
45.83
0.51
(13.73)
7.30
3.05%
to the BPPR reportable segment and was mainly on loans to builders
and developers of multi-unit construction projects serving both
the residential and business sectors. The increase in the
construction loan portfolio was offset by an increase in
construction loan net charge-offs of $122 million.
The decrease in the lease financing portfolio of 7% from the
end of 2007 to 2008 was principally related to the BPPR reportable
segment, which experienced a decline in the portfolio of
approximately $100 million. This decline was primarily due to
the recessionary economy which has led to lower origination
volume. The lease financing portfolio of the BPNA reportable
segment remained relatively stable. As of December 31, 2008, the
BPNA reportable segment included $328 million in lease financing
held-for-sale, compared to $67 million at the same date in the
previous year.
The main factor contributing to the decrease of $2.8 billion in
mortgage loans from December 31, 2007 to December 31, 2008
was due to the loan sales by PFH during 2008. The discontinued
operations of PFH had a mortgage loan portfolio of $2.4 billion at
December 31, 2007. The decline from December 31, 2007 was
also related to the banking operations of BPPR, which completed
a residential mortgage loans securitization into FNMA mortgage-
backed securities of approximately $307 million unpaid principal
balance of mortgage loans during 2008. Most of these mortgage-
backed securities were sold in the secondary markets during the
second quarter of 2008. The sale proceeds were reinvested in U.S.
agency securities. The objective of the sale was to reduce the
Corporation’s level of mortgage loans retained in portfolio and
enhance its return on risk-weighted capital.
The decrease in consumer loans from December 31, 2007 to
December 31, 2008 of approximately $1.0 billion was mainly due
to sales during 2008 of the consumer loan portfolio of PFH,
particularly personal loans. These operations had a consumer loan
portfolio of $678 million at the end of 2007. The decline from
December 31, 2007 to the same date in 2008 was also related to
sales of auto loans by E-LOAN during 2008, and reductions in the
consumer loan portfolio of BPNA’s banking operations, primarily
due to the runoff mode of its auto loan portfolios without any
concentrated lending efforts in these products. The U.S. operations
ceased originating auto loans as part of the E-LOAN 2007
Restructuring Plan. Furthermore, there was lower volume of
personal and auto loans in the Banco Popular de Puerto Rico
reportable segment due to current economic conditions. Auto
loan originations have reduced, but the Puerto Rico operations
have maintained their market share, ranking first in the Island.
A breakdown of the Corporation’s consumer loan portfolio at
December 31, 2008 and 2007 follows:
(In thousands)
2008 (1)
2007
Change % Change
Personal
Credit cards
Auto
Home equity
lines of credit
Other
Total
$1,911,958
1,148,631
766,999
$2,525,458
1,128,137
1,040,661
($613,500)
20,494
(273,662)
(24%)
2
(26)
572,917
248,279
751,299
239,045
(178,382)
9,234
(24)
4
$4,648,784
$5,684,600
($1,035,816)
(18%)
(1) Consumer loans from discontinued operations at December 31, 2008 are presented as part of “Assets
from discontinued operations” in the consolidated statement of condition. Refer to Note 2 to the
financial statements for further information on the discontinued operations.
consolidated
The home equity lines of credit at December 31, 2008 pertain
principally to E-LOAN with a portfolio of approximately $457
million and BPNA banking operations with a home equity lines of
credit portfolio of close to $79 million. These loans are classified
as held-in-portfolio, thus are not measured at fair value or lower of
cost or fair value at December 31, 2008. The “other” category in
consumer loans includes marine loans and revolving lines of credit.
Servicing assets
Servicing assets totaled $180 million at December 31, 2008,
compared to $197 million at December 31, 2007. The Corporation
accounts for mortgage servicing rights at fair value, and
42 POPULAR, INC. 2008 ANNUAL REPORT
represented 98% of the total servicing assets at the end of 2008.
The remainder of the servicing rights is related to SBA loans.
The PFH discontinued operations had $81 million in mortgage
servicing rights at December 31, 2007, all of which were sold
during 2008. The decline in servicing rights caused by the PFH
sale was offset in part by increases in the BPPR reportable segment.
This reportable segment originates servicing rights principally
as part of the pooling of mortgage loans into agency securities
and, from time to time, purchases the right to service other
mortgage portfolios. During 2008, the Corporation acquired the
servicing rights to a $5.1 billion mortgage loan portfolio owned
by Freddie Mac and GNMA, and previously serviced by R&G
Mortgage Corporation. Refer to Note 22 to the consolidated
financial statements for detailed information related to the
Corporation’s servicing assets.
Other assets
The following table provides a breakdown of the principal
categories that comprise the caption of “Other assets” in the
consolidated statements of condition at December 31, 2008 and
2007.
(In thousands)
Net deferred tax assets
2008 (1)
2007
Change
(net of valuation allowance)
$357,507
$525,369
($167,862)
Bank-owned life insurance
program
Prepaid expenses
Derivative assets
Investments under the equity
method
Trade receivables from brokers
and counterparties
Securitization advances and
related assets
Others
Total
224,634
136,236
109,656
215,171
188,237
76,958
9,463
(52,001)
32,698
92,412
89,870
2,542
1,686
1,160
526
-
193,466
$1,115,597
168,599
191,630
$1,456,994
(168,599)
1,836
($341,397)
(1) Other assets from discontinued operations at December 31, 2008 are presented as part of “Assets
from discontinued operations” in the consolidated statement of condition. Refer to Note 2 to the
financial statements for further information on the discontinued operations.
consolidated
Explanations for the principal variances from December 31,
2007 to December 31, 2008 include:
• A decrease in net deferred tax assets, which was impacted
by the establishment of a full valuation allowance on the
deferred tax assets of the U.S mainland operations. At
December 31, 2007, the U.S. operations had net deferred
tax assets of $289 million.
• A decrease in securitization advances and related assets,
which was due to the sale of these assets by PFH in the
fourth quarter of 2008.
Goodwill and other intangibles
Goodwill and other intangible assets totaled $659 million at
December 31, 2008, a decrease of $41 million, compared to
December 31, 2007. The decrease was principally associated with
purchase accounting adjustments related to the Citibank’s retail
branches acquisition completed in December 2007, and
impairment losses on E-LOAN’s trademark of $10.9 million in
the fourth quarter of 2008. Refer to Note 12 to the consolidated
financial statements for further information on goodwill and the
composition of other intangible assets.
Deposits, Borrowings and Other Liabilities
The composition of the Corporation’s financing to total assets at
December 31, 2008 and 2007 was as follows:
(Dollars in millions)
2008
2007
Non-interest bearing
% increase (decrease) % of total assets
2007
from 2007 to 2008
2008
deposits
$4,294
$4,511
(4.8%)
11.1% 10.2%
Interest bearing core
deposits
15,647
15,553
Other interest bearing
deposits
Federal funds and
7,609
8,271
0.6
(8.0)
40.2
35.0
19.6
18.6
repurchase agreements
3,552
5,437
(34.7)
Other short-term
borrowings
Notes payable
Others
Stockholders’ equity
5
3,387
1,121
3,268
1,502
4,621
934
3,582
(99.7)
(26.7)
20.0
(8.8)
9.1
-
8.7
2.9
8.4
12.2
3.4
10.4
2.1
8.1
Deposits
The Corporation’s deposits by categories for 2008 and previous
years are presented in Table H. Total deposits amounted to $27.6
billion at December 31, 2008, a decrease of $784 million, or 3%,
from the end of 2007. Brokered deposits totaled $3.1 billion at
December 31, 2008 and 2007. The Corporation has maintained
the level of brokered deposits to increase its level of on-hand
liquidity.
Borrowings
At December 31, 2008, borrowed funds amounted to $6.9 billion,
compared to $11.6 billion at December 31, 2007. Refer to Notes
14, 15 and 16 to the consolidated financial statements for detailed
information on the Corporation’s borrowings as of such dates.
Also, refer to the Liquidity Risk section in this MD&A for
additional information on the Corporation’s funding sources at
December 31, 2008.
The decline in borrowings from December 31, 2007 to
December 31, 2008 was principally impacted by the reduction in
financing requirements due to the sale of the PFH assets during
2008. Also, the decrease was influenced by a general reduction in
Table H
Deposits Ending Balances
(Dollars in thousands)
Demand deposits*
Savings, NOW and
money market deposits
Time deposits
Total
As of December 31,
2008
$4,849,387
2007
$5,115,875
2006
$4,910,848
2005
$4,415,972
2004
$4,173,268
9,554,866
13,145,952
$27,550,205
9,804,605
13,413,998
$28,334,478
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
*Includes interest and non-interest bearing demand deposits.
43
Five-Year
C.G.R.
5.41%
4.04
15.01
8.77%
asset size given the maturities of investment securities, which
proceeds were not reinvested in securities, and other sales of loan
portfolios, such as the sales of auto loans by E-LOAN during
2008.
During 2008, the Corporation placed less reliance on short-
term borrowings, which declined from $1.5 billion at December
31, 2007 to $5 million at December 31, 2008. The reduction
included less reliance on advances with the Federal Home Loan
Banks and on advances under credit facilities with other financial
institutions. There were also lower balances of repurchase
agreements, which amounted to $3.4 billion at December 31,
2008, compared with $5.1 billion at December 31, 2007. This
decline was due in part to lower volume of investment securities
available as collateral due to the Corporation’s deleverage strategy.
Notes payable also declined from $4.6 billion at December 31,
2007 to $3.4 billion at December 31, 2008. The decline was
principally in medium-term notes, despite an issuance of $350
million of notes in private offerings to certain institutional
investors during 2008.
Other liabilities amounted to $1.1 billion at December 31,
2008, compared with $934 million at December 31, 2007, an
increase of $162 million, or 17%. The increase in other liabilities
was principally due to an increase in the liability for pension and
restoration benefit plans of $200 million, which was primarily the
result of a decline in the fair value of the plan assets due to the
volatility in fair values in the current distressed market. Refer to
Note 25 to the consolidated financial statements for information
on the pension and restoration benefit plans, as well as the Critical
Accounting Policies / Estimates section of this MD&A.
Stockholders’ Equity
Stockholders’ equity totaled $3.3 billion at December 31, 2008,
compared with $3.6 billion at December 31, 2007. Refer to the
consolidated statements of condition and of stockholders’ equity
included in this Form 10-K for information on the composition of
stockholders’ equity at December 31, 2008 and 2007. Also, the
disclosures of accumulated other comprehensive loss, an integral
component of stockholders’ equity, are included in the
consolidated statements of comprehensive (loss) income.
Stockholders’ equity decreased $314 million from the end of
2007 to December 31, 2008 as a result of the reduction in retained
earnings due to the net loss of $1.2 billion recorded for the year
ended December 31, 2008, dividends paid during the year and the
$262 million negative after-tax adjustment to beginning retained
earnings due to the transitional adjustment for electing the fair
value option. These unfavorable variances were partially offset by
the $400 million preferred stock offering in May 2008 and the
$935 million of proceeds from the issuance of preferred stock
under the TARP in December 2008. Accumulated other
comprehensive loss reflected the impact of the increase in the
underfunding of the pension and postretirement benefit plans and
higher unrealized gains on securities available-for-sale.
In May 2008, the Corporation issued $400 million of its 8.25%
Non-cumulative Monthly Income Preferred Stock, 2008 Series B.
These shares of preferred stock are perpetual, nonconvertible and
are redeemable, in whole or in part, solely at the option of the
Corporation with the consent of the Board of Governors of the
Federal Reserve System beginning on May 28, 2013. The
redemption price per share is $25.50 from May 28, 2013 through
May 28, 2014, $25.25 from May 28, 2014 through May 28, 2015
and $25.00 from May 28, 2015 and thereafter. The Series B
Preferred Stock was issued on May 28, 2008 at a purchase price of
$25.00 per share.
On December 5, 2008, in connection with the TARP Capital
Purchase Program, the Corporation issued and sold to the U.S.
Treasury 935,000 shares of Popular, Inc.’s Fixed Rate Cumulative
Perpetual Preferred Stock, Series C. The Preferred Stock Series C
has a liquidation preference of $1,000 per share, and a warrant to
purchase 20,932,836 shares of Popular’s common stock at an
exercise price of $6.70 per share. Proceeds from the issuance
amounted to $935 million. The allocated carrying values of the
Series C Preferred Stock and the warrant on the date of issuance
44 POPULAR, INC. 2008 ANNUAL REPORT
Table 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:
2008
2007
2006
2005
2004
As of December 31,
$3,272,375
384,975
$3,657,350
$3,361,132
417,132
$3,778,264
$3,727,860
441,591
$4,169,451
$3,540,270
403,355
$3,943,625
$3,316,009
389,638
$3,705,647
$26,838,542
3,431,217
$30,269,759
$30,294,418
2,915,345
$33,209,763
$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
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
10.81%
12.08
8.46
8.21
6.64
12.14
(42.11)
10.12%
11.38
7.33
8.20
6.64
11.79
(6.61)
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
* 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.
(based on the relative fair values) were $896 million and $39
million, respectively.
The shares of Series C Preferred Stock qualify as Tier 1
regulatory capital and pay cumulative dividends quarterly at a
rate of 5% per annum for the first five years, and 9% per annum
thereafter. The Series C Preferred Stock will accrete to the
redemption price of $935 million over five years. The Series C
Preferred Stock is non-voting, other than class voting rights on
certain matters that could adversely affect the preferred shares.
The Series C Preferred Stock may be redeemed by Popular at par
after December 5, 2011. Prior to that date, the preferred shares
may only be redeemed by Popular at par in an amount up to the
cash proceeds received by Popular (minimum $233.75 million)
from qualifying equity offerings of any Tier 1 perpetual preferred
or common stock. Any redemption is subject to the consent of the
Board of Governors of the Federal Reserve System. Until December
5, 2011, or such earlier time as all preferred shares have been
redeemed or transferred by Treasury, Popular will not, without
Treasury’s consent, be able to increase its dividend rate per share
of common stock or repurchase its common stock. The Series C
Preferred Stock is not subject to any mandatory redemption,
sinking fund or other similar provisions. Holders of Series C
Preferred Stock will have no right to require redemption or
repurchase of any shares of Series C Preferred Stock. The warrant
is immediately exercisable and has a 10-year term. The
Corporation’s common stock ranks junior to Series C Preferred
Stock as to dividend rights and / or as to rights on liquidation,
dissolution or winding up of the Corporation. Refer to Note 20 to
the consolidated financial statements for further information with
respect to the Series C preferred shares.
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. No shares will be sold directly by the Corporation
to participants in the dividend reinvestment and stock purchase
plan at less than $6 per share, the par value of the Corporation’s
common stock. During 2008, $17.7 million in additional capital
was issued under the plan, compared to $20.2 million in 2007.
The Corporation continues to exceed the well-capitalized
guidelines under the federal banking regulations. At December
31, 2008 and 2007, BPPR and BPNA were all well-capitalized.
Table I presents the Corporation’s capital adequacy information
for the years 2004 to 2008. 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, 2008 was $392 million corresponding to a statutory reserve
fund applicable exclusively to Puerto Rico banking institutions.
This statutory reserve fund totaled $374 million at December 31,
2007. The Banking Act of the Commonwealth of Puerto Rico
requires that a minimum of 10% of BPPR’s net income for the year
45
Table J
Common Stock Performance
2008
4th quarter
3rd quarter
2nd quarter
1st quarter
2007
4th quarter
3rd quarter
2nd quarter
1st 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**
Market Price
High
L o w
Cash
Dividends
Declared
Per Share
Book
Value
Per
Share
Dividend
Payout
Ratio
Dividend
Yield *
Price/
Earnings
Ratio
Market/
Book
Ratio
$6.33
N.M.
6.17%
N.M.
81.52%
$ 83/5
111/6
13
14
$121/2
161/6
171/2
19
$192/3
201/8
22
211/5
$24
271/2
252/3
28
$287/8
261/3
22
24
$5
51/8
63/5
9
$ 82/3
113/8
155/6
155/6
$172/9
172/5
181/2
191/2
$201/9
242/9
23
234/5
$241/2
211/2
20
211/2
$0.08
0.08
0.16
0.16
$0.16
0.16
0.16
0.16
$0.16
0.16
0.16
0.16
$0.16
0.16
0.16
0.16
$0.16
0.16
0.16
0.14
12.12
N.M.
4.38
(39.26x)
87.46
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
* Based on the average high and low market price for the four quarters.
**Per share data for these periods have been adjusted to reflect the two-for-one stock split effected in the form of a dividend on July 8, 2004.
N.M. refers to not meaningful value.
be transferred to a statutory reserve account until such statutory
reserve equals the total of paid-in capital on common and preferred
stock. During 2008, $18 million was 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,
2008 and 2007, 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.
The average tangible equity amounted to $2.7 billion for the
period ended December 31, 2008, compared to $3.1 billion at
December 31, 2007. Total tangible equity was $2.6 billion at
December 31, 2008, compared to $2.9 billion at December 31,
2007. The average tangible equity to average tangible assets ratio
was 6.64% at December 31, 2008 and December 31, 2007.
Tangible equity consists of total stockholders’ equity less goodwill
and other intangibles.
46 POPULAR, INC. 2008 ANNUAL REPORT
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, 2008
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
$200
128,646
1,047,830
$199
301,626
915,859
$100,213
882,949
$100
7,102,839
11,751,592
0-30
days
$763,809
1,271,221
10,525,656
Within
31-90
days
$30,346
178,259
1,152,218
12,560,686
1,360,823
1,176,676
1,217,684
983,162
18,854,531
$2,729,207
2,729,207
2,051,950
1,635,902
35
2,020,242
28,454
3,083,801
1,916,237
110
1,177,544
8,030,152
3,312,225
1,876,730
2,711
215,244
327,015
1,400
251,609
62,000
823
608,926
1,285,863
813
819
2,309,352
4,293,553
Total
$794,654
9,082,804
26,276,104
2,729,207
38,882,769
10,110,701
13,145,951
3,551,608
4,934
3,386,763
4,293,553
$5,782,537
$2,600,301
$3,784,004
$1,917,050
$1,178,473
$14,937,592
1,120,895
3,268,364
$8,682,812
1,120,895
3,268,364
$38,882,769
200,000
6,978,149
(1,239,478)
(200,000)
(2,807,328)
(699,366)
(195,311)
3,916,939
(5,953,605)
6,978,149
5,738,671
2,931,343
2,231,977
2,036,666
5,953,605
19.30%
15.87%
8.11%
6.17%
5.63%
16.47%
* This table includes information from the discontinued operations.
RISK MANAGEMENT
Managing risk is an essential component of the Corporation’s
business. The Corporation’s primary risk exposures are market,
liquidity, credit and operational risks, all of which are discussed
in the following sections. Risk identification and monitoring are
key elements in overall risk management.
The Corporation’s Board of Directors (the “Board”) has
established a Risk Management Committee (“RMC”) to undertake
the responsibilities of overseeing and approving the Corporation’s
Risk Management Program. The RMC, management structure and
established management committees jointly delineate the
management of risks.
The RMC will, as an oversight body, monitor and evaluate
policies and procedures to identify, measure, monitor and control
risks while maintaining the effectiveness and efficiency of the
business and operational processes. As an approval body, the RMC
reviews and approves or disapproves the Corporation’s risk
management policies and risk management systems. It also reports
periodically to the Board about its activities.
The Board and RMC have delegated to the Corporation’s
management the implementation of the risk management
processes. This implementation is split into three separate but
coordinated efforts that include business and / or operational units,
a Corporate Risk Management Group (“CRMG”) and risk managers
at the reportable segments. Moreover, management oversight of
the Corporation’s risk-taking and risk management activities is
conducted through management committees, some of which are
as follows:
• CRESCO (Credit Risk Management Committee) –
manages the Corporation’s overall credit exposure and
approves credit policies, standards and guidelines that
define, quantify, and monitor credit risk. Through this
committee, management reviews asset quality ratios,
trends and forecasts, problem loans, establishes the
provision for loan losses and assesses the methodology
47
and adequacy of the allowance for loan losses on a monthly
basis.
• ALCO (Asset / Liability Management Committee) – oversees
and approves the policies and processes designed to ensure
prudent market risk and balance sheet management
including interest rate, liquidity, investment and trading
policies.
• ORCO (Operational Risk Committee) – monitors
operational risk management activities to ensure the
development and consistent application of operational risk
policies, processes and procedures that measure, limit and
manage the Corporation’s operational risks while
maintaining the effectiveness and efficiency of the operating
and businesses processes. It also reviews and approves
operational risk tolerance levels and positions across the
Corporation.
Market Risk
Market risk represents the risk of loss due to adverse movements
in market rates or prices, which include interest rates, foreign
exchange rates and equity prices; the failure to meet financial
obligations coming due because of the inability to liquidate assets
or obtain adequate funding; and the inability to easily unwind or
offset specific exposures without significantly lowering prices
because of inadequate market depth or market disruptions.
The ALCO and the Corporate Finance Group are responsible
for planning and executing the Corporation’s market, interest
rate risk, funding activities and strategy, and for implementing
the policies and procedures approved by the RMC.
The financial results and capital levels of Popular, Inc. are
constantly exposed to market risk.
Current levels of market volatility are unprecedented. The
capital and credit markets have been experiencing volatility and
disruption for more than 12 months. The markets have produced
downward pressure on stock prices and credit availability for
certain issuers, often without regard to those issuers’ underlying
financial strength. If current levels of market disruption and
volatility continue or worsen, there can be no assurance that the
Corporation will not experience an adverse effect, which may be
material, on its ability to access capital and on its business,
financial condition and results of operations. The programs
announced in the fourth quarter of 2008 by the federal government
should help ensure that the Corporation obtain access to capital
markets liquidity, if needed. The FDIC TLGP program permits
the Corporation to issue senior debt with an FDIC guarantee.
Significant declines in the housing market, with falling home
prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major
commercial and investment banks, and also in sales of those assets
at significantly discounted prices. These write-downs, initially
of mortgage-backed securities but spreading to credit default
swaps and other derivative securities, have caused many financial
institutions to seek additional capital, to merge with more
strongly capitalized institutions and, in some cases, to fail.
Concerned about the general stability of the financial markets
and the strength of counterparties, many lenders and institutional
investors have reduced and, in some cases, ceased to provide
funding to borrowers including other financial institutions. The
resulting lack of available credit, lack of confidence in the financial
sector, increased volatility in the financial markets and reduced
business activity could also materially and adversely affect the
Corporation’s ability to raise capital or longer-term financing.
Financial services institutions are interrelated as a result of
trading, clearing, counterparty, or other relationships. The
Corporation has exposure to many different industries and
counterparties, and management routinely executes transactions
with counterparties in the financial services industry, including
brokers and dealers, commercial banks, and other institutional
clients. Many of these transactions expose the Corporation to
credit risk in the event of default of the Corporation’s counterparty
or client. In addition, the Corporation’s credit risk may be
exacerbated when the collateral held by it cannot be realized or is
liquidated at prices not sufficient to recover the full amount of the
loan or derivative exposure. There is no assurance that any such
losses would not materially and adversely affect the Corporation’s
results of operations.
Despite the varied nature of market risks, the primary source
of this risk to the Corporation is the impact of changes in interest
rates on net interest income. Net interest income is the difference
between the revenue generated on earning assets and the interest
cost of funding those assets. Depending on the duration and
repricing characteristics of the assets, liabilities and off-balance
sheet items, changes in interest rates could either increase or
decrease the level of net interest income. For any given period,
the pricing structure of the assets and liabilities is matched when
an equal amount of such assets and liabilities mature or reprice in
that period. Any mismatch of interest earning assets and interest
bearing liabilities is known as a gap position. A positive gap
denotes asset sensitivity, which means that an increase in interest
rates could have a positive effect on net interest income, while a
decrease in interest rates could have a negative effect on net interest
income. At December 31, 2008, the Corporation had a positive
gap position as shown on Table K of this MD&A.
The Board of Governors of the Federal Reserve, which
influences interest rates, lowered interbank borrowing rates during
the year ended December 31, 2008 between 400 and 425 basis
points. The Board of Governors of the Federal Reserve has also
48 POPULAR, INC. 2008 ANNUAL REPORT
expressed concerns about a variety of economic conditions. Many
of the Corporation’s commercial loans are variable-rate and,
accordingly, rate decreases may result in lower interest income
to Popular in the near term; however, depositors will continue to
expect reasonable rates of interest on their accounts, potentially
compressing net interest margins further. The future outlook on
interest rates and their impact on Popular’s interest income, interest
expense and net interest income is uncertain.
Because of the current economic and market crisis, the
governments of major world economic powers, including the
United States, have taken extraordinary steps to stabilize the
financial system. For example, the U.S. Government has passed
the EESA, which provides the U.S. Treasury Department the ability
to purchase or insure troubled assets held by financial institutions.
In addition, the Treasury Department has the ability to purchase
equity stakes in financial institutions. Other extraordinary
measures taken by U.S. governmental agencies include increasing
deposit insurance limits, providing financing to money market
mutual funds, and purchasing commercial paper. It is not clear at
this time what impacts these measures, as well as other
extraordinary measures previously announced or that will be
announced in the future, will have on the Corporation or the
financial markets as a whole. Management will continue to monitor
the effects of these programs as they relate to the Corporation and
its future operations. Refer to the Overview of this MD&A for
additional information on the regulatory initiatives and the impact
to Popular as of the end of 2008.
Interest Rate Risk
Interest rate risk (“IRR”), a component of market risk, is the
exposure to adverse changes in net interest income due to changes
in interest rates. Management considers IRR a predominant market
risk in terms of its potential impact on profitability or market
value.
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, 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.
Interest rate risk management is an active process that
encompasses monitoring loan and deposit flows complemented
by investment and funding activities. Effective management of
interest rate risk begins with understanding the dynamic
characteristics of assets and liabilities and determining the
appropriate rate risk position given line of business forecasts,
management objectives, market expectations and policy
constraints.
Designated management, as previously described, implements
the market risk policies approved by the Board as well as the risk
management strategies reviewed and adopted by the RMC on its
meetings. The ALCO 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. Economic value of equity (“EVE”) analysis is
used to monitor the level of long-term IRR assumed. During 2008,
management expanded the types of analyses used to measure
interest rate risk. Simulations used to isolate and measure basis
and yield curve risk exposures were developed as well as
prepayment stress 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, 2008. These static measurements
do not reflect the results of any projected activity and are best
49
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, 2008,
the Corporation’s one-year cumulative positive gap was $2.0
billion, or 5.63% 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. It also incorporates
assumptions on balance sheet growth and expected changes in its
composition, estimated prepayments in accordance with projected
interest rates, pricing and maturity expectations on new volumes
and other non-interest related data. Simulations are processed
using various interest rate scenarios to determine potential changes
to the future earnings of the Corporation. The types of rate
scenarios processed during the year include economic most likely
scenarios, flat rates, yield curve twists, +/- 200 basis points parallel
ramps and +/- 200 basis points parallel shocks. The asset and
liability management group also performs validation procedures
on various assumptions used as part of the sensitivity analysis as
well as validations of results on a monthly basis. 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 loans,
estimates on the duration of the Corporation’s deposits and
interest rate scenarios.
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
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.
The Corporation usually runs its net interest income
simulations under interest rate scenarios in which the yield curve
is assumed to rise and decline gradually by the same amount,
usually 200 basis points. Given the fact that as of year-end 2008,
some short-term rates were close to zero and some term interest
rates were below 2.0%, management has decided to focus measuring
the risk of net interest income in rising rate scenarios. The rising
rate scenarios used were gradual parallel changes of 200 and 400
basis points during the twelve-month period ending December
31, 2009. Projected net interest income under the 200 basis points
rising rate scenario increased by $50.9 million while the 400
basis points simulation increased by $90.8 million. These
scenarios were compared against the Corporation’s flat interest
rates forecast.
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,
2008, 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 1% 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
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.
The Corporation uses EVE analysis to attempt to measure the
sensitivity of its assets and liabilities to changes in interest rates.
EVE is equal to the estimated present value of the Corporation’s
assets minus the estimated present value of the liabilities. It is a
useful tool to measure long-term interest rate risk because it
captures cash flows from all future periods.
EVE is estimated on a monthly basis and shock scenarios are
prepared on a quarterly basis. The shock scenarios consist of +/-
200 basis points parallel shocks. As previously mentioned, given
the low levels of current market rates, the Corporation will focus
on measuring the risk in a rising rate scenario. Minimum EVE
ratio limits, expressed as EVE as a percentage of total assets,
have been established for base case and shock scenarios. In
addition, management has also defined limits for the increases /
decreases in EVE resulting from the shock scenarios. As of
December 31, 2008, the Corporation was in compliance with
these limits.
Trading
The Corporation’s trading activities are another source of market
risk and are subject to policies and risk guidelines approved by
the Board 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. Trading positions in the mortgage banking business,
which are mostly agency mortgage-backed securities, are hedged
in the agency TBA market. In anticipation of customer demand,
the Corporation carries an inventory of capital market instruments
and maintains market liquidity by quoting bid and offer prices
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
50 POPULAR, INC. 2008 ANNUAL REPORT
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, 2008
Maturities
After one year
through five years
After five years
Fixed
interest
rates
$100
5,257,639
2,438,344
40,092
460,340
1,533,034
1,288,972
Variable
interest
rates
-
$213,224
2,586,886
433,017
-
419,408
420,000
Fixed
interest
rates
-
$1,943,736
1,288,481
5,981
2,331
162,539
1,500,690
Variable
interest
rates
-
$681,831
2,321,881
18,710
-
380,381
548,930
Total
$794,654
8,854,986
13,687,059
2,212,813
1,080,810
4,648,784
4,639,465
One year
or less
$794,554
758,556
5,051,467
1,715,013
618,139
2,153,422
880,873
$11,972,024
$11,018,521
$4,072,535
$4,903,758
$3,951,733
$35,918,571
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.
constitute the proprietary trading business and are conducted by
the Corporation to provide customers with securities inventory
and liquidity.
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 33 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, 2008, the trading portfolio of the Corporation
amounted to $646 million and represented 2% of total assets,
compared with $768 million and 2% a year earlier. Mortgage-
backed securities represented 92% of the trading portfolio at the
end of 2008, compared with 90% in 2007. 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, 2008. 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,
2008:
(Dollars in thousands)
Amount
Average Yield*
Weighted
Mortgage-backed securities
CMO
Commercial paper
U.S. Treasury and agencies
Puerto Rico and U.S. Government obligations
Interest-only strips
Other
*Not on a taxable equivalent basis.
$591,390
4,776
4,600
275
27,808
1,803
15,251
$645,903
5.99%
5.91
3.05
-
5.99
26.32
6.76
6.04%
At December 31, 2008, the trading portfolio of the Corporation
had an estimated duration of 2.45 years and a one-month value at
risk (VAR) of approximately $3 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 within one month in the course of
its risk taking activities with 95% confidence. 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.
51
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, 2008,
the fair value of these forward contracts was not significant.
Derivatives
The Corporation utilizes derivatives as part of its overall interest
rate risk management strategy to protect against changes in net
interest income and cash flows. 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
interest rate swaps, interest rate caps and foreign exchange
contracts 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 33 to
the consolidated financial statements for further information on
the Corporation’s involvement in derivative instruments and
hedging activities.
The Corporation’s derivative 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. Derivative 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, 2008, 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. The
Corporation controls 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
credit risk. The credit risk attributed to the counterparty’s
nonperformance risk is incorporated in the fair value of the
derivatives. Additionally, as required by SFAS No. 157, the fair
value of the Corporation’s own credit standing is considered in
the fair value of the derivative liabilities. At December 31, 2008,
inclusion of the credit risk in the fair value of the derivatives
resulted in a net benefit of $1.8 million, which consisted of a loss
of $7.1 million resulting from the assessment of the counterparties’
credit risk and a gain of $8.9 million from the Corporation’s
credit standing adjustment.
Cash Flow Hedges
Utilizing 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, 2008 amounted to $313 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 $113 million at December 31, 2008. The seller agrees
to deliver on a specified future date, a specified instrument, at a
specified price or yield. These securities are hedging a forecasted
transaction and thus qualify for cash flow hedge accounting.
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.
These contracts are designated as cash flow hedges for accounting
purposes in accordance with SFAS No. 133, and have a notional
amount of $200 million at December 31, 2008. Refer to Note 33
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, 2008 and 2007.
52 POPULAR, INC. 2008 ANNUAL REPORT
Trading and Non-Hedging Derivative Activities
The Corporation takes derivative 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. The Corporation also enters 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
33 to the consolidated financial statements for additional
quantitative and qualitative information on these derivative
instruments.
At December 31, 2008, the Corporation had outstanding $2.1
billion in notional amount of interest rate swap agreements with a
positive fair value (asset) of $2 million, which were not designated
as accounting hedges. These swaps were entered in the
Corporation’s capacity as an intermediary on behalf of its
customers and their offsetting swap position.
For the year ended December 31, 2008, the impact of the
mark-to-market of interest rate swaps not designated as accounting
hedges was a net decrease in earnings of approximately $2.5
million, primarily in the interest expense category of the statement
of operations, compared with an earnings reduction of
approximately $11.6 million in 2007 mainly in the interest expense
category. Derivatives that the Corporation no longer utilized at
December 31, 2008 included swaps to economically hedge changes
in the fair value of loans prior to securitization, swaps that were
economically hedging the cost of short-term borrowings, and
swaps that were hedging the payments of bond certificates offered
as part of on-balance sheet securitizations. Additionally, during
2007, the Corporation cancelled all swaps related to the auto
loans because a substantial amount of that loan portfolio was sold.
Another strategy that was discontinued in the latter part of
2008 was the issuing of interest rate lock commitments (“IRLCs”)
in connection with E-LOAN’s activities to fund mortgage loans
at interest rates previously agreed (locked) by both the Corporation
and the borrower for a specified period of time. These IRLCs were
recognized as derivatives pursuant to SFAS No. 133. To account
for the changes in IRLC’s market value, the Corporation entered
into forward loan sales commitments to economically hedge the
risk of potential changes in the value of the loans that would result
from these commitments. This strategy was discontinued since
E-LOAN ceased originating mortgage loans in 2008. 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.
At December 31, 2008, the Corporation had forward contracts
with a notional amount of $272 million and a negative fair value
(liability) of $5 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 sale of loans and / or
mortgage-backed securities. For the year ended December 31,
2008, the impact of the mark-to-market of the forward contracts
not designated as accounting hedges was a reduction to earnings
of $15.3 million, which was included in the categories of trading
account profit and gain on sale of loans in the consolidated
statement of operations. In 2007, the unfavorable impact to
earnings of $11.2 million was also included in the categories of
trading account profit and gain on sale of loans.
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, 2008, these deposits amounted
to $179 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 invested but allows
the customer the potential to earn a return based on the
performance of the indexes.
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
53
asset. The derivative asset is marked-to-market on a quarterly
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 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, 2008, the notional amount of the index
options on deposits approximated $209 million with a fair value
of $9 million (asset) while the embedded options had a notional
value of $179 million with a fair value of $9 million (liability).
Refer to Note 33 to the consolidated financial statements for a
description of other non-hedging derivative activities utilized
by the Corporation during 2008 and 2007.
Foreign Exchange
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
other operating income in the consolidated statements of
operations.
At December 31, 2008, the Corporation had approximately
$39 million in an unfavorable foreign currency translation
adjustment as part of accumulated other comprehensive loss,
compared to unfavorable adjustments of $35 million at December
31, 2007 and $37 million at December 31, 2006.
Liquidity Risk
Liquidity is the ongoing ability to meet liability maturities and
deposit withdrawals, fund asset growth and business operations,
and repay contractual obligations at reasonable cost and without
incurring material losses. Liquidity management involves
forecasting funding requirements and maintaining sufficient
capacity to meet the needs and accommodate fluctuations in asset
and liability levels due to changes in the Corporation’s business
operations or unanticipated events.
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.
The Board is responsible for establishing Popular’s tolerance
for liquidity risk including approving relevant risk limits and
policies. The Board has delegated the monitoring of these risks
to the RMC and the ALCO. The management of liquidity risk, on
both a long-term and day-to-day basis, is the responsibility of the
Corporate Treasury Division. The Corporation’s Corporate
Treasurer is responsible for implementing the policies and
procedures approved by the Board and for monitoring the liquidity
position on an ongoing basis. Also, the Corporate Treasury
Division coordinates corporate wide liquidity management
strategies and activities with the reportable segments, oversees
any policy breaches and manages the escalation process. The
Corporate Treasurer reports to the ALCO and RMC the
Corporation’s liquidity risk position, any critical risks or issues
and proposed solutions.
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.
Liquidity, Funding and Capital Resources
The financial market disruptions that began in 2007 severely
impacted the economy and financial services sector during 2008.
The unsecured short-term funding markets remained stressed as
investors reduced their exposures and were hesitant to lend cash
on a long-term basis. The commercial paper markets essentially
ceased to function efficiently. Also, the availability of overnight
and term funds in the interbank market was substantially reduced.
54 POPULAR, INC. 2008 ANNUAL REPORT
As indicated earlier, the U.S. credit markets have been marked
by unprecedented instability and disruption since 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 taken 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 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 adversely 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
for contingency purposes.
The Corporation’s liquidity position is closely monitored on
an ongoing basis. Sources of liquidity include access to a stable
base of core deposits and to brokered deposits available in the
national markets. Other sources are available with other third-
party providers, which may include primarily secured credit lines
and on-balance sheet liquidity in the form of unpledged securities.
In addition to these, asset sales could 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, the Corporation’s funding sources are adequate.
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 subsequent 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,
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.
While market conditions have been challenging, the
Corporation was able to maintain a stable base of deposits. Also,
the Corporation took a series of actions to enhance its liquidity
and capital position during 2008. The following major events
impacted the Corporation’s funding activities and capital position
during 2008:
• The Corporation repaid $500 million in medium-term notes
upon their maturity in April 2008.
• During the second quarter of 2008, the Corporation
completed the public offering of $400 million of 8.25%
Non-cumulative Monthly Income Preferred Stock, Series
B, which qualifies in its entirety as “Tier I” capital for risk-
based capital ratios. Net proceeds were used for general
corporate purposes, including funding subsidiaries and
increasing Popular’s liquidity and capital.
• As previously indicated in the Discontinued Operations
section in this MD&A, during 2008, the Corporation sold
substantially all assets of PFH. The proceeds from the
transactions were used to cancel short-term debt and
provided additional liquidity to the bank holding
companies.
• During the third quarter and early fourth quarter of 2008,
Popular, Inc. issued an aggregate principal amount of $350
million of senior notes in private offerings to certain
institutional investors. The notes mature in 2011 subject
to specific provisions under the note indentures. The
proceeds from the issuances, coupled with the proceeds
from the sale of the PFH assets, were used for general
corporate purposes, including the upcoming repayment of
medium-term notes due in 2009.
• There were reductions in short-term borrowings in the
normal course of business related in part to lower volume of
investment securities and loans, including reductions from
the sales by PFH.
• Brokered deposits, which amounted to $3.1 billion at
December 31, 2008, continued to be used as an important
funding source of on-hand liquidity amidst the financial
industry developments in the second half of 2008. The level
of brokered deposits at year-end 2008 was at the same level
as in the previous year. One of the strategies followed by
management during 2007 in response to the unprecedented
market disruptions was the utilization of brokered deposits
to replace short-term uncommitted lines of credit.
• The Board of Directors reduced the quarterly dividend level
from $0.16 per common share to $0.08 per common share
commencing in the third quarter of 2008. The new dividend
payment rate represents a reduction of 50 percent from its
previous quarterly dividend payment rate. The reduction
will help preserve $90 million of capital a year. In February
Table M
Average Total Deposits
For the Year
(Dollars in thousands)
2008
2007
2006
2005
2004
55
Five-Year
C.G.R.
Non-interest bearing demand deposits
$4,120,280
$4,043,427
$3,969,740
$4,068,397
$3,918,452
3.35%
Savings accounts
NOW, money market and other interest
5,600,377
5,697,509
5,440,101
5,676,452
5,407,600
1.53
bearing demand accounts
4,948,186
4,429,448
3,877,678
3,731,905
2,965,941
14.17
Certificates of deposit:
Under $100,000
$100,000 and over
Certificates of deposit
Other time deposits
6,955,843
4,598,146
11,553,989
1,241,447
3,949,262
5,928,983
9,878,245
1,520,471
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
Total interest bearing deposits
23,343,999
21,525,673
19,294,392
18,184,672
15,490,603
19.30
9.80
14.94
10.25
10.36
Total deposits
$27,464,279
$25,569,100
$23,264,132
$22,253,069
$19,409,055
9.11%
2009, the Board reduced again the common dividend to
$0.02 per common share. This will conserve an additional
$68 million in capital per year. The dividend payment is
reviewed on a quarterly basis.
• As indicated earlier, in December 2008, the Corporation
received $935 million as part of the TARP Capital Purchase
Program in exchange for senior preferred stock and a warrant
to purchase shares of common stock of the Corporation.
The Corporation has made capital contributions to BPNA
with the proceeds from the TARP to ensure the entity
remained well-capitalized. The remaining proceeds have
been temporarily deployed to purchase mortgage-backed
securities, corporate bonds, and as a loan to the
Corporation’s subsidiary BPPR. The funds provided to both
banks will encourage creditworthy lending in our home
markets.
Holders of the Corporation’s common stock are only entitled
to receive such dividends as the Board may declare out of funds
legally available for such payments. Although the Corporation
has historically declared cash dividends on its common stock, it
is not required to do so, and it may have to reduce the amount of
cash dividends payable on the common stock in future periods as
circumstances warrant. Dividends on the Corporation’s preferred
stock, 2003 Series A and 2008 Series B, are non-cumulative and
payable only if declared by the Board, and can only be declared out
of funds legally available for such payments. Dividends on the
Series C Preferred Stock are cumulative and can only be declared
out of funds legally available for such payments. The Corporation’s
issuance of preferred shares to the U.S. Treasury under the TARP
Capital Purchase Program also imposes restrictions on the
Corporation’s ability to pay dividends under certain conditions.
Refer to Note 20 to the consolidated financial statements for
detailed information on the Series C preferred stock.
The preferred stock issuances described above, including the
participation in the TARP, the reduction in the common stock
dividend payment, as well as the sales of PFH assets substantially
improved the Corporation’s liquidity and capital position.
Management believes that the measures that have been taken and
the current sources of liquidity, some of which are described in
the sections below, will provide sufficient liquidity for the
Corporation to meet the repayment of debt maturities during
2009 and other operational needs.
Banking Subsidiaries
Primary sources of funding for the Corporation’s banking
subsidiaries (BPPR, BPNA or “the banking subsidiaries”) include
retail and commercial deposits, secured institutional borrowings,
unpledged marketable securities and, to a lesser extent, loan sales.
In addition, the Corporation’s banking subsidiaries maintain
secured 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.
The principal uses of funds for the banking subsidiaries include
loan and investment portfolio growth, repayment of obligations
as they become due, and operational needs. Also, the banking
subsidiaries assume liquidity risk related to off-balance sheet
activities mainly in connection with contractual commitments,
56 POPULAR, INC. 2008 ANNUAL REPORT
recourse provisions, servicing advances, derivatives and support
to several mutual funds administered by BPPR.
The bank operating subsidiaries maintain sufficient funding
capacity to address large increases in funding requirements such
as deposit outflows. This capacity is comprised of available
liquidity derived from secured funding sources and on-balance
sheet liquidity in the form of liquid unpledged securities.
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.
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.
As indicated in the Overview section of this MD&A, the TAGP,
to which the Corporation elected to be a participant, offers a full
guarantee for non-interest bearing deposit accounts held at FDIC-
insured depository institutions. The unlimited deposit coverage
will be voluntary for eligible institutions and would be in addition
to the $250,000 FDIC deposit insurance per account that was
included as part of the EESA. The TAGP coverage will continue
until December 31, 2009.
Total deposits at the Corporation decreased from $28.3 billion
at December 31, 2007 to $27.6 billion at December 31, 2008, a
decrease of 3%. Refer to Table H for a breakdown of deposits by
major types.
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 deposit with
denominations under $100,000.
Core deposits totaled $19.9 billion, or 72% of total deposits,
at December 31, 2008, compared to $20.1 billion and 71% at
December 31, 2007. Core deposits financed 55% of the
Corporation’s earning assets at December 31, 2008, compared to
49% at December 31, 2007.
Certificates of deposit with denominations of $100,000 and
over at December 31, 2008 totaled $4.7 billion, or 17% of total
deposits, compared to $5.3 billion, or 19%, at December 31,
2007. Their distribution by maturity at December 31, 2008 was
as follows:
(In thousands)
3 months or less
3 to 6 months
6 to 12 months
Over 12 months
$1,654,941
1,153,939
1,156,210
741,537
$4,706,627
The Corporation had $3.1 billion in brokered deposits at
December 31, 2008 and 2007. 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. All of the Corporation’s banking subsidiaries were
considered well-capitalized at December 31, 2008.
Average deposits for the year ended December 31, 2008
represented 76% of average earning assets, compared with 70%
and 63% for the years ended December 31, 2007 and 2006,
respectively. Table M summarizes average deposits for the past
five years.
Borrowings
To the extent that the banking subsidiaries are unable to obtain
sufficient liquidity through core deposits, the Corporation may
meet its liquidity needs through short-term borrowings by selling
securities under repurchase agreements. These are subject to
availability of collateral.
The Corporation’s banking subsidiaries also have the ability
to borrow funds from the FHLB at competitive prices. At December
31, 2008, the banking subsidiaries had short-term and long-term
credit facilities authorized with the FHLB aggregating $2.2 billion
based on assets pledged with the FHLB at that date, compared
with $2.6 billion as of December 31, 2007. Outstanding
borrowings under these credit facilities totaled $1.1 billion at
December 31, 2008, compared with $1.7 billion as of December
31, 2007. Such advances are collateralized by securities, do not
have restrictive covenants and, generally do not have any callable
features. Refer to Note 17 to the consolidated financial statements
for additional information.
57
At December 31, 2008, the banking subsidiaries had a
borrowing capacity at the FED discount window of approximately
$3.4 billion, which remained unused as of that date. This compares
to a borrowing capacity at the FED discount window of $3.0
billion at December 31, 2007, which was also unused at that date.
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.
As previously discussed in the Overview section of this MD&A,
the Corporation has the option under the DGP to issue senior
unsecured debt fully guaranteed by the FDIC on or before October
31, 2009 with a maturity of June 30, 2012 or sooner.
At December 31, 2008, management believes that the banking
subsidiaries had sufficient liquidity to meet its cash flow
obligations for the foreseeable future.
Bank Holding Companies
The principal sources of funding for the holding companies have
included dividends received from its banking and non-banking
subsidiaries, asset sales and proceeds from the issuance of
medium-term notes, junior subordinated debentures and equity.
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 in the past borrowed in the money markets and the corporate
debt market primarily to finance their non-banking subsidiaries.
These sources of funding have become difficult and costly due to
disrupted marked conditions. The cash needs of non-banking
subsidiaries are now minimal given that the PFH business has
been discontinued.
The BHCs have additional sources of liquidity available in the
form of credit facilities available from affiliate banking subsidiaries
and on-hand liquidity, as well as a limited amount of dividends
that can be paid by the subsidiaries subject to regulatory and
legal limitations, and assets that could be sold or financed. Other
potential sources of funding include the issuance of FDIC-backed
senior debt under the DGP.
As members subject to the 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. At December 31, 2008, BPPR could have declared a dividend
of approximately $31.6 million without the approval of the Federal
Reserve Board. At December 31, 2008, BPNA was required to
obtain the approval of the Federal Reserve Board to be able to
declare a dividend. The Corporation has never received dividend
payments from its U.S. subsidiaries. Refer to Popular, Inc.’s Form
10-K for the year ended December 31, 2008 for further information
on dividend restrictions imposed by regulatory requirements and
policies on the payment of dividends by BPPR and BPNA.
Non-banking subsidiaries
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, 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. Given the discontinuance
of the PFH operations, the liquidity needs of non-banking
subsidiaries are minimal since most of them fund internally from
operating cash flows or from intercompany borrowings from their
holding companies, BPPR or BPNA.
Other Funding Sources
The Corporation may also raise limited amounts of funding through
approved, but uncommitted 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 government sponsored agency
securities, government sponsored issued mortgage-backed
securities, and collateralized mortgage obligations of excellent
credit standing that can be used to raise funds in the repo markets.
At December 31, 2008, the investment and trading securities
portfolios, as shown in Table L, totaled $8.9 billion, of which
$759 million, or 9%, 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,
58 POPULAR, INC. 2008 ANNUAL REPORT
amounted to $2.7 billion as of December 31, 2008. A substantial
portion of these securities could be used to raise financing quickly
in the U.S. money markets or from secured lending sources.
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, 2008 is presented in Table L. As
of that date, $10.4 billion, or 40% 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.
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 also
complicate the impact of a recession in Puerto Rico, as the U.S.
recession underway, concurrently with a slowdown in Puerto Rico,
may make a recovery in the local economic cycle more
challenging, which is what was experienced in 2008 and is
expected for the foreseeable future. The economy in Puerto Rico
is experiencing its fourth year of a recessionary cycle.
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 of certain
asset classes and accessing secured credit lines and loan facilities
put in place with the FHLB 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. Some of these
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 impact 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.
The Corporation’s ratings and outlook at December 31, 2008
are presented in the tables below. Also included are revised ratings
announced by the rating agencies during January 2009.
At December 31, 2008
Popular, Inc.
Short-term
debt
Long-term
debt
Preferred
stock
Fitch
Moody’s
S&P
F-2
P-2
A-2
A-
A3
BBB+
BBB+
Baa2
BBB-
January 2009
Popular, Inc.
Short-term
debt
Long-term
debt
Preferred
stock
Fitch
F-2
Moody’s
W/R*
S&P
A-3
* W/R - withdrawn
B B B
Baa1
BBB-
BB+
Baa3
BB
Outlook
Negative
Negative
Negative
Outlook
Negative
Negative
Stable
In their January 2009 report, Fitch Ratings recognized
numerous positive actions over 2008 to address the Corporation’s
near-term challenges. However, they indicated the continued
credit quality deterioration and the expectations for ongoing
pressure in the real estate loan portfolios as the principal factors
considered in the downgrade given recent trends in core operating
performance and the difficult outlook. Their rating outlook
remained negative reflecting the possibility that credit and market
conditions could deteriorate further, placing additional stress on
the Corporation’s turnaround prospects. Fitch Ratings indicated
that a stabilization of core profitability and asset quality would
have to be achieved before the rating outlook returns to stable.
In their January 2009 report, Moody’s indicated that the
downgrade of the Corporation’s ratings was prompted by the
59
deterioration in the company’s asset quality and profitability in
2008, and the prospect of continuing weakness in these metrics
in 2009. Such weakness could further undermine the Corporation’s
ratio of tangible common equity to risk-weighted assets, which
the rating agency indicated was comparatively weak. Moody’s
believes that the deepening of the recession in the U.S. and the
continuation of the recession in Puerto Rico will most likely
cause the Corporation’s asset quality indicators and, hence, its
profitability to remain pressured through 2009.
In their January 2009 report, S&P indicated that the rating
action resulted from several factors, including the Corporation’s
reported net operating losses, a continued deterioration in credit
quality, and an expected decline in capital ratios. S&P is also
concerned by the increase in nonperforming assets and the
potential for further deterioration, notably in the construction,
mortgage, and commercial loan portfolios, as they see continued
pressure on home prices and reduced sale activity. S&P views
capital as adequate, but foresees more downward pressure in 2009.
Some of the Corporation’s obligations, which may include
borrowings, deposits and derivative positions, are subject to
“rating triggers”, contractual provisions that may accelerate the
maturity of the underlying obligations in the case of a change in
rating or that may result in an adjustment to the interest rate.
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
or adjust their rates was $464 million at December 31, 2008.
As of December 31, 2008, the Corporation has $350 million
in senior debt issued by the bank holding companies with interest
that adjusts in the event of senior debt ratings downgrades. As a
result of the actions taken by the ratings agencies in 2009, the
cost of that debt increased by 50 basis points, which would
represent an increase in the yearly interest expense of
approximately $1.75 million.
The corporation’s preferred stock rating is currently “non-
investment” grade under two rating agencies. The market for
noninvestment grade securities is much smaller and less liquid
than for investment grade securities. Therefore, if the company
were to attempt to issue preferred stock in the capital markets, it
is possible that would not be sufficient demand to complete a
transaction and the cost could be substantially higher than for
more highly rated securities.
Contractual Obligations and Commercial
Commitments
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
defined at a fixed, minimum or variable price over a specified
period of time, are defined as purchase obligations.
At December 31, 2008, 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
years
After 5
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
$9,855
$2,355
$841
$95
$13,146
2,275
165
5
802
142
42
1
-
1,032
60
69
1
124
-
669
18
63
1
988
3,552
-
858
3
200
23
5
3,361
223
374
26
obligations
$13,122
$3,682
$1,716
$2,167
$20,687
Purchase obligations include major legal and binding
contractual obligations outstanding at the end of 2008, 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 the Corporation has committed to contracts that may extend
for several years to secure favorable pricing concessions.
As of December 31, 2008, the Corporation’s liability on its
pension and postretirement benefit plans amounted to $374
million. During 2009, the Corporation expects to contribute $18.2
million to the pension and benefit restoration plans, and $6.1
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 25 to the consolidated financial statements for further
information on these plans. Despite the increase in the pension
plan liability, principally due to a decline of $157 million in the
fair value of plan assets, management believes that the effect of the
pension and postretirement plans on liquidity is not significant
60 POPULAR, INC. 2008 ANNUAL REPORT
to the Corporation’s overall financial condition. The Corporation’s
pension and other postretirement benefit plans are funded on a
current basis. Recent market conditions have resulted in an
unusually high degree of volatility associated with certain plan
assets. Should deterioration in market conditions continue, the
Corporation’s pension asset portfolio could be adversely impacted,
and it may be required to make additional contributions.
Management expects that the long-term return will revert to a
more normalized level.
As of December 31, 2008, the liability for uncertain tax
positions, excluding associated interest and penalties, was $45
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
timing of any future cash settlements cannot be predicted with
reasonable certainty. Under the statute of limitation, the liability
for uncertain tax positions expires as follows: 2009 - $7 million,
2010 - $5 million, 2011 - $16 million, 2012 - $11 million and
2013 - $6 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, 2008, the contractual amounts related to the
Corporation’s off-balance sheet lending and other activities were
the following:
(In millions)
Commitments to
extend credit
Commercial letters
of credit
Standby letters of
credit
Commitments to originate
mortgage loans
Unfunded investment
obligations
Total
Amount of Commitment – Expiration Period
Less than
1 year
1 to 3
years
3 to 5 After 5
years
years
Total
$5,980
$566
$328
$243
$7,117
19
140
67
-
-
34
4
2
7
-
-
-
-
-
-
8
19
181
71
10
$6,206
$606
$335
$251
$7,398
The Corporation also enters into derivative contracts under
which it is required either to receive 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. The Corporation may also be
required to post additional collateral on margin calls on the
derivatives and repurchase transactions.
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. The Corporation
may also have credit recourse on mortgage servicing portfolios
for which the Corporation may have acquired the right to service
the loan. 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, 2008, the Corporation serviced $4.9 billion
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 residential mortgage loans serviced
with credit recourse. In the event of nonperformance, the
Corporation has rights to the underlying collateral securing the
mortgage loan, thus, historically, the losses associated to these
guarantees have not been significant. At December 31, 2008, the
Corporation had reserves of approximately $14 million to cover
the estimated credit loss exposure related to the residential
mortgage loans serviced with recourse, which are principally
related to loans serviced that belong to mortgage-backed securities
issued by GNMA and Freddie Mac. At December 31, 2008, the
Corporation also serviced $12.7 billion 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, 2008, SBA loans serviced with recourse amounted
to $10 million. Due to the guaranteed nature of the SBA loans
sold, the Corporation’s exposure to loss under these agreements
should not be significant.
During 2008, in connection with certain sales of assets by the
discontinued operations of PFH, which approximated $2.7 billion
in principal balance of loans, the Corporation provided
indemnifications for the breach of certain representations or
warranties. Generally, the primary indemnifications included:
• Indemnification for breaches of certain key representations
and warranties, including corporate authority, due
organization, required consents, no liens or encumbrances,
compliance with laws as to origination and servicing, no
litigation relating to violation of consumer lending laws,
and absence of fraud.
• Indemnification for breaches of all other representations
including general litigation, general compliance with laws,
ownership of all relevant licenses and permits, compliance
with the seller’s obligations under the pooling and servicing
agreements, lawful assignment of contracts, valid security
interest, good title and all files and documents are true and
complete in all material respects, among others.
Also, one of PFH’s 2008 sale agreements included a repurchase
obligation for defaulted loans, which was limited and extended
only for loans originated within 120 days prior to the transaction
61
closing date and under which the borrower failed to make the first
schedule monthly payment due within 45 days after such closing
date. This obligation had expired as of December 31, 2008. Also,
the same agreement provided for reimbursement of premium on
loans that prepaid prior to the first anniversary date of the
transaction closing date, which is March 1, 2009. The premium
amount declined monthly over a 12-month term. As of December
31, 2008, the exposure under this obligation was not significant.
Certain of the representations and warranties covered under
the indemnifications expire within a definite time period; others
survive until the expiration of the applicable statute of limitations,
and others do not expire. Certain of the indemnifications are
subject to a cap or maximum aggregate liability defined as a
percentage of the purchase price. In the event of a breach of a
representation, the Corporation may be required to repurchase
the loan. The indemnifications outstanding at December 31, 2008
do not require repurchase of loans under credit recourse
obligations.
Under certain sale agreements, the repurchase obligation may
be subject to (1) an obligation on the part of the buyer to confer
with the Corporation on possible strategies for mitigating or
curing the issue which resulted in the repurchase demand being
made; (2) an obligation to pursue commercially reasonable efforts
to achieve such mitigation strategies; and (3) buyer’s obligation
to secure a bonafide, arms-length bid from a third party to acquire
such loan, in which case the seller would have the right to either
(1) acquire the loan from buyer, or (2) agree to have the loan sold
at bid and pay to buyer the shortfall between the original purchase
price for the loan and the bid price.
At December 31, 2008, the Corporation has recorded a liability
reserve for potential future claims under the indemnities of
approximately $16 million. If there is a breach of a representation
or warranty, the Corporation may be required to repurchase the
loan and bear any subsequent loss related to the loan. Popular, Inc.
Holding Company and Popular North America have agreed to
guarantee certain obligations of PFH with respect to the
indemnification obligations. In addition, the Corporation has
agreed to restrict $10 million in cash or cash equivalents for a
period of one year expiring in November 2009 to cover any such
obligations related to the principal sale transaction that involved
the sale of loans representing approximately $1.0 billion in
principal balance.
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
62 POPULAR, INC. 2008 ANNUAL REPORT
31, 2008 approximated $2 million. 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.
Refer to the notes to the consolidated financial statements for
further information on the Corporation’s contractual obligations,
commercial commitments, and derivative contracts.
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-balance
sheet 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.
The Corporation manages credit risk by maintaining sound
underwriting standards, monitoring and evaluating loan portfolio
quality, its trends and collectability, and assessing reserves and
loan concentrations. Also, credit risk is mitigated by
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.
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 was reorganized during 2008 to
strengthen its analysis and reporting capabilities. CCRMD is a
centralized unit, independent of the lending function, which
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. 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 CCRMD 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 CCRMD performs ongoing
monitoring of the portfolio, including potential areas of concern
for specific borrowers and / or geographic regions. The
Corporation has specialized workout officers that handle
substantially all commercial loans which are past due 90 days and
over, borrowers which have filed bankruptcy, or that are considered
problem loans based on their risk profile.
The Corporation also has a Credit Process Review Group within
the CCRMD, 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 participates in defining the review plan with the outside
loan review firm and actively participates in the discussions of
the results of the loan reviews with the business units. The
CCRMD may periodically review the work performed by the
outside loan review firm. CCRMD reports the results of the credit
process reviews to the Risk Management Committee of the
Corporation’s Board of Directors. The Corporation’s loan review
plan for 2009 will be conducted by this 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
63
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
29 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 dealing
with counterparties of good credit standing, entering into master
netting agreements whenever possible and, when appropriate,
obtaining collateral. Refer to Note 33 to the consolidated financial
statements for further information on the Corporation’s
involvement in derivative instruments and hedging activities.
The Corporation may also encounter risk of default in relation
to its investment securities portfolio. Refer to Notes 6 and 7 for
the composition of the investment securities available-for-sale
and held-to-maturity. The investment securities held by the
Corporation at December 31, 2008 are mostly Obligations of
U.S. government sponsored entities, collateralized mortgage
obligations, mortgage-backed securities and U.S. Treasury
securities. The vast majority of these securities are rated the
equivalent of AAA by the major rating agencies. A substantial
portion of these instruments are guaranteed by mortgages, a U.S.
government sponsored entity or the full faith and credit of the U.S.
Government.
At December 31, 2008, the Corporation’s credit exposure was
centered in its $26.3 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 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
313 of these commercial lending relationships have credit relations
with an aggregate exposure of $10 million or more. At December
31, 2008, highly leveraged transactions and credit facilities to
finance speculative real estate ventures amounted to $132 million,
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 disrupted financial market conditions that commenced in
2007 continued to affect the economy and the financial services
sector in 2008. During 2009, the Corporation expects continued
market turbulence and economic uncertainty. The impact of the
housing downturn and the broader economic slowdown has been
significant and the length and intensity of the downturn remains
unclear. Continued deterioration of the housing markets and the
economy in general will negatively impact the credit quality of
our loan portfolios and may result in a higher provision for loan
losses in future periods.
During 2008, management executed a series of actions to
mitigate its credit risk exposure in the U.S. mainland. These
actions included the closure of PFH’s retail branch network which
served principally the subprime sector. Also, the Corporation
exited the lending business of E-LOAN which also faced high
credit losses, particularly in its HELOC and closed-end second
lien loan portfolios. In the case of the banking operations, the
Corporation approved a plan to close, consolidate or sell
underperforming branches and exit lending businesses that do
not generate deposits or fee income. The Corporation has
significantly curtailed the production of non-traditional
mortgages as it ceased to originate non-conventional mortgage
loans in its U.S. operations. This initiative was part of the BPNA
Restructuring Plan implemented in the fourth quarter of 2008.
The non-conventional mortgage unit is currently focused on
servicing the runoff portfolio and restructuring loans that have or
show signs of credit deterioration.
Management continues to refine the Corporation’s credit
standards to meet the changing economic environment. The
Corporation has adjusted its underwriting criteria, as well as
enhanced its line management and collection strategies, in an
attempt to mitigate losses. The commercial banking group
restructured and strengthened several areas to manage more
effectively the current scenario, focusing strategies on critical
steps in the origination and portfolio management processes to
ensure the quality of incoming loans as well as detect and manage
potential problem loans early. The consumer lending area also
tightened underwriting standards across all business lines and
reduced its exposure in areas that are more likely to be impacted
under the current economic conditions. It also invested in
analytical tools to enhance collection practices, redesigned
operational processes and improved workforce productivity
through training and revision of incentive programs. The changes
both in the commercial and individual credit areas have placed
the Corporation in a stronger position to manage what looks to
be another challenging year in terms of credit quality.
64 POPULAR, INC. 2008 ANNUAL REPORT
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
35 to the consolidated financial statements.
A significant portion of the Corporation’s financial activities
and credit exposure is concentrated in Puerto Rico (the “Island”).
Consequently, its financial condition and results of operations
are dependent on the Island’s economic conditions. The weak
fiscal position of the Puerto Rico Government and strained
consumer finances, which were impacted by the effects of rising
unemployment rates, oil prices, utilities and taxes, among others,
has affected the Puerto Rico 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.
This decline in the Island’s economy has resulted in, among
other things, a downturn in the Corporation’s loan originations,
an increase in the level of its non-performing assets and loan loss
provisions, particularly in the Corporation’s commercial and
construction loan portfolios, an increase in the rate of foreclosure
loss on mortgage loans and a reduction in the value of its loans
and loan servicing portfolio, all of which have adversely affected
its profitability. If the decline in economic activity continues,
there could be further adverse effects on the Corporation’s
profitability. The economic slowdown could cause those adverse
effects to continue, as delinquency rates may increase in the short-
term, until more sustainable growth resumes. Also, a potential
reduction in consumer spending may also impact growth in the
Corporation’s other interest and non-interest revenue sources.
Puerto Rico’s general obligation ratings (“Puerto Rico ratings”)
are investment-grade, and remain unchanged since 2007 when
the debt was downgraded by Moody’s Investor Services to “Baa3.”
In 2006, Standard & Poor’s (“S&P”) downgraded Puerto Rico
ratings to “BBB-”. Both rating agencies maintain a stable outlook.
The primary factors behind the rating downgrades are the ongoing
recession in Puerto Rico since 2006 and its impact on tax receipts.
The Commonwealth government has been unable to resolve its
structural deficit and this is a major area of concern for the rating
agencies. General fund net revenues were down 3 percent during
the first six months of fiscal year 2009 (July to December 2008),
according to the Puerto Rico Treasury Department. Moody’s
“Baa3” rating and S&P’s “BBB-” take into consideration Puerto
Rico’s fiscal challenges. Both ratings stand one notch above non-
investment grade. Other factors could trigger an outlook change,
such as the government’s ability to implement meaningful steps
to curb operating expenditures or if the decline in government
revenues continues for a longer time period.
At December 31, 2008, the Corporation had $1.0 billion of
credit facilities granted to or guaranteed by the P.R. Government
and its political subdivisions, of which $215 million were
uncommitted lines of credit, compared to $1.0 billion and $150
million, respectively, as of December 31, 2007. Of these total
credit facilities granted, $943 million in loans were outstanding
at December 31, 2008, compared to $914 million 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 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, 2008, the Corporation had
outstanding $386 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, $363 million was exposed
to the creditworthiness of the Puerto Rico Government and its
municipalities. Of that portfolio, $47 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 S&P rates them as investment grade. At December
31, 2008, the Puerto Rico Commonwealth Appropriation Bonds
represented approximately $3.2 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, $187 million of
residential mortgages and $406 million in commercial loans were
65
insured or guaranteed by the U.S. Government or its agencies at
December 31, 2008.
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
loans and real estate property acquired through foreclosure.
Non-performing commercial loans as of December 31, 2008
reflected an increase of $198 million from December 31, 2007
mainly due to the continuous downturn in the U.S. economy and
the recessionary economy in Puerto Rico that is now entering its
fourth year. The percentage of non-performing commercial loans
to commercial loans held-in-portfolio rose from 1.95% at the end
of 2007 to 3.41% at the same date in 2008. For December 31,
2006, this ratio was 1.21%. Non-performing commercial loans
increased from December 31, 2007 to the same date in 2008
primarily in the Banco Popular de Puerto Rico reportable segment
by $138 million and in the Banco Popular North America reportable
segment by $70 million. There were two commercial loan
relationships greater than $10 million in non-accrual status at
December 31, 2008, both pertaining to the Puerto Rico operations.
These particular commercial loans are to customers in the
commercial real estate and meat by-products processing
industries. Commercial loans considered impaired under the
Corporation’s criteria for SFAS No. 114 amounted to $447 million
at December 31, 2008, compared with $322 million at the same
date in 2007. The specific reserves for the impaired commercial
loans at December 31, 2008 amounted to $61 million.
Non-performing construction loans increased $224 million
from the end of 2007 to December 31, 2008 primarily in the Banco
Popular de Puerto Rico reportable segment by $168 million and in
the Banco Popular North America reportable segment by $62
million. The construction loans in non-performing status are
primarily residential real estate construction loans which had
been adversely impacted by general market economic conditions,
decreases in property values, the tightening of credit origination
standards and oversupply in certain areas. There were six
construction loan relationships greater than $10 million in non-
accrual status at December 31, 2008. Historically, the
Corporation’s loss experience with real estate construction loans
has been relatively low due to the sufficiency of the underlying
real estate collateral. In the current stressed housing market, the
value of the collateral securing the loan has become one of the
most important factors in determining the amount of loss incurred
and the appropriate level of the allowance for loan losses. As further
described in the Allowance for Loan Losses section of this MD&A,
management has increased the allowance for loan losses through
specific reserves for the construction loans considered impaired
under SFAS No. 114. Construction loans considered impaired
under the Corporation’s criteria for SFAS 114 amounted to $375
million at December 31, 2008. The specific reserves for impaired
construction loans amounted to $120 million at December 31,
2008.
The reduction in non-performing mortgage loans held-in-
portfolio from December 31, 2007 to December 31, 2008 by $10
million was associated in part to the reclassification of $2 million
in non-performing mortgage loans of PFH to “Assets from
discontinued operations” in the consolidated statement of
condition as of December 31, 2008. PFH had $179 million in
non-performing mortgage loans as of December 31, 2007. This
was offset in part by increases in non-performing mortgage loans
in both the Banco Popular de Puerto Rico and Banco Popular
North America reportable segments by $80 million and $89
million, respectively. Mortgage loans net charge-offs in the Puerto
Rico operations for the year ended December 31, 2008 amounted
to approximately $2.9 million. Banco Popular de Puerto Rico
reportable segment’s mortgage loan portfolio averaged
approximately $2.8 billion for the year ended December 31, 2008.
Mortgage loans net charge-offs in the Banco Popular North America
reportable segment amounted to $50.0 million for the year ended
December 31, 2008, an increase of $35.7 million compared to the
previous year. This increase was related to the slowdown in the
United States housing sector. The declines in residential real
estate values, coupled with the reduced ability of certain
homeowners to refinance or repay their residential real estate
obligations, have led to higher delinquencies and losses in
residential real estate loans. Banco Popular North America’s non-
conventional mortgages reported a total of $76 million worth of
loan modifications at December 31, 2008. These modifications
were considered trouble debt restructures (“TDR”) since they
involved granting a concession to borrowers under financial
difficulties. Although SFAS No. 114 excludes large groups of
smaller-balance homogenous loans that are collectively evaluated
for impairment (e.g. mortgage loans), it specifically requires its
application to modifications considered TDR. These TDR
mortgage loans were evaluated for impairment resulting in a reserve
of $14 million at December 31, 2008. There were no commitments
outstanding at December 31, 2008 to provide additional funding
on these TDR mortgage loans. Non-performing mortgage loans
decreased by $150 million, or 30%, from December 31, 2006 to
the same date in 2007. The decline was directly related to the
2007 PFH loan recharacterization transaction which resulted in a
reduction in non-performing mortgage loans of approximately
$316 million, partially offset by increases in non-performing
mortgage loans in PFH’s remaining owned portfolio, the Puerto
Rico operations and BPNA. The increase at the BPPR and BPNA
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
66 POPULAR, INC. 2008 ANNUAL REPORT
Table N
Non-Performing Assets
(Dollars in thousands)
Non-accrual loans:
Commercial
Construction
Lease financing
Mortgage
Consumer
Total non-performing loans
Other real estate
Total non-performing assets
Accruing loans past-due
90 days or more
2008*
2007
As of December 31,
2006
2005
2004
$464,802
319,438
11,345
338,961
68,263
1,202,809
89,721
$1,292,530
$266,790
95,229
10,182
349,381
49,090
770,672
81,410
$852,082
$158,214
-
11,898
499,402
48,074
717,588
84,816
$802,404
$131,260
2,486
2,562
371,885
39,316
547,509
79,008
$626,517
$116,969
5,624
3,665
395,749
32,010
554,017
59,717
$613,734
$150,545
$109,569
$99,996
$86,662
$79,091
2.19%
Non-performing assets to loans held-in-portfolio
1.98
Non-performing loans to loans held-in-portfolio
1.38
Non-performing assets to assets
Interest lost
$45,089
* Amounts as of December 31, 2008 exclude assets from discontinued operations. Non performing loans and other real estate from discontinued operations amounted to
5.02%
4.67
3.32
$48,707
3.04%
2.75
1.92
$71,037
2.51%
2.24
1.69
$58,223
2.02%
1.77
1.29
$46,198
$3 million and $0.9 million, respectively, as of December 31, 2008.
in Puerto Rico. Ratios of mortgage loans net charge-offs as a
percentage of average mortgage loans held-in-portfolio are
presented later in the Allowance for Loan Losses section of this
MD&A.
The increase in non-performing consumer loans by $19 million
from December 31, 2007 to the same date in 2008 was principally
associated with the Banco Popular North America reportable
segment which increased by $24 million. E-LOAN reported an
increase of $18 million. The increase in the U.S. mainland non-
performing consumer loans was mainly attributed to the home
equity lines of credit and second lien mortgage loans, which are
categorized by the Corporation as consumer loans. With the
downsizing of E-LOAN in late 2007, this subsidiary ceased
originating these types of loans. The increase in non-performing
consumer loans was in part offset by the reduction in PFH of $6
million due to the sale of its portfolio and the discontinuance of
the business. Non-performing consumer loans at December 31,
2007 remained at a level very close to 2006, in part, because the
portfolio growth in consumer loans was 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, at that time, were
a relatively newly originated portfolio from the 2007 vintage.
Other real estate, which represents real estate property acquired
through foreclosure, increased by $8 million from December 31,
2007 to the same date in 2008. This increase was principally due
to an increase in the Banco Popular North America reportable
segment by $28 million and Banco Popular de Puerto Rico
reportable segment by $12 million, which was partially offset by
$32 million in other real estate pertaining to PFH as of December
31, 2007. At December 31, 2006, PFH had $57 million in other
real estate, which is included as part of other real estate in Table
N. The slowdown in the housing market and continued economic
deterioration in certain geographic areas 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 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, adjusted non-performing assets would have been $1.2
billion at December 31, 2008, $803 million as of December 31,
2007 and $754 million at December 31, 2006.
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 included in Table N,
there were $206 million of loans at December 31, 2008, which in
management’s opinion are currently subject to potential future
classification as non-performing and are considered impaired under
67
SFAS No. 114, compared to $50 million at December 31, 2007
and $103 million at December 31, 2006. The increase from 2007
to 2008 was mainly related to commercial and construction loans
in Puerto Rico. 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, 2008 and 2007 are presented
below.
(Dollars in millions)
Loans delinquent 30 days or more
Total delinquencies as a percentage
of total loans:
Commercial
Construction
Lease financing
Mortgage
Consumer
Total
2008
2007
$2,547 $2,011
6.74% 4.09%
19.33
4.95
18.51
6.12
9.69% 6.72%
11.21
4.36
12.28
4.75
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
The allowance for loan losses, which represents management’s
estimate of credit losses inherent in the loan portfolio, is maintained
at a sufficient level to provide for these estimated loan losses
based on evaluations of inherent risks in the loan portfolios. The
Corporation’s management evaluates the adequacy of the allowance
for loan losses on a monthly basis. In this evaluation, management
considers current economic conditions and the resulting impact
on Popular’s loan portfolio, the composition of the portfolio by
loan type and risk characteristics, historical loss experience,
loss volatility, results of periodic credit reviews of individual
loans, regulatory requirements and loan impairment measurement,
among other factors. The increase in the Corporation’s allowance
for loan losses level as of December 31, 2008 reflects the prevailing
negative economic outlook, and specific reserves for commercial,
construction and troubled debt restructured mortgage loans
considered impaired under SFAS No. 114.
The Corporation’s methodology to determine its allowance
for loan losses is based on SFAS No. 114. Under SFAS No. 114,
commercial and construction loans over a predetermined amount
are identified for evaluation on an individual basis, and specific
reserves are calculated based on impairment analyses. 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 uses
historical net charge-offs and volatility experience 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
projections and assumptions, actual losses can vary from the
estimated amounts.
The allowance for loan losses increased from December 31,
2007 to December 31, 2008 by $334 million. The increase is
mainly the result of additional reserves for specific commercial
and construction loans considered impaired, as well as for certain
troubled debt restructured mortgage loans, and higher reserves
for Popular’s U.S. mainland consumer loan portfolio (mainly home
equity lines of credit). The allowance for loan losses for commercial
and construction credits has been increased based on proactive
identification of risk and thorough borrower analysis.
Historically, the Corporation’s loss experience with real estate
construction loans has been relatively low due to the sufficiency
of the underlying real estate collateral. In the current stressed
housing market, the value of the collateral securing the loan has
become one of the most important factors in determining the
68 POPULAR, INC. 2008 ANNUAL REPORT
amount of loss incurred and the appropriate level of allowance for
loan losses. Management has increased the allowance for loan losses
for construction mainly through specific reserves for the loans
considered impaired under SFAS No. 114.
Under SFAS No. 114, the Corporation considers a commercial
borrower to be impaired when the outstanding debt amounts to
$250,000 or more and interest and / or principal is past due 90
days or more, or, when the outstanding debt amounts to $500,000
or more and based on current information and events, management
considers that the debtor will be unable to pay all amounts due
according to the contractual terms of the loan agreement. Also,
the Corporation considers certain mortgage loans that had been
negotiated under troubled debt restructurings as part of its SFAS
No. 114 evaluation.
The Corporation’s recorded investment in impaired
commercial, construction and mortgage troubled debt restructured
loans and the related valuation allowance calculated under SFAS
No. 114 as of December 31, 2008, 2007 and 2006 were:
2008
2007
2006
(In millions)
Recorded Valuation Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance Investment Allowance
Impaired loans:
Valuation allowance
No valuation
allowance required
Total impaired loans
$664.9
$194.7
$174.0
$54.0
$125.7
$37.0
232.7
$897.6
-
$194.7
147.7
$321.7
-
$54.0
82.5
$208.2
-
$37.0
With respect to the $233 million portfolio of impaired
commercial loans (including construction) for which no allowance
for loan losses was required as of December 31, 2008, management
followed the SFAS No. 114 guidance. 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 $898 million
impaired loans included in the table above as of December 31,
2008 were collateral dependent loans in which management
performed a detailed analysis based on the fair value of the collateral
less estimated costs to sell and determined if the collateral was
deemed adequate to cover any losses.
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.
The following table presents net charge-offs to average loans
held-in-portfolio by loan category for the years ended December
31, 2008, 2007 and 2006:
Commercial
Construction
Lease financing
Mortgage
Consumer
Total
2008
1.24%
5.81
1.72
1.17
4.95
2.29%
2007
0.58%
(0.10)
1.28
0.35
3.25
1.01%
2006
0.31%
-
1.08
0.09
2.15
0.65%
The ratios of net charge-offs to average loans held-in-portfolio
exclude the discontinued operations of PFH for all periods
presented in the above table for comparative purposes. Non-
performing assets and the allowance for loan losses by loan type
include the discontinued operations for 2007 and earlier years. As
of December 31, 2008, the discontinued operations of PFH only
had a $7 million loan portfolio that was accounted at fair value.
The increase in commercial loans net charge-offs for the year
ended December 31, 2008, compared to the previous year, was
mostly associated with continued deterioration in the economic
conditions in Puerto Rico and the U.S mainland which are both
experiencing a recessionary cycle. Credit deterioration trends
have been reflected across all industry sectors. 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 1.60% for the year ended December 31, 2008,
compared to 0.72% for 2007 and 0.36% for 2006. Also, an increase
was experienced in the Banco Popular North America reportable
segment, which had reported a ratio of 0.76% for the year 2008,
compared with 0.35% for 2007 and 0.23% for 2006. The allowance
for loan losses corresponding to commercial loans held-in-
portfolio represented 2.16% of that portfolio at December 31,
2008, compared with 1.02% in 2007 and 1.31% in 2006. The
ratio of allowance to non-performing loans in the commercial loan
category was 63.39% at the end of 2008, compared with 52.10%
in 2007 and 108.27% in 2006.
The increase in construction loans net charge-offs for the year
ended December 31, 2008, compared to 2007, was related to the
Corporation’s Puerto Rico and U.S. mainland operations. The
ratio of construction loans net charge-offs to average construction
loans held-in-portfolio in the Banco Popular de Puerto Rico
reportable segment was 4.83% for the year ended December 31,
2008. Also, the Banco Popular North America reportable segment
experienced an increase with a ratio of 7.54% for the year 2008.
The construction loans charge-offs for the year ended December
31, 2008 included approximately $32 million in a $51 million
syndicated commercial loan that was placed in non-performing
status during the quarter ended March 31, 2008 and for which the
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
Construction
Lease financing
Mortgage
Consumer
Recoveries:
Commercial
Construction
Lease financing
Mortgage
Consumer
Net loans charged-off:
Commercial
Construction
Lease financing
Mortgage
Consumer
2008
$548,832
-
991,384
-
1,540,216
184,578
120,425
22,761
53,303
264,437
645,504
15,167
-
3,934
425
26,014
45,540
169,411
120,425
18,827
52,878
238,423
599,964
2007
$522,232
7,290
341,219
-
870,741
94,992
-
23,722
15,889
173,937
308,540
18,280
1,606
8,695
421
28,902
57,904
76,712
(1,606)
15,027
15,468
145,035
250,636
2006
$461,707
-
187,556
-
649,263
54,724
-
24,526
4,465
125,350
209,065
17,195
22
10,643
526
27,327
55,713
37,529
(22)
13,883
3,939
98,023
153,352
2005
$437,081
6,291
121,985
1,586
566,943
64,559
-
20,568
4,908
85,068
175,103
21,965
-
10,939
301
26,292
59,497
42,594
-
9,629
4,607
58,776
115,606
69
2004
$408,542
13,588
133,366
-
555,496
62,491
994
37,125
5,367
82,935
188,912
19,626
-
11,385
531
25,927
57,469
42,865
994
25,740
4,836
57,008
131,443
Write-downs related to loans transferred
to loans held-for-sale
Change in allowance for loan losses from
discontinued operations**
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
12,430
-
-
-
-
(45,015)
(71,273)
26,321
10,370
$882,807
$548,832
$522,232
$461,707
13,028
$437,081
$25,732,873
26,162,786
$28,021,456
24,908,943
$32,017,017
23,533,341
$31,011,026
21,280,242
$27,991,533
17,315,966
3.43%
7.05
2.29
1.29x
1.47
1.65
3.79%
68.30
73.40
1.96%
18.77
1.01
2.53x
2.19
1.36
1.37%
64.41
71.21
1.63%
26.65
0.65
4.87x
3.41
1.22
0.80%
65.08
72.78
1.49%
33.98
0.54
6.84x
3.99
1.06
0.57%
73.69
84.33
1.56%
30.42
0.76
5.14x
3.33
1.01
0.77%
71.22
78.89
*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 (change from
fiscal to calendar reporting year for non-banking subsidiaries).
**A positive amount represents higher provision for loan losses recorded during the period compared to net charge-offs, and vice versa for a negative amount.
70 POPULAR, INC. 2008 ANNUAL REPORT
Table P
Allocation of the Allowance for Loan Losses
(Dollars in millions)
2008
2007
2006
2005
2004
As of December 31,
Allowance
for
Loan Losses
Percentage of
Loans in Each
Category to
Total Loans*
Percentage of
Loans in Each
Category to
Loan Losses Total Loans*
Allowance
for
Percentage of
Loans in Each
Category to
Loan Losses Total Loans* Loan Losses Total Loans* Loan Losses Total Loans*
Percentage of
Loans in Each Allowance
Category to
Percentage of
Loans in Each Allowance
Category to
Allowance
for
for
for
Commercial
Construction
Lease financing
Mortgage
Consumer
Total
$294.6
170.3
22.0
106.3
289.6
$882.8
53.0%
8.6
2.9
17.4
18.1
100.0%
$139.0
83.7
25.6
70.0
230.5
$548.8
48.8%
6.9
3.9
21.7
18.7
100.0%
$171.3
32.7
24.8
92.2
201.2
$522.2
40.9%
4.4
3.8
34.6
16.3
100.0%
$171.7
12.7
27.6
72.7
177.0
$461.7
38.0%
2.7
4.2
39.7
15.4
100.0%
$169.4
9.6
28.7
67.7
161.7
$437.1
37.1%
1.8
4.2
42.5
14.4
100.0%
*Note: For purposes of this table, the term loans refers to loans held-in-portfolio (excludes loans held-for-sale).
Corporation established a specific reserve based on a third-party
appraisal of value of the collateral less estimated cost to sell at that
time. This syndicated commercial loan is collateralized by a
marina, commercial real estate, and a high-end apartment complex
in the U.S. Virgin Islands. During the fourth quarter of 2008, the
Corporation charged-off $22 million in a construction loan which
was considered a trouble debt restructure and was reserved under
SFAS No. 114. The Corporation also recorded construction loans
net charge-offs of $20.5 million during the quarter ended September
30, 2008 at BPNA. Management has identified construction loans
considered impaired under SFAS No. 114 and established specific
reserves based on the value of the collateral. The allowance for loan
losses corresponding to construction loans represented 7.70% of
that portfolio at December 31, 2008, compared with 4.31% in
2007 and 2.30% in 2006. The ratio of allowance to non-performing
loans in the construction loan category was 53.32% at the end of
2008, compared with 87.86% in 2007.
The Corporation’s allowance for loan losses for mortgage loans
held-in-portfolio represented 2.38% of that portfolio at December
31, 2008, compared with 1.15% in 2007 and 0.83% in 2006.
Mortgage loans net charge-offs as a percentage of average mortgage
loans held-in-portfolio for the continuing operations increased
primarily in the U.S. mainland operations. The Banco Popular
North America reportable segment reported a ratio of mortgage
loans net charge-offs to average mortgage loans held-in-portfolio
of 2.91% for the year ended December 31, 2008, compared with
0.89% for the previous year. Deteriorating economic conditions
in the U.S. mainland housing market have impacted the mortgage
industry delinquency rates. As a result of higher delinquency and
net charge-offs, BPNA recorded a higher provision for loan losses
in 2008 to cover for inherent losses in this portfolio. The general
level of property values in the U.S., as measured by several indexes
widely followed by the market, has declined. These declines are
the result of ongoing market adjustments that are aligning property
values with income levels and home inventories. The supply of
homes in the market has increased substantially, and additional
property value decreases may be required to clear the overhang of
excess inventory in the U.S. market. Declining property values
could impact the credit quality of the Corporation’s U.S. mortgage
loan portfolio because the value of the homes underlying the loans
is a primary source of repayment in the event of foreclosure.
Mortgage loans net charge-offs in the Banco Popular de Puerto
Rico reportable segment amounted to $2.9 million for 2008,
compared to net charge-offs of $1.2 million in 2007 and net charge-
offs of $0.1 million in 2006. The slowdown in the housing sector
in Puerto Rico has begun to put pressure on home prices and
reduce sale activity. The ratio of mortgage loans net charge-offs
to average mortgage loans held-in-portfolio for the BPPR reportable
segment mortgage loans portfolio was 0.10% for the year ended
December 31, 2008, compared to 0.04% for 2007. BPPR’s
mortgage 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
experienced significant increases in losses to date.
Consumer loans net charge-offs as a percentage of average
consumer loans held-in-portfolio rose mostly due to higher
delinquencies in the U.S. mainland and in Puerto Rico. Consumer
loans net charge-offs in the BPNA reportable segment rose for the
year ended December 31, 2008, when compared with the previous
year, by $70.9 million. The ratio of consumer loans net charge-
offs to average consumer loans held-in-portfolio in the Banco
Popular North America reportable segment was 6.89% for 2008,
compared to 1.83% for 2007 and 1.47% for 2006. This increase
71
was principally related to home equity lines of credit and second
lien mortgage loans which are categorized by the Corporation as
consumer loans. A home equity line of credit is a loan secured by
a primary residence or second home. Home price declines coupled
with the fact that most home equity loans are secured by second
lien positions have significantly reduced and, in some cases,
resulted in no collateral value after consideration of the first lien
position. This drove more severe charge-offs as borrowers
defaulted. E-LOAN represented approximately $52.7 million of
that increase in the net charge-offs in consumer loans held-in-
portfolio for the BPNA reportable segment. With the downsizing
of E-LOAN in late 2007, this subsidiary ceased originating these
types of loans. Consumer loans net charge-offs in the Banco Popular
de Puerto Rico reportable segment rose for the year ended December
31, 2008, when compared with the previous year, by $22.5
million. The ratio of consumer loans net charge-offs to average
consumer loans held-in-portfolio in the Banco Popular de Puerto
Rico reportable segment was 4.21% for 2008, compared to 3.73%
for 2007 and 2.43% for 2006. The allowance for loan losses for
consumer loans held-in-portfolio represented 6.23% of that
portfolio at December 31, 2008, compared with 4.39% in 2007
and 3.86% in 2006. The increase in this ratio was the result of
increased levels of delinquencies and charge-offs.
The Corporation maintains a reserve of approximately $15.5
million for potential losses associated with unfunded loan
commitments related to commercial and consumer lines of credit.
The estimated reserve is principally based on the expected draws
on these facilities using historical trends and the application of
the corresponding reserve factors determined under the
Corporation’s allowance for loan losses methodology. This reserve
for unfunded exposures remains separate and distinct from the
allowance for loan losses and is reported as part of other liabilities
in the consolidated statement of condition.
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 for 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.
Recently Issued Accounting Pronouncements and
Interpretations
SFAS No. 141-R “Statement of Financial Accounting Standards No.
141(R), Business Combinations (a revision of SFAS No. 141)”
SFAS No. 141(R), issued in December 2007, 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
72 POPULAR, INC. 2008 ANNUAL REPORT
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
No. 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 No. 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 No. 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 evaluate the impact of SFAS No. 141(R) on business
combinations consumated in 2009 and beyond.
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 No. 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 is evaluating the effects, if any, that the
adoption of this statement will have on its consolidated financial
statements. The effects, if any, are not expected to be material.
SFAS No. 161 “Disclosures about Derivative Instruments and Hedging
Activities”
In March 2008, the FASB issued SFAS No. 161, an amendment of
SFAS No. 133. The standard requires enhanced disclosures about
derivative instruments and hedged items that are accounted for
under SFAS No. 133 and related interpretations. The standard
will be effective for all of the Corporation’s interim and annual
financial statements for periods beginning after November 15,
2008, with early adoption permitted. The standard expands the
disclosure requirements for derivatives and hedged items and has
no impact on how the Corporation accounts for these instruments.
Management will be evaluating the enhanced disclosure
requirements effective for the first quarter of 2009.
SFAS No. 162 “The Hierarchy of Generally Accepted Accounting
Principles”
SFAS No. 162, issued by the FASB in May 2008, identifies the
sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements
that are presented in conformity with generally accepted
accounting principles in the United States. This statement is
effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section
411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” Management does not expect
SFAS No. 162 to have a material impact on the Corporation’s
consolidated financial statements. The Board does not expect
that this statement will result in a change in current accounting
practice. However, transition provisions have been provided in
the unusual circumstance that the application of the provisions of
this statement results in a change in accounting practice.
FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions”
The objective of FSP FAS 140-3, issued by the FASB in February
2008, 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. FSP FAS 140-3 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
73
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 Corporation adopted FSP FAS 140-3 effective on January
1, 2009. The impact of this FSP is not expected to be material.
FSP No. FAS 142-3, “Determination of the Useful Life of Intangible
Assets”
FSP FAS 142-3, issued by the FASB in April 2008, amends the
factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142
“Goodwill and Other Intangible Assets”. In developing these
assumptions, an entity should consider its own historical
experience in renewing or extending similar arrangements
adjusted for entity’s specific factors or, in the absence of that
experience, the assumptions that market participants would use
about renewals or extensions adjusted for the entity specific factors.
FSP FAS 142-3 shall be applied prospectively to intangible
assets acquired after the effective date. This FSP was adopted by
the Corporation on January 1, 2009. The Corporation will be
evaluating the potential impact of adopting this FSP to prospective
transactions.
FSP No. FAS 132(R)-1 “Employers’ Disclosures about Postretirement
Benefit Plan Assets”
FSP No. FAS 132(R)-1 applies to employers who are subject to the
disclosure requirements of FAS 132(R) and is effective for fiscal
years ending after December 15, 2009. Early application is
permitted. Upon initial application, the provisions of this FSP
are not required for earlier periods that are presented for
comparative periods. The FSP requires the following additional
disclosures: (a) the investment allocation decision making
process, including the factors that are pertinent to an
understanding of investment policies and strategies; (b) the fair
value of each major category of plan assets, disclosed separately
for pension plans and other postretirement benefit plans; (c) the
inputs and valuation techniques used to measure the fair value of
plan assets, including the level within the fair value hierarchy in
which the fair value measurements in their entirety fall; and (d)
significant concentrations of risk within plan assets. Additional
detailed information is required for each category above. The
Corporation will apply the new disclosure requirements
commencing with the December 31, 2009 financial statements.
This FSP impacts disclosures only and will not have an effect on
the Corporation’s consolidated statements of condition or
operations.
FSP No. EITF 03-6-1 “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities”
FSP No. EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (“EPS”) under the
two-class method described in paragraphs 60 and 61 of FASB
Statement No. 128, Earnings per Share. Unvested share-based
payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of EPS pursuant
to the two-class method. This FSP shall be effective for financial
statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period
EPS data presented shall be adjusted retrospectively (including
interim financial statements, summaries of earnings, and selected
financial data) to conform with the provisions of this FSP. Early
application is not permitted. This FSP will not have an impact on
the Corporation’s EPS computation upon adoption.
EITF Issue No. 07-5 “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock”
In June 2008, the EITF reached consensus on Issue No. 07-5.
EITF Issue No. 07-5 provides guidance about whether an
instrument (such as outstanding common stock warrants) should
be classified as equity and not marked to market for accounting
purposes. EITF Issue No. 07-5 is effective for financial statements
for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The guidance in this issue shall
be applied to outstanding instruments as of the beginning of the
fiscal year in which this issue is initially applied. Adoption of
EITF Issue No. 07-5 was evaluated by the Corporation in
accounting for the warrant associated to a preferred stock issuance
in December 2008. Based on management’s analysis of EITF Issue
07-5 and other accounting guidance, the warrant was classified
as an equity instrument, and adoption of EITF Issue 07-5 will not
have an effect at adoption. Refer to Note 20 to the consolidated
financial statements for a description of the warrant issued in
2008.
EITF 08-6 “Equity Method Investment Accounting Considerations”
EITF 08-6 clarifies the accounting for certain transactions and
impairment considerations involving equity method investments.
This EITF applies to all investments accounted for under the
equity method. This issue is effective for fiscal years beginning
74 POPULAR, INC. 2008 ANNUAL REPORT
on or after December 15, 2008. Early adoption is not permitted.
EITF 08-6 provides guidance on (1) how the initial carrying
value of an equity method investment should be determined, (2)
how an impairment assessment of an underlying indefinite-lived
intangible asset of an equity method investment should be
performed, (3) how an equity method investee’s issuance of shares
should be accounted for, and (4) how to account for a change in an
investment from the equity method to the cost method.
Management is evaluating the impact that the adoption of EITF
08-6 could have on the Corporation’s financial condition or results
of operations.
EITF 08-7 “Accounting for Defensive Intangible Assets”
EITF 08-7 clarifies how to account for defensive intangible assets
subsequent to initial measurement. EITF 08-7 applies to acquired
intangible assets in situations in which an entity does not intend
to actively use the asset but intends to hold (lock up) the asset to
prevent others from obtaining access to the asset (a defensive
intangible asset), except for intangible assets that are used in
research and development activities. A defensive intangible asset
should be accounted for as a separate unit of accounting. A
defensive intangible asset shall be assigned a useful life in
accordance with paragraph 11 of SFAS. No 142. EITF 08-7 is
effective for intangible assets acquired on or after the beginning
of the first annual reporting period beginning on or after December
15, 2008. Management will be evaluating the impact of adopting
this EITF for future acquisitions commencing in January 2009.
75
Glossary of Selected Financial
Terms
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.
Efficiency Ratio
Efficiency Ratio - Non-interest expense divided by net interest
Efficiency Ratio
Efficiency Ratio
Efficiency Ratio
income plus recurring non-interest income.
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.
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.
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.
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.
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
and interest), whereas average life computes the average time
needed to collect one dollar of principal.
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.
Effective Tax Rate
Effective Tax Rate
Effective Tax Rate - Income tax expense divided by income
Effective Tax Rate
Effective Tax Rate
before taxes.
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 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).
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 arrange-
ments.
Internal Capital Generation Rate - Rate at which a bank
Internal Capital Generation Rate
Internal Capital Generation Rate
Internal Capital Generation Rate
Internal Capital Generation Rate
generates equity capital, computed by dividing net income (loss)
less dividends by the average balance of stockholder’s equity for
a given accounting period.
76 POPULAR, INC. 2008 ANNUAL REPORT
N e t C h a r g e - O f f s - The amount of loans written-off as
N e t C h a r g e - O f f s
N e t C h a r g e - O f f s
N e t C h a r g e - O f f s
N e t C h a r g e - O f f s
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.
B a s i c
B a s i c
N e t I n c o m e P e r C o m m o n S h a r e
N e t I n c o m e P e r C o m m o n S h a r e
B a s i c - Net income
N e t I n c o m e P e r C o m m o n S h a r e - B a s i c
N e t I n c o m e P e r C o m m o n S h a r e
B a s i c
N e t I n c o m e P e r C o m m o n S h a r e
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
Non-Performing Assets
Non-Performing Assets - Includes loans on which the accrual
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
Options Adjustable Rate Mortgage
Options Adjustable Rate Mortgage - Is an adjustable rate
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. Four basic
payment options that exist are the minimum payment option,
interest-only payment, 30-year payment and 15-year payment.
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.
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.
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
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 a p i t a l
C a p i t a l - C ons ist s of com mon
T i e r 1 R i s k - B a s e d
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
77
earnings and capital reserves), qualifying noncumulative perpetual
preferred stock, senior perpetual preferred stock issued under the
TARP Capital Purchase Program, 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.
78 POPULAR, INC. 2008 ANNUAL REPORT
Statistical Summary 2004-2008
Statements of Condition
(In thousands)
Assets
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
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
Assets from discontinued operations
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
Liabilities from discontinued operations
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Preferred stock
Common stock
Surplus
Retained earnings (deficit)
Treasury stock - at cost
Accumulated other comprehensive (loss) income,
net of tax
2008
2007
2006
2005
2004
As of December 31,
$784,987
$818,825
$950,158
$906,397
$716,459
519,218
275,436
-
794,654
645,903
883,686
123,026
-
1,006,712
767,955
286,531
15,177
-
301,708
382,325
740,770
8,653
-
749,423
519,338
879,321
319
-
879,640
385,139
7,924,487
8,515,135
9,850,862
11,716,586
11,162,145
294,747
484,466
91,340
153,104
340,850
217,667
536,058
25,857,237
124,364
882,807
24,850,066
620,807
89,721
156,227
180,306
1,115,597
605,792
53,163
12,587
$38,882,769
$4,293,553
23,256,652
27,550,205
3,551,608
4,934
3,386,763
-
1,096,229
24,557
35,614,296
109
1,483,525
1,773,792
621,879
(374,488)
(207,515)
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
-
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
-
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
-
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
-
$44,411,437
$47,403,987
$48,623,668
$44,401,576
$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)
$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)
$3,958,392
18,679,613
22,638,005
$4,173,268
16,419,892
20,593,160
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)
6,436,853
3,139,639
10,180,710
125,000
821,491
-
41,296,853
102
186,875
1,680,096
278,840
1,129,793
(206,437)
(28,829)
3,268,364
$38,882,769
(46,812)
3,581,882
$44,411,437
(233,728)
3,620,306
$47,403,987
(176,000)
3,449,247
$48,623,668
35,454
3,104,621
$44,401,576
79
Statistical Summary 2004-2008
Statements of Operations
(In thousands, except per
common share information)
Interest Income:
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 profit (loss)
Gain on sale of loans and valuation adjustments
on loans held-for-sale
All other operating income
Operating Expenses:
Personnel costs
All other operating expenses
(Loss) income from continuing operations before income tax
Income tax expense
Net gain of minority interest
(Loss) income from continuing operations before
cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
(Loss) income from continuing operations
(Loss) income from discontinued operations, net of tax
Net (Loss) Income
Net (Loss) Income Applicable to Common Stock
Basic EPS before cumulative effect of accounting change:
From Continuing Operations*
From Discontinued operations*
T o t a l *
Diluted EPS before cumulative effect of accounting change:
From Continuing Operations*
From Discontinued Operations*
T o t a l *
Basic EPS after cumulative effect of accounting change:
From Continuing Operations*
From Discontinued operations*
T o t a l *
Diluted EPS after cumulative effect of accounting change:
For the year ended December 31,
2008
2007
2006
2005
2004
$1,868,462
17,982
343,568
44,111
2,274,123
994,919
1,279,204
991,384
$2,046,437
25,190
441,608
39,000
2,552,235
1,246,577
1,305,658
341,219
$1,888,320
29,626
508,579
28,714
2,455,239
1,200,508
1,254,731
187,556
$1,537,340
30,736
483,854
30,010
2,081,940
859,075
1,222,865
121,985
$1,196,986
25,660
413,492
25,963
1,662,101
543,267
1,118,834
133,366
287,820
964,439
1,067,175
1,100,880
985,468
69,716
43,645
100,869
37,197
22,120
36,258
66,512
30,051
15,254
(159)
6,018
710,595
1,117,794
608,465
728,263
1,336,728
(218,934)
461,534
-
(680,468)
-
(680,468)
(563,435)
($1,243,903)
($1,279,200)
($2.55)
($2.00)
($4.55)
($2.55)
($2.00)
($4.55)
($2.55)
($2.00)
($4.55)
60,046
675,583
1,838,134
620,760
924,702
1,545,462
292,672
90,164
-
202,508
-
202,508
(267,001)
($64,493)
($76,406)
$0.68
($0.95)
($0.27)
$0.68
($0.95)
($0.27)
$0.68
($0.95)
($0.27)
76,337
635,794
1,837,684
591,975
686,256
1,278,231
559,453
139,694
-
419,759
-
419,759
(62,083)
$357,676
$345,763
$1.46
($0.22)
$1.24
$1.46
($0.22)
$1.24
$1.46
($0.22)
$1.24
37,342
598,707
1,833,492
30,097
539,945
1,570,605
546,586
617,582
1,164,168
669,324
142,710
-
526,614
3,607
530,221
10,481
$540,702
$528,789
505,591
522,961
1,028,552
542,053
110,343
-
431,710
-
431,710
58,198
$489,908
$477,995
$1.93
$0.04
$1.97
$1.92
$0.04
$1.96
$1.94
$0.04
$1.98
$1.57
$0.22
$1.79
$1.57
$0.22
$1.79
$1.57
$0.22
$1.79
T o t a l *
From Continuing Operations*
From Discontinued Operations*
$1.57
$0.22
$1.79
$0.62
*The average common shares used in the computation of basic earnings (losses) per common share were 281,079,201 for 2008; 279,494,150 for 2007; 278,468,552 for 2006;
267,334,606 for 2005 and 266,302,105 for 2004. The average common shares used in the computation of diluted earnings (losses) per common share were 281,079,201 for
2008, 279,494,150 for 2007; 278,703,924 for 2006; 267,839,018 for 2005; and 266,674,856 for 2004.
($2.55)
($2.00)
($4.55)
$0.48
$0.68
($0.95)
($0.27)
$0.64
$1.46
($0.22)
$1.24
$0.64
Dividends Declared per Common Share
$1.93
$0.04
$1.97
$0.64
80 POPULAR, INC. 2008 ANNUAL REPORT
Statistical Summary 2004-2008
Average Balance Sheet and
Summary of Net Interest Income
On a Taxable Equivalent Basis*
(Dollars in thousands)
Assets
Interest earning assets:
Money market investments
U.S. Treasury securities
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations and
mortgage-backed securities
Other
Total investment securities
Trading account securities
Loans (net of unearned income)
Total interest earning assets/
Interest income
Total non-interest earning assets
Total assets from continuing
operations
Total assets from discontinued
operations
Total assets
Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Savings, NOW, money market and other
interest bearing demand accounts
Time deposits
Short-term borrowings
Notes payable
Subordinated notes
Total interest bearing liabilities/
Interest expense
Average
Balance
2008
Interest
Average
Rate
Average
Balance
2007
Interest
Average
Rate
$699,922
463,268
$18,790
21,934
2.68%
4.73
$513,704
498,232
$26,565
21,164
5.17%
4.25
4,793,935
243,709
254,952
2,411,171
266,306
8,189,632
664,907
16,760
114,810
14,952
412,165
47,909
26,471,616
1,888,786
5.08
6.57
4.76
5.61
5.03
7.21
7.14
6,294,489
310,632
4.93
185,035
12,546
6.78
2,575,941
273,558
9,827,255
148,620
14,085
507,047
652,636
40,408
25,380,548
2,068,078
5.77
5.15
5.16
6.19
8.15
36,026,077
3,417,397
39,443,474
1,480,543
$40,924,017
$2,367,650
6.57%
$2,642,098
7.26%
36,374,143
3,054,948
39,429,091
7,675,844
$47,104,935
$10,548,563
12,795,436
5,115,166
2,263,272
$177,729
522,394
168,070
126,726
1.68%
4.08
3.29
5.60
$10,126,956
11,398,715
8,315,502
1,041,410
$226,924
538,869
424,530
56,254
2.24%
4.73
5.11
5.40
30,722,437
994,919
3.24
30,882,583
1,246,577
4.04
Total non-interest bearing liabilities
4,966,820
35,689,257
1,876,465
37,565,722
3,358,295
$40,924,017
Total liabilities from continuing
operations
Total liabilities from discontinued
operations
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income on a taxable
equivalent basis
Cost of funding earning assets
Net interest margin
Effect of the taxable equivalent adjustment
Net interest income per books
4,825,029
35,707,612
7,535,897
43,243,509
3,861,426
$47,104,935
$1,372,731
$1,395,521
2.76%
3.81%
93,527
$1,279,204
3.43%
3.83%
89,863
$1,305,658
*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 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 accordance with the Corporation’s policy.
81
Average
Balance
2006
Interest
Average
Rate
Average
Balance
2005
Interest
Average
Rate
Average
Balance
2004
Interest
Average
Rate
$564,423
521,917
$31,382
22,930
5.56%
4.39
$797,166
551,328
$33,319
25,613
4.18%
4.65
$835,139
550,997
$25,660
26,600
3.07%
4.83
7,527,841
368,738
188,690
13,249
3,063,097
415,131
11,716,676
491,122
177,206
15,807
597,930
30,593
24,123,315
1,910,737
4.90
7.02
5.79
3.81
5.10
6.23
7.92
7,574,297
364,081
247,220
14,954
3,338,925
472,425
12,184,195
487,319
163,853
17,628
586,129
32,427
21,533,294
1,556,552
4.81
6.05
4.91
3.73
4.81
6.65
7.23
6,720,329
322,854
255,244
13,504
3,233,378
388,429
11,148,377
480,890
128,421
15,407
506,786
27,387
17,529,795
1,211,125
4.80
5.29
3.97
3.97
4.55
5.70
6.91
36,895,536
2,963,092
39,858,628
8,435,938
$48,294,566
$2,570,642
6.97% 35,001,974
2,772,410
$2,208,427
6.31%
37,774,384
8,587,945
$46,362,329
$1,770,958
5.90%
29,994,201
2,045,221
32,039,422
7,859,353
$39,898,775
$9,317,779
9,976,613
10,404,667
2,093,337
$157,431
422,663
508,174
112,240
1.69% $9,408,358
8,776,314
4.24
9,806,452
4.88
1,776,842
5.36
119,178
$125,585
305,228
330,254
89,861
8,147
1.33%
3.48
3.37
5.06
6.84
$8,373,541
7,117,062
8,289,723
954,488
125,000
$92,026
238,325
155,264
49,089
8,563
1.10%
3.35
1.87
5.14
6.85
31,792,396
1,200,508
3.78
29,887,144
859,075
2.87
24,859,814
543,267
2.19
4,626,272
36,418,668
8,134,625
44,553,293
3,741,273
$48,294,566
4,736,829
34,623,973
8,463,548
43,087,521
3,274,808
$46,362,329
4,519,131
29,378,945
7,616,693
36,995,638
2,903,137
$39,898,775
$1,370,134
$1,349,352
$1,227,691
3.25%
3.72%
2.45%
3.86%
1.81%
4.09%
115,403
$1,254,731
126,487
$1,222,865
108,857
$1,118,834
82 POPULAR, INC. 2008 ANNUAL REPORT
Statistical Summary 2007-2008
Quarterly Financial Data
(In thousands, except per
common share information)
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Net gain (loss) on sale and
valuation adjustment of
investment securities
Other non-interest income
Operating expenses
(Loss) income from continuing
operations before income tax
Income tax expense (benefit)
(Loss) income from continuing
2008
2007
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$541,542
252,676
288,866
388,823
$555,481
231,199
324,282
252,160
$565,258
234,961
330,297
189,165
$611,842
276,083
335,759
161,236
$651,407
314,091
337,316
121,742
$649,783
318,137
331,646
86,340
$632,366
308,427
323,939
75,700
$618,679
305,922
312,757
57,437
286
141,211
360,180
(9,132)
197,060
322,915
28,334
207,464
330,338
50,228
214,523
323,295
(11,973)
202,590
572,090
(776)
177,701
318,961
2,494
189,129
330,665
111,124
203,406
323,746
(318,640)
309,067
(62,865)
148,308
46,592
(12,581)
115,979
16,740
(165,899)
(15,434)
103,270
23,056
109,197
26,818
246,104
55,724
operations
(627,707)
(211,173)
59,173
99,239
(150,465)
80,214
82,379
190,380
(Loss) income from discontinued
operations, net of tax
Net (loss) income
Net (loss) income applicable
to common stock
(75,193)
($702,900)
(457,370)
($668,543)
(34,923)
$24,250
4,051
$103,290
(143,628)
($294,093)
(44,211)
$36,003
(7,429)
$74,950
(71,733)
$118,647
($717,987)
($679,772)
$18,247
$100,312
($297,071)
$33,024
$71,972
$115,669
(Losses) earnings per common share -
basic and diluted:
(Loss) income from
continuing operations
(Loss) income from
discontinued operations
Net (loss) income
Selected Average Balances
(In millions)
Total assets
Loans
Interest earning assets
Deposits
Interest bearing liabilities
Selected Ratios
Return on assets
Return on equity
($2.28)
($0.79)
$0.19
(0.27)
($2.55)
(1.63)
($2.42)
(0.13)
$0.06
$0.33
0.03
$0.36
($0.55)
$0.28
$0.29
$0.66
(0.51)
($1.06)
(0.16)
$0.12
(0.03)
$0.26
(0.25)
$0.41
$39,531
26,346
35,762
28,046
30,935
$40,634
26,443
35,793
27,255
30,270
$40,845
26,546
35,815
26,994
30,395
$42,705
26,554
36,739
27,557
31,292
$46,918
26,183
37,085
27,339
31,393
$47,057
25,650
36,466
25,646
30,985
$47,140
24,980
36,008
24,924
30,515
$47,310
24,689
35,923
24,333
30,628
(7.07%)
(123.03)
(6.55%)
(93.32)
0.24%
2.08
0.97%
12.83
(2.49%)
(32.32)
0.30%
3.52
0.64%
7.80
1.02%
12.91
Management's Report to
Stockholders
83
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, 2008. 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, 2008 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, 2008, as stated in their report dated March 2, 2009 which
appears herein.
Richard L. Carrión
Chairman of the Board
and Chief Executive Officer
Jorge A. Junquera
Senior Executive Vice President
and Chief Financial Officer
84 POPULAR, INC. 2008 ANNUAL REPORT
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 (loss) 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, 2008 and 2007, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on 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 adopted Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” and Statement of Financial Accounting Standards No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115”, which changed the manner in
which it accounts for the financial assets and liabilities in 2008. In addition, 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
85
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.
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
March 2, 2009
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires December 1, 2010
Stamp 2387119 of the P.R.
Society of Certified Public
Accountants has been affixed
to the file copy of this report.
86 POPULAR, INC. 2008 ANNUAL REPORT
Consolidated Statements of
Condition
(In thousands, except share information)
Assets
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
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge
Other securities available-for-sale
Investment securities held-to-maturity, at amortized cost (fair value 2008 - $290,134; 2007 - $486,139)
Other investment securities, at lower of cost or realizable value (fair value 2008 - $255,830;
2007 - $216,819)
Loans held-for-sale, at lower of cost or fair 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 (measured at fair value 2008 - $176,034; 2007 - $191,624)
Other assets (Note 24)
Goodwill
Other intangible assets
Assets from discontinued operations
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
Other liabilities
Liabilities from discontinued operations
Commitments and contingencies (See Notes 27, 29, 33, 36, 37)
Minority interest in consolidated subsidiaries
Stockholders’ Equity:
Preferred stock, 30,000,000 shares authorized;
24,410,000 issued and outstanding (2007 - 7,475,000) (aggregate liquidation
preference value of $1,521,875 in 2008; 2007 - $186,875)
Common stock, $6 par value; 470,000,000 shares authorized in both periods
presented; 295,632,080 shares issued (2007 - 293,651,398) and 282,004,713
shares outstanding (2007 - 280,029,215)
Surplus
Retained earnings (deficit)
Treasury stock-at cost, 13,627,367 shares (2007 - 13,622,183)
Accumulated other comprehensive loss,
net of tax of ($24,771) (2007 - ($15,438))
The accompanying notes are an integral part of the consolidated financial statements.
2008
$784,987
214,990
304,228
275,436
794,654
562,795
83,108
3,031,137
4,893,350
294,747
217,667
536,058
-
25,857,237
124,364
882,807
24,850,066
620,807
89,721
156,227
180,306
1,115,597
605,792
53,163
12,587
$38,882,769
$4,293,553
23,256,652
27,550,205
3,551,608
4,934
3,386,763
1,096,229
24,557
35,614,296
109
December 31,
2007
$818,825
737,815
145,871
123,026
1,006,712
673,958
93,997
4,249,295
4,265,840
484,466
216,584
1,889,546
149,610
28,053,956
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
1,483,525
186,875
1,773,792
621,879
(374,488)
(207,515)
(28,829)
3,268,364
$38,882,769
1,761,908
568,184
1,319,467
(207,740)
(46,812)
3,581,882
$44,411,437
Consolidated Statements of
Operations
(In thousands, except per share information)
Interest Income:
Loans
Money market investments
Investment securities
Trading securities
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 38)
Net gain 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
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 from continuing operations before income tax
Income tax expense
(Loss) income from continuing operations
Loss from discontinued operations, net of tax
Net (Loss) Income
Net (Loss) Income Applicable to Common Stock
(Losses) Earnings per Common Share - Basic and Diluted
(Loss) income from continuing operations
Loss from discontinued operations
Net (Loss) Income per Common Share
Dividends Declared per Common Share
The accompanying notes are an integral part of the consolidated financial statements.
87
Year ended December 31,
2007
2006
$2,046,437
25,190
441,608
39,000
2,552,235
765,794
424,530
56,253
1,246,577
1,305,658
341,219
964,439
196,072
365,611
100,869
37,197
60,046
113,900
1,838,134
485,178
135,582
620,760
109,344
117,082
48,489
119,523
58,092
109,909
15,603
10,478
113,987
-
211,750
10,445
1,545,462
292,672
90,164
202,508
(267,001)
($64,493)
($76,406)
$0.68
(0.95)
($0.27)
$0.64
$1,888,320
29,626
508,579
28,714
2,455,239
580,094
508,174
112,240
1,200,508
1,254,731
187,556
1,067,175
190,079
317,859
22,120
36,258
76,337
127,856
1,837,684
458,977
132,998
591,975
99,599
120,445
43,313
117,502
56,932
118,682
15,040
-
99,162
3,560
-
12,021
1,278,231
559,453
139,694
419,759
(62,083)
$357,676
$345,763
$1.46
(0.22)
$1.24
$0.64
2008
$1,868,462
17,982
343,568
44,111
2,274,123
700,122
168,070
126,727
994,919
1,279,204
991,384
287,820
206,957
416,163
69,716
43,645
6,018
87,475
1,117,794
485,720
122,745
608,465
120,456
111,478
52,799
121,145
51,386
62,731
14,450
13,491
156,338
-
12,480
11,509
1,336,728
(218,934)
461,534
(680,468)
(563,435)
($1,243,903)
($1,279,200)
($2.55)
(2.00)
($4.55)
$0.48
88 POPULAR, INC. 2008 ANNUAL REPORT
Consolidated Statements of Cash
Flows
(In thousands)
Cash Flows from Operating Activities:
Net (loss) income
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
Net (loss) income before 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
Losses from changes in fair value related to instruments measured at fair value
pursuant to SFAS No. 159
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
Fair value adjustment of other assets held for sale
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 decrease (increase) in other assets
Net (decrease) increase in interest payable
Deferred income taxes
Net increase in postretirement benefit obligation
Net (decrease) increase 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
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 investing activities
Cash Flows from Financing Activities:
Net (decrease) increase in deposits
Net decrease 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
Proceeds from issuance of preferred stock and associated warrants
Treasury stock acquired
Net cash used in 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
2008
($1,243,903)
-
(1,243,903)
73,088
1,010,375
12,480
17,445
11,509
52,174
(64,296)
198,880
(25,904)
83,056
19,884
52,495
120,789
(8,916)
1,099
(2,302,189)
(431,789)
1,492,870
1,754,100
59,459
86,073
(58,406)
379,726
3,405
(35,986)
2,501,421
1,257,518
212,058
(4,075,884)
(5,086,169)
(193,820)
2,491,732
5,277,873
192,588
2,445,510
49,489
(1,093,437)
2,426,491
(4,505)
-
(42,331)
(146,140)
60,058
166,683
2,680,196
(754,177)
(1,885,656)
(1,497,045)
(2,016,414)
1,028,098
(188,644)
17,712
1,324,935
(361)
(3,971,552)
-
(33,838)
818,825
$784,987
Year ended December 31,
2007
($64,493)
-
(64,493)
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
2006
$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
(638,568)
381,421
(160,712)
(29,320,286)
(112,108)
(254,930)
(20,863,367)
(66,026)
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
2,889,524
(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
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
1,789,662
(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
The accompanying notes are an integral part of the consolidated financial statements.
Note: The Consolidated Statements of Cash Flows for the year ended December 31, 2008, 2007 and 2006 include the cash flows from operating, investing and financing
activities associated with discontinued operations.
Consolidated Statements of
Changes in Stockholders’’’’’ Equity
(In thousands, except share information)
Preferred Stock:
Balance at beginning of year
Issuance of preferred stock - 2008 Series B
Issuance of preferred stock - 2008 Series C
Preferred stock discount - 2008 Series C,
net of amortization
Balance at end of period
Common Stock:
Balance at beginning of year
Common stock issued under
Dividend Reinvestment Plan
Issuance of common stock
Options exercised
Balance at end of year
Surplus:
Balance at beginning of year
Common stock issued under
Dividend Reinvestment Plan
Issuance cost of preferred stock
Issuance of common stock warrants
Issuance of common stock
Issuance cost of common stock
Stock options expense on unexercised options,
net of forfeitures
Options exercised
Transfer from retained earnings (deficit)
Balance at end of year
Retained Earnings (Deficit):
Balance at beginning of year
Net (loss) income
Cumulative effect of accounting change -
adoption of SFAS No. 159 in 2008
(2007 - SFAS No. 156 and EITF 06-5)
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Amortization of preferred stock discount - 2008 Series C
Transfer to surplus
Balance at end of year
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 Loss:
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
Disclosure of changes in number of shares:
Preferred Stock:
Balance at beginning of year (2003 Series A)
Shares issued - (2008 Series B)
Shares issued - (2008 Series C)
Balance at end of year
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
89
Year ended December 31,
2007
$186,875
-
-
-
186,875
1,753,146
8,702
-
60
1,761,908
526,856
11,466
-
-
-
-
1,713
149
28,000
568,184
1,594,144
(64,493)
8,667
(178,938)
(11,913)
-
(28,000)
1,319,467
(206,987)
(2,525)
1,772
(207,740)
(233,728)
186,916
-
(46,812)
$3,581,882
Year ended December 31,
2007
7,475,000
-
-
7,475,000
292,190,924
1,450,410
-
10,064
293,651,398
(13,622,183)
280,029,215
2006
$186,875
-
-
-
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
2006
7,475,000
-
-
7,475,000
289,407,190
858,905
1,885,380
39,449
292,190,924
(13,449,377)
278,741,547
2008
$186,875
400,000
935,000
(38,350)
1,483,525
1,761,908
11,884
-
-
1,773,792
568,184
5,828
(10,065)
38,833
-
-
1,099
-
18,000
621,879
1,319,467
(1,243,903)
(261,831)
(134,924)
(34,814)
(483)
(18,000)
(374,488)
(207,740)
(361)
586
(207,515)
(46,812)
17,983
-
(28,829)
$3,268,364
2008
7,475,000
16,000,000
935,000
24,410,000
293,651,398
1,980,682
-
-
295,632,080
(13,627,367)
282,004,713
The accompanying notes are an integral part of the consolidated financial statements.
90 POPULAR, INC. 2008 ANNUAL REPORT
Consolidated Statements of
Comprehensive (Loss) Income
(In thousands)
Net (loss) income
Other comprehensive (loss) income, 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 (loss) income
Unrealized net losses on cash flow hedges
Reclassification adjustment for losses included in net (loss) income
Cumulative effect of accounting change
Income tax benefit (expense)
Total other comprehensive income (loss), net of tax
Year ended December 31,
2008
2007
2006
($1,243,903)
($64,493)
$357,676
(4,480)
(209,070)
237,837
(14,955)
(3,522)
2,840
-
8,650
9,333
17,983
2,113
18,121
239,390
(55)
(4,782)
1,077
(243)
255,621
(68,705)
186,916
(386)
(1,539)
(12,194)
(4,359)
(1,573)
1,839
-
(18,212)
335
(17,877)
Comprehensive (loss) income, net of tax
($1,225,920)
$122,423
$339,799
Tax effects allocated to each component of other comprehensive income (loss):
(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 (loss) income
Unrealized net losses on cash flow hedges
Reclassification adjustment for losses included in net (loss) income
Income tax benefit (expense)
Disclosure of accumulated other comprehensive loss:
(In thousands)
Foreign currency translation adjustment
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
Accumulated other comprehensive loss
The accompanying notes are an integral part of the consolidated financial statements.
Year ended December 31,
2008
$79,533
(71,934)
2,266
579
(1,111)
$9,333
2007
($6,926)
(63,104)
8
1,723
(406)
($68,705)
2006
$600
2,747
(2,898)
630
(744)
$335
2008
($39,068)
Year ended December 31,
2007
2006
($34,588)
($36,701)
-
-
-
-
-
(260,209)
99,641
(160,568)
249,974
(75,618)
174,356
(4,297)
748
(3,549)
-
($28,829)
-
-
-
-
-
(51,139)
20,108
(31,031)
27,092
(5,950)
21,142
(3,615)
1,280
(2,335)
-
(3,893)
1,518
3,893
(1,518)
-
(69,260)
27,034
(42,226)
(212,243)
57,146
(155,097)
90
(37)
53
243
($46,812)
($233,728)
Notes to Consolidated Financial
Statements
91
Note 1 - Nature of operations and summary of significant
accounting policies ............................................... 92
Note 2 - Discontinued operations ...................................... 106
Note 3 - Restructuring plans ............................................. 108
Note 4 - Restrictions on cash and due from banks and
highly liquid securities ....................................... 110
Note 5 - Securities purchased under agreements to resell ... 110
Note 6 - Investment securities available-for-sale ................. 111
Note 7 - Investment securities held-to-maturity ................. 114
Note 8 - Pledged assets ...................................................... 115
Note 9 - Loans and allowance for loan losses ...................... 116
Note 10 - Related party transactions ................................... 117
Note 11 - Premises and equipment ...................................... 117
Note 12 - Goodwill and other intangible assets ................... 118
Note 13 -Deposits ............................................................... 120
Note 14 - Federal funds purchased and assets sold
under agreements to repurchase ............................ 121
Note 15 -Other short-term borrowings ............................... 122
Note 16 - Notes payable ....................................................... 122
Note 17 - Unused lines of credit and other funding sources 123
Note 18 -Trust preferred securities .................................... 123
Note 19 - (Loss) earnings per common share ....................... 124
Note 20 - Stockholders’ equity ............................................ 124
Note 21 - Regulatory capital requirements ........................... 126
Note 22 - Servicing assets ................................................... 127
Note 23 -Retained interests on transfers of financial assets 130
Note 24 - Other assets ......................................................... 134
Note 25 -Employee benefits ................................................ 134
Note 26 - Stock-based compensation .................................. 139
Note 27 - Rental expense and commitments ......................... 141
Note 28 -Income tax ........................................................... 141
Note 29 - Off-balance sheet activities and
concentration of credit risk ................................. 145
Note 30 - Fair value option ................................................. 146
Note 31 - Fair value measurements ..................................... 147
Note 32 -Disclosures about fair value of financial
instruments .......................................................... 151
Note 33 - Derivative instruments and hedging activities ... 152
Note 34 - Supplemental disclosure on the consolidated
statements of cash flows ...................................... 155
Note 35 - Segment reporting ............................................. 155
Note 36 - Contingent liabilities .......................................... 159
Note 37 - Guarantees .......................................................... 159
Note 38 - Other service fees ............................................... 161
Note 39 - Popular, Inc. (Holding Company only) financial
information ........................................................... 161
Note 40 - Condensed consolidating financial information
of guarantor and issuers of registered guaranteed
securities ............................................................. 163
92 POPULAR, INC. 2008 ANNUAL REPORT
Note 1 - Nature of Operations and Summary of
Significant Accounting Policies:
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
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.
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 markets deposit accounts under its name for
the benefit of BPNA and offers loan customers the option of being
referred to a trusted consumer lending partner for loan products.
PFH, the Corporation’s consumer and mortgage lending
subsidiary in the U.S., carried a maturing loan portfolio and
operated a mortgage loan servicing unit during 2008. The PFH
operations were discontinued in the later part of 2008. Disclosures
on the discontinued operations as well as recent restructuring
plans in the BPNA and E-LOAN subsidiaries are included in Notes
2 and 3 of these consolidated financial statements. 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 35 to the consolidated
financial statements presents information about the Corporation’s
business segments.
Business combinations
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. In 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 million in deposits and $220 million in loans
as of acquisition date. The purchase price paid was approximately
$123.5 million. Also, in 2007, Popular Securities, a subsidiary of
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
$1.2 billion in assets under its management (thus, are not included
in the Corporation’s consolidated financial statements). As of
December 31, 2008, there is approximately $104 million in
goodwill and $25 million in other intangible assets related to
these 2007 acquisitions that were accounted as business
combinations. The latter consisted primarily of core deposit
intangibles.
There were no significant business combinations in 2008.
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 would also
consolidate 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. These
investments are included in other assets and the Corporation’s
proportionate share of income or loss is included in other operating
income. Those investments 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
93
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
in the past 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 the first quarter of 2006,
the Corporation completed the second phase of 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 financial results
for the month of December 2005 of 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 an income before tax of $3.6
million, excluding the impact of $6.2 million related to the
discontinued operations (before tax). 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.
Discontinued operations
Components of the Corporation that have been or will be disposed
of by sale, where the Corporation does not have a significant
continuing involvement in the operations after the disposal, are
accounted for as discontinued operations.
The financial results of Popular Financial Holdings are reported
as discontinued operations in the consolidated statements of
operations for all periods presented and in the consolidated
statement of condition for the year ended December 31, 2008.
Prior to the discontinuance of the business, PFH was considered
a reportable segment. Refer to Note 2 to the consolidated financial
statements for additional information on PFH’s discontinued
operations.
The results of operations of the discontinued operations
exclude allocations of corporate overhead. The interest expense
allocated to the discontinued operations is based on legal entity,
which considers a transfer pricing allocation for intercompany
funding.
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.
Fair Value Measurements
Effective January 1, 2008, the Corporation determines the fair
values of its financial instruments based on the fair value framework
established in SFAS No. 157 “Fair Value Measurements,” which
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value. Fair value is defined under SFAS No. 157 as the exchange
price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between
market participants on the measurement date. The standard
describes three levels of inputs that may be used to measure fair
value which 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.
The fair value hierarchy ranks the quality and reliability of the
information used to determine fair values. The Corporation elected
to delay the adoption of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair
value on a nonrecurring basis until January 1, 2009. Refer to Note
31 to these consolidated financial statements for the SFAS No.
157 disclosures required for the year ended December 31, 2008.
The adoption of SFAS No. 157 in January 1, 2008 did not have an
impact in beginning retained earnings.
In October 2008, the FASB issued FASB Staff Position No.
FAS 157-3, “Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active” (“FSP 157-3”).
FSP 157-3 clarifies the application of SFAS No. 157 in a market
that is not active. The FSP is intended to address the following
application issues: (a) how the reporting entity’s own assumptions
(that is, expected cash flows and appropriately risk-adjusted
discount rates) should be considered when measuring fair value
when relevant observable inputs do not exist; (b) how available
observable inputs in a market that is not active should be
considered when measuring fair value; and (c) how the use of
94 POPULAR, INC. 2008 ANNUAL REPORT
market quotes (for example, broker quotes or pricing services for
the same or similar financial assets) should be considered when
assessing the relevance of observable and unobservable inputs
available to measure fair value. FSP 157-3 is effective on issuance,
including prior periods for which financial statements have not
been issued. The Corporation adopted FSP 157-3 for the quarter
ended September 30, 2008 and the effect of adoption on the
consolidated financial statements was not material.
Fair value option
In January 2008, the Corporation adopted SFAS No. 159 “The
Fair Value Option for Financial Assets and Liabilities - Including
an Amendment of FASB Statement No. 115”, 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 beginning retained earnings. Subsequent
changes in fair value are recognized in earnings. After the initial
adoption, the election is made at the acquisition of a financial
asset, financial liability, or a firm commitment and it may not be
revoked.
Refer to Note 30 to these consolidated financial statements for
the impact of the initial adoption of SFAS No. 159 to beginning
retained earnings as of January 1, 2008 and additional disclosures
as of December 31, 2008.
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 non-interest income.
• Debt and equity securities not classified as either securities
held-to-maturity or trading securities, and which have a
readily available fair value, are classified as securities
available-for-sale and reported at fair value, with unrealized
gains and losses 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. Declines in the value of debt and equity
securities that are considered other than temporary reduce
the value of the asset, and the estimated loss is recorded in
non-interest income. The other-than-temporary impairment
analysis for both debt and equity securities is performed on
a quarterly basis.
• 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, and
are subject to impairment testing if applicable. 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
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. The Corporation’s policy is not to offset the fair value
amounts recognized for multiple derivative instruments executed
with the same counterparty under a master netting arrangement
nor to offset the fair value amounts recognized for the right to
95
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.
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. Hedge accounting
is discontinued when the derivative instrument is not highly
effective as a hedge, a derivative expires, is sold, terminated,
when it is unlikely that a forecasted transaction will occur or
when it is determined that is no longer appropriate. When hedge
accounting is discontinued the derivative continues to be carried
at fair value with changes in fair value included in earnings.
For non-exchange traded contracts, fair value is based on dealer
quotes, pricing models, discounted cash flow methodologies, or
similar techniques for which the determination of fair value may
require significant management judgment or estimation.
Valuations of derivative assets and liabilities reflect the value
of the instrument including the values associated with non-
performance risk. With the issuance of SFAS No. 157, these
values must also take into account the Corporation’s own credit
standing, thus including in the valuation of the derivative
instrument the value of the net credit differential between the
counterparties to the derivative contract. Effective 2008, the
Corporation updated its methodology to include the impact of
the counterparty and its own credit standing in the valuation of
derivatives.
The Corporation obtains collateral in connection with its
derivative activities. Required collateral levels vary depending
on the credit risk rating and the type of counterparty. Generally,
the Corporation accepts collateral in the form of cash, U.S.
Treasury securities and other marketable securities. The
Corporation also pledges collateral on its own derivative positions
which can be applied against derivative liabilities.
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 are stated at the lower of cost or fair value,
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
discounted cash flow analyses which utilize 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
fair 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.
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
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.
Subsequent to the adoption of SFAS 159, on January 1, 2008,
the Corporation elected the fair value option for certain loans.
Fair values for these loans were based on market prices, where
96 POPULAR, INC. 2008 ANNUAL REPORT
available, or discounted cash flows using market-based credit
spreads of comparable debt instruments or credit derivatives of
the specific borrower or comparable borrowers. Results of
discounted cash flow calculations may be adjusted, as appropriate,
to reflect other market conditions or the perceived credit risk of
the borrower. Refer to Note 30 to the consolidated financial
statements for information on financial instruments measured at
fair value pursuant to SFAS No. 159.
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. Unsecured commercial loans are charged-off
at 180 days past due. The impaired portions on secured
commercial and construction loans are charged-off at 365 days
past due. 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. 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
lease 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 allowance for loan losses excludes loans measured at fair
value in accordance with SFAS No. 159 as fair value adjustments
related to these financial instruments already reflect a credit
component.
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 borrowers with
outstanding debt of $250,000 or more and with interest and /or
principal 90 days or more past due. Also, specific commercial
borrowers with outstanding debt of $500,000 and over 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. Although SFAS No. 114 excludes large
groups of smaller balance homogeneous loans that are collectively
evaluated for impairment (e.g. mortgage loans), it specifically
requires that loan modifications considered trouble debt
restructures be analyzed under its provisions. A specific allowance
for loan impairment is recognized to the extent that the carrying
value of an impaired 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
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
collectability 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
97
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
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. For information on PFH’s securitizations at December 31,
2007, refer to Note 23 to the consolidated financial statements.
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
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.
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
98 POPULAR, INC. 2008 ANNUAL REPORT
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 results of operations 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.
Residual interests
The Corporation sells residential mortgage loans to QSPEs, which
in turn issue asset-backed securities to investors. The Corporation
may retain 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. The residual interests derived from
securitizations performed by PFH, which were all sold in 2008,
were measured at fair value at December 31, 2007.
Fair value estimates of the residual interests were 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 included market discount
rates, and anticipated prepayment, delinquency and loss rates on
the underlying assets. The residual interests were valued using
forward yield curves for interest rate projections. The valuations
were performed by using a third-party model with assumptions
provided by the Corporation.
The Corporation recognized 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
became a component of the residuals basis. On a regular basis,
estimated cash flows were updated based on revised fair value
estimates of the residual, and as such accretable yields were
recalculated to reflect the change in the underlying cash flow.
Adjustments to the yield were accounted for prospectively as a
change in estimate, with the amount of periodic accretion adjusted
over the remaining life of the beneficial interest.
On a quarterly basis, management performed a fair value analysis
of the residual interests that were classified as available-for-sale
and evaluated whether any unfavorable change in fair value was
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”,
as amended by FSP EITF No. 99-20-1 “Amendment to the
Impairment Guidance of EITF 99-20”, to evaluate when a decline
in fair value of a beneficial interest should be considered an other-
than-temporary impairment. Whenever the current fair value of a
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, 2007 and 2008, all declines in fair value in residual interests
99
classified as available-for-sale were considered other-than-
temporary.
For residual interests classified as trading securities, the fair
value determinations were 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
investment less cash received to date less other-than-temporary
impairments recognized to date plus the yield accreted to date.
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, 2008, 2007 and 2006 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.
Restructuring costs
A liability for a cost associated with an exit or disposal activity
is 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.
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
100 POPULAR, INC. 2008 ANNUAL REPORT
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
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.
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 “Impairment
losses 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
$0.9 million cumulative effect adjustment to beginning retained
earnings (reduction of capital) for the existing bank-owned life
insurance arrangement.
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 agreements to resell. However, the counterparties
to such agreements maintain effective control over such securities,
and accordingly those securities 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.
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.
The Corporation may require counterparties to deposit
additional collateral or return collateral pledged, when appropriate.
Software
Capitalized software is stated at cost, less accumulated
amortization. Capitalized software includes purchased software
and capitalizable application development costs associated with
internally-developed software. Amortization, computed on a
straight-line method, is charged to operations over the estimated
useful life of the software. Capitalized software is included in
“Other assets” in the consolidated statement of condition.
101
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 37 to the consolidated
financial statements for further disclosures.
Accounting considerations related to the cumulative preferred
stock and warrant to purchase shares of common stock
The value of the warrant to purchase shares of common stock is
determined by allocating the proceeds received by the Corporation
based on the relative fair values of the instruments issued (preferred
stock and warrant). The transaction is recorded when it is
consummated and proceeds are received. Refer to Note 20 to the
consolidated financial statements for information on the warrant
issued in 2008.
Warrants issued are included in the calculation of average
diluted shares in determining earnings (losses) per common share
using the treasury stock method.
The discount on increasing rate preferred stock is amortized
over the period preceding commencement of the perpetual dividend
by charging an imputed dividend cost against retained earnings.
The amortization of the discount on the preferred shares also
reduces the income (or increases the losses) applicable to common
stockholders in the computation of basic and diluted earnings
per share.
Income (losses) applicable to common stockholders considers
the deduction of both the dividends declared in the period on
cumulative preferred stock (whether or not paid) and the dividends
accumulated for the period on cumulative preferred stock (whether
or not earned) from income (loss) from continuing operations and
also from net income (loss). Therefore, the dividends on
cumulative preferred stock impact earnings (losses) per common
share, regardless of whether or not they are declared.
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
102 POPULAR, INC. 2008 ANNUAL REPORT
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 2008 and 2007, the foreign currency translation
adjustment from operations in the Dominican Republic were
reported in accumulated other comprehensive income (loss). For
the year ended 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 $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) income.
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.
Refer to the disclosure of accumulated other comprehensive
income (loss) included in the accompanying consolidated
statements of comprehensive income (loss) for the outstanding
balances of unfavorable foreign currency translation adjustments
at December 31, 2008, 2007 and 2006.
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.
SFAS No. 109 requires a reduction of the carrying amounts of
deferred tax assets by a valuation allowance if, based on the available
evidence, it is more likely than not (defined by SFAS No. 109 as
a likelihood of more than 50 percent) that such assets will not be
realized. Accordingly, the need to establish valuation allowances
for deferred tax assets are assessed periodically by the Corporation
based on the SFAS No. 109 more-likely-than-not realization
threshold criterion. In the assessment for a valuation allowance,
appropriate consideration is given to all positive and negative
evidence related to the realization of the deferred tax assets. This
assessment considers, among other matters, all sources of taxable
income available to realize the deferred tax asset, including the
future reversal of existing temporary differences, the future taxable
income exclusive of reversing temporary differences and
carryforwards, taxable income in carryback years and tax-planning
strategies. In making such assessments, significant weight is
given to evidence that can be objectively verified.
The valuation of deferred tax assets requires judgment in
assessing the likely future tax consequences of events that have
been recognized in the Corporation’s financial statements or tax
returns and future profitability. The Corporation’s accounting
for deferred tax consequences represents management’s best
estimate of those future events.
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
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 28 to the consolidated
financial statements for further information on the impact of FIN
48.
Income tax expense or benefit for the year is allocated among
continuing operations, discontinued operations, and other
comprehensive income, as applicable. The amount allocated to
continuing operations is the tax effect of the pretax income or
loss from continuing operations that occurred during the year,
plus or minus income tax effects of (a) changes in circumstances
that cause a change in judgment about the realization of deferred
tax assets in future years, (b) changes in tax laws or rates, (c)
changes in tax status, and (d) tax-deductible dividends paid to
shareholders, subject to certain exceptions.
103
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.
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 (loss)
Comprehensive income (loss) 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 (loss) is included in
separate consolidated statements of comprehensive income (loss).
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, restricted
stock and warrants on common 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 2007 and 2006
consolidated financial statements to conform with the 2008
presentation.
Recently issued accounting pronouncements and
interpretations
SFAS No. 141-R “Statement of Financial Accounting Standards No.
141(R), Business Combinations (a revision of SFAS No. 141)”
SFAS No. 141(R), issued in December 2007, 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
No. 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 No. 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 No. 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
104 POPULAR, INC. 2008 ANNUAL REPORT
will evaluate the impact of SFAS No. 141(R) on business
combinations consumated in 2009 and beyond.
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 No. 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 is evaluating the effects, if any, that the
adoption of this statement will have on its consolidated financial
statements. The effects of adopting this standard, if any, are not
expected to be significant.
SFAS No. 161 “Disclosures about Derivative Instruments and Hedging
Activities”
In March 2008, the FASB issued SFAS No. 161, an amendment of
SFAS No. 133. The standard requires enhanced disclosures about
derivative instruments and hedged items that are accounted for
under SFAS No. 133 and related interpretations. The standard
will be effective for all of the Corporation’s interim and annual
financial statements for periods beginning after November 15,
2008, with early adoption permitted. The standard expands the
disclosure requirements for derivatives and hedged items and has
no impact on how the Corporation accounts for these instruments.
Management will be evaluating the enhanced disclosure
requirements effective for the first quarter of 2009.
SFAS No. 162 “The Hierarchy of Generally Accepted Accounting
Principles”
SFAS No. 162, issued by the FASB in May 2008, identifies the
sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements
that are presented in conformity with generally accepted
accounting principles in the United States. This statement is
effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section
411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” Management does not expect
SFAS No. 162 to have a material impact on the Corporation’s
consolidated financial statements. The Board does not expect
that this statement will result in a change in current accounting
practice. However, transition provisions have been provided in
the unusual circumstance that the application of the provisions of
this statement results in a change in accounting practice.
FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions”
The objective of FSP FAS 140-3, issued by the FASB in February
2008, 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 FAS 140-3 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 Corporation adopted FSP FAS 140-3 effective on January
1, 2009. The impact of this FSP is not expected to be material.
FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful
Life of Intangible Assets”
FSP FAS 142-3, issued by the FASB in April 2008, amends the
factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142
“Goodwill and Other Intangible Assets”. In developing these
assumptions, an entity should consider its own historical
experience in renewing or extending similar arrangements
adjusted for entity’s specific factors or, in the absence of that
experience, the assumptions that market participants would use
about renewals or extensions adjusted for the entity specific factors.
105
FSP FAS 142-3 shall be applied prospectively to intangible
assets acquired after the effective date. This FSP was adopted by
the Corporation on January 1, 2009. The Corporation will be
evaluating the potential impact of adopting this FSP to prospective
transactions.
FSP No. FAS 132(R)-1“ Employers’ Disclosures about Postretirement
Benefit Plan Assets”
FSP No. FAS 132(R)-1 applies to employers who are subject to the
disclosure requirements of FAS 132(R), and is effective for fiscal
years ending after December 15, 2009. Early application is
permitted. Upon initial application, the provisions of this FSP
are not required for earlier periods that are presented for
comparative periods. The FSP requires the following additional
disclosures: (a) the investment allocation decision making
process, including the factors that are pertinent to an
understanding of investment policies and strategies, (b) the fair
value of each major category of plan assets, disclosed separately
for pension plans and other postretirement benefit plans, (c) the
inputs and valuation techniques used to measure the fair value of
plan assets, including the level within the fair value hierarchy in
which the fair value measurements in their entirety fall, and (d)
significant concentrations of risk within plan assets. Additional
detailed information is required for each category above. The
Corporation will apply the new disclosure requirements
commencing with the December 31, 2009 financial statements.
This FSP impacts disclosures only and will not have an effect on
the Corporation’s consolidated statements of condition or
operations.
FSP No. EITF 03-6-1 “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities”
FSP No. EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (“EPS”) under the
two-class method described in paragraphs 60 and 61 of FASB
Statement No. 128, Earnings per Share. Unvested share-based
payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of EPS pursuant
to the two-class method. This FSP shall be effective for financial
statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period
EPS data presented shall be adjusted retrospectively (including
interim financial statements, summaries of earnings, and selected
financial data) to conform with the provisions of this FSP. Early
application is not permitted. This FSP will not have an impact on
the Corporation’s EPS computation upon adoption.
EITF Issue No. 07-5 “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock”
In June 2008, the EITF reached consensus on Issue No. 07-5.
EITF Issue No. 07-5 provides guidance about whether an
instrument (such as outstanding common stock warrants) should
be classified as equity and not marked to market for accounting
purposes. EITF Issue No. 07-5 is effective for financial statements
for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The guidance in this issue shall
be applied to outstanding instruments as of the beginning of the
fiscal year in which this issue is initially applied. Adoption of
EITF Issue No. 07-5 was evaluated by the Corporation in
accounting for the warrant associated to a preferred stock issuance
in December 2008. Based on management’s analysis of EITF Issue
07-5 and other accounting guidance, the warrant was classified
as an equity instrument, and adoption of EITF Issue 07-5 will not
have an effect at adoption. Refer to Note 20 to the consolidated
financial statements for a description of the warrant issued in
2008.
EITF 08-6 “Equity Method Investment Accounting Considerations”
EITF 08-6 clarifies the accounting for certain transactions and
impairment considerations involving equity method investments.
This EITF applies to all investments accounted for under the
equity method. This issue is effective for fiscal years beginning
on or after December 15, 2008. Early adoption is not permitted.
EITF 08-6 provides guidance on (1) how the initial carrying
value of an equity method investment should be determined, (2)
how an impairment assessment of an underlying indefinite-lived
intangible asset of an equity method investment should be
performed, (3) how an equity method investee’s issuance of shares
should be accounted for, and (4) how to account for a change in an
investment from the equity method to the cost method.
Management is evaluating the impact that the adoption of EITF
08-6 could have on the Corporation’s financial condition or results
of operations.
EITF 08-7 “Accounting for Defensive Intangible Assets”
EITF 08-7 clarifies how to account for defensive intangible assets
subsequent to initial measurement. EITF 08-7 applies to acquired
intangible assets in situations in which an entity does not intend
to actively use the asset but intends to hold (lock up) the asset to
prevent others from obtaining access to the asset (a defensive
intangible asset), except for intangible assets that are used in
research and development activities. A defensive intangible asset
should be accounted for as a separate unit of accounting. A
defensive intangible asset shall be assigned a useful life in
accordance with paragraph 11 of SFAS. No 142. EITF 08-7 is
effective for intangible assets acquired on or after the beginning
of the first annual reporting period beginning on or after December
106 POPULAR, INC. 2008 ANNUAL REPORT
15, 2008. Management will be evaluating the impact of adopting
this EITF for future acquisitions commencing in January 2009.
Note 2 - Discontinued operations:
During the third and fourth quarters of 2008, the Corporation
executed a series of significant asset sale transactions and a
restructuring plan that led to the discontinuance of the
Corporation’s PFH operations, which prior to September 30,
2008, were defined as a reportable segment for managerial
reporting. The discontinuance included the sale of a substantial
portion of PFH’s loan portfolio, servicing related assets, residual
interests and other real estate assets. Also, the discontinuance
included exiting the loan servicing functions related to portfolios
from non-affiliated parties. For financial reporting purposes, the
results of the discontinued operations of PFH are presented as
“Assets / Liabilities from discontinued operations” in the
consolidated statement of condition and “Loss from discontinued
operations, net of tax” in the consolidated statement of operations.
Prior periods presented in the consolidated statement of
operations, as well as note disclosures covering income and
expense amounts included in the accompanying notes to the
consolidated financial statements, were retrospectively adjusted
for comparative purposes. The consolidated statement of
condition and related amounts in the notes to the consolidated
financial statements for the year ended December 31, 2007 do not
reflect the reclassification of PFH’s assets / liabilities to
discontinued operations.
Total assets from PFH’s discontinued operations amounted to
$13 million at December 31, 2008 and are classified as “Assets
from discontinued operations” in the consolidated statement of
condition. PFH assets approximated $3.9 billion at December
31, 2007 and $8.4 billion at December 31, 2006.
Assets and liabilities of the PFH discontinued operations at
December 31, 2008 are detailed in the table below. These assets
are mostly held-for-sale.
($ in millions)
December 31, 2008
Loans held-for-sale at lower of
cost or fair value
Loans measured pursuant to
SFAS No. 159
Others
Total assets
Other liabilities
Total liabilities
Net liabilities
$2.3
4.9
5.4
$12.6
$24.6
$24.6
$12.0
The Corporation reported a net loss for the discontinued
operations of $563.4 million for the year ended December 31,
2008, compared with a net loss of $267.0 million for the previous
year. The loss included write-downs of assets held-for-sale to fair
value, net losses on the sale of loans, residual interests and other
assets, restructuring charges and an impact in income taxes
related to the recording of a valuation allowance on deferred tax
assets of $209.0 million.
The following table provides financial information for the
discontinued operations for the year ended December 31, 2008
and 2007.
($ in millions)
Net interest income
Provision for loan losses
Non-interest loss, including fair
value adjustments on loans and MSRs
Lower of cost or market adjustments on
reclassification of loans to held-for-sale
prior to recharacterization
Gain upon completion of recharacterization
Operating expenses, including reductions
in value of servicing advances and other
real estate, and restructuring costs
Loss on disposition during the period (1)
Pre-tax loss from discontinued operations
Income tax expense (benefit)
2008
$30.8
19.0
2007
$143.7
221.4
(266.9)
(89.3)
-
-
(506.2)
416.1
213.5
(79.9)
($548.5)
14.9
159.1
-
($416.2)
(149.2)
($563.4)
Loss from discontinued operations, net of tax
($267.0)
(1) Loss on disposition includes the loss associated to the sale of manufactured hous-
ing loans in September 2008, including lower of cost or market adjustments at reclas-
sification from loans held-in-portfolio to loans held-for-sale. Also, it includes the impact
of fair value adjustments and other losses incurred during the fourth quarter of 2008
specifically related to the sale of loans, residual interests and servicing related assets to
the third-party buyer in November 2008. These events led the Corporation to classify
PFH’s operations as discontinued operations.
In 2007, PFH began downsizing its operations and shutting
down certain loan origination channels, which included among
others the wholesale subprime mortgage origination, wholesale
broker, retail and call center business units. PFH began 2008
with a significantly reduced asset base due to shutting down
those origination channels and the recharacterization, in December
2007, of certain on-balance sheet securitizations as sales that
involved approximately $3.2 billion in unpaid principal balance
(“UPB”) of loans. This recharacterization transaction is discussed
in Note 23 to these consolidated financial statements.
In March 2008, the Corporation sold approximately $1.4 billion
of consumer and mortgage loans that were originated through
Equity One’s (a subsidiary of PFH) consumer branch network and
recognized a gain upon sale of approximately $54.5 million. The
loan portfolio buyer retained certain branch locations. Equity One
107
consumer services branches principally dedicated to direct
subprime loan origination, consumer finance and mortgage
servicing.
The following table details the expenses recorded by the
Corporation that were associated with this particular restructuring
plan.
(In millions)
Personnel costs
Net occupancy expenses
Equipment expenses
Professional fees
Other operating expenses
Total restructuring costs
Impairment losses on long-lived assets
Goodwill impairment losses
Total
(a) Severance, retention bonuses and other benefits
(b) Lease terminations
(c) Outplacement and service contract terminations
(d) Software and leasehold improvements
(e) Attributable to business exited at PFH
December 31,
2007
2006
$7.8 (a)
4.5 (b)
0.3
1.8 (c)
0.3
$14.7
-
-
$14.7
-
-
-
-
-
-
$7.2 (d)
14.2 (e)
$21.4
At December 31, 2007, the accrual for restructuring costs
associated with the PFH Restructuring and Integration Plan
amounted to $3.2 million. There was no accrual outstanding at
December 31, 2008 associated with this plan.
PFH Branch Network Restructuring Plan
Given the 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 was difficult to
generate an adequate return on the capital invested at Equity
One’s consumer service branches. As a result, the Corporation
closed Equity One’s consumer service branches during the first
quarter of 2008. This strategic move involved the implementation
of additional restructuring efforts under the PFH Branch Network
Restructuring Plan.
closed all consumer service branches not assumed by the buyer,
thus exiting PFH’s consumer finance business in early 2008.
In September 2008, the Corporation sold PFH’s portfolio of
manufactured housing loans with a UPB of approximately $309
million for cash proceeds of $198 million. The Corporation
recognized a loss on disposition of $53.5 million.
During the third quarter of 2008, the Corporation also entered
into an agreement to sell substantially all of PFH’s outstanding
loan portfolio, residual interests and servicing related assets. This
transaction, which consummated in November 2008, involved
the sale of approximately $748 million in assets, which for the
most part were measured at fair value. The Corporation recognized
a loss of approximately $26.4 million in the fourth quarter of 2008
related to this disposition. Proceeds from this sale amounted to
$731 million. During the third quarter of 2008, the Corporation
recognized fair value adjustments on these assets held-for-sale of
approximately $360 million.
Also, in conjunction with the November 2008 sale, the
Corporation sold the implied residual interests associated to
certain on-balance sheet securitizations, thus transferring all rights
and obligations to the third party with no continuing involvement
whatsoever of Popular with the transferred assets. The Corporation
derecognized the secured debt related to these securitizations of
approximately $164 million, as well as the loans that served as
collateral for approximately $158 million. The on-balance sheet
secured debt as well as the related loans were measured at fair value
pursuant to SFAS No. 159.
As part of the actions to exit PFH’s business, the Corporation
executed two restructuring plans during 2008 related to the PFH
operations: the “PFH Branch Network Restructuring Plan” and
the “PFH Discontinuance Restructuring Plan”. Also, in 2007, it
had executed the “PFH Restructuring and Integration Plan”. The
following section provides information on these restructuring
plans. The restructuring costs are included in the line item “Loss
from discontinued operations, net of tax” in the consolidated
statements of operations for 2008 and 2007.
PFH Restructuring and Integration Plan
In January 2007, the Corporation adopted a Restructuring and
Integration Plan at PFH, the holding company of Equity One (the
“PFH Restructuring and Integration Plan”). This particular 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
108 POPULAR, INC. 2008 ANNUAL REPORT
The following table details the expenses recorded by the
Corporation that were associated with this particular restructuring
plan.
The following table presents the activity in the reserve for
restructuring costs associated with the PFH Discontinuance
Restructuring Plan.
(In millions)
Personnel costs
Net occupancy expenses
Equipment expenses
Communications
Other operating expenses
Total restructuring costs
Impairment losses on long-lived assets
(a) Severance, retention bonuses and other benefits
(b) Lease terminations
(c) Leasehold improvements, furniture and equipment
December 31,
2008
$8.9 (a)
6.7 (b)
0.7
0.2
0.9
$17.4
-
$17.4
2007
-
-
-
-
-
-
$1.9 (c)
$1.9
(In millions)
Balance at January 1, 2008
Charges expensed during the year
Payments made during the year
Balance as of December 31, 2008
December 31, 2008
-
$4.1
(0.7)
$3.4
Full-time equivalent employees at the PFH discontinued
operations decreased from 930 at December 31, 2007 to 200 at
December 31, 2008. The employees that remain at PFH are expected
to depart by mid-2009 or transferred to other of the Corporation’s
U.S. mainland subsidiaries for support functions.
The following table presents the activity in the reserve for
restructuring costs associated with the PFH Branch Network
Restructuring Plan.
(In millions)
Balance at January 1, 2008
Charges expensed during the year
Payments made during the year
Balance as of December 31, 2008
December 31, 2008
-
$17.4
(15.5)
$1.9
The Corporation does not expect to incur additional
restructuring costs related to the PFH Branch Network
Restructuring Plan. The reserve balances at December 31, 2008
were mostly related to lease terminations.
PFH Discontinuance Restructuring Plan
In August 2008, the Corporation entered into an additional
restructuring plan for its PFH operations to eliminate employment
positions, terminate contracts and incur other costs associated
with the discontinuance of PFH’s operations.
Restructuring charges and impairment losses on long-lived
assets, which resulted from the PFH Discontinuance Restructuring
Plan, are detailed in the table below.
(In millions)
December 31, 2008
Personnel costs
Total restructuring costs
Impairment losses on long-lived assets
(a) Severance, retention bonuses and other benefits
(b) Leasehold improvements, furniture, equipment and prepaid expenses
$4.1 (a)
$4.1
3.9 (b)
$8.0
Note 3 - Restructuring plans:
The accelerated downturn of the U.S. economy requires a leaner,
more efficient U.S. business model. As such, the Corporation
determined to reduce the size of its banking operations in the
U.S. mainland to a level suited to present economic conditions
and focus on core banking activities. On October 17, 2008, the
Board of Directors of Popular, Inc. approved two restructuring
plans for the BPNA reportable segment. The objective of the
restructuring plans is to improve profitability in the short-term,
increase liquidity and lower credit costs and, over time, achieve
a greater integration with corporate functions in Puerto Rico.
BPNA Restructuring Plan
The restructuring plan for BPNA’s banking operations (the “BPNA
Restructuring Plan”) contemplates the following measures: closing,
consolidating or selling approximately 40 underperforming
branches in all existing markets; the shutting down, sale or
downsizing of lending businesses that do not generate deposits
or fee income; and the reduction of general expenses associated
with functions supporting the aforementioned branch and balance
sheet initiatives. This plan entails a 30% headcount reduction or
about 640 full-time equivalent positions. The Corporation expects
to complete the BPNA Restructuring Plan by mid-2009.
109
The following table details the expenses recorded by the
Corporation that were associated with this particular restructuring
plan.
the 2008 plan, all operational and support functions will be
transferred to BPNA and EVERTEC.
The 2008 E-LOAN Restructuring Plan is estimated to be
completed by mid-2009.
Refer to Note 35 to the consolidated financial statements for
information on the results of operations of E-LOAN, which are
part of BPNA’s reportable segment.
For the year ended
December 31, 2008
For the year ended
December 31, 2007
E-LOAN
2008
E-LOAN
2007
Restructuring Restructuring
(In millions)
Personnel costs
Net occupancy
expenses
Equipment
expenses
Professional fees
Other operating
expenses
Total restructuring
charges
Plan
$3.0
-
-
-
0.1
$3.1
8.0
Impairment losses on
long-lived assets
Goodwill and trademark
impairment losses
Total
10.9
$22.0
Plan
($0.3)
0.1
-
-
-
($0.2)
-
-
($0.2)
E-LOAN
2007
Restructuring
Plan
$4.6 (a)
4.2 (b)
0.4 (c)
0.4 (c)
-
$9.6
10.5 (d)
211.8 (e)
$231.9
(a) Severance, retention bonuses and other benefits
(b) Lease terminations
(c) Service contract terminations
(d) Consists mostly of leasehold improvements, equipment and intangible assets with definite lives
(e) Goodwill impairment of $164.4 million and trademark impairment of $47.4 million
The following table presents the activity in the reserve for
restructuring costs associated with the E-LOAN 2007 and 2008
Restructuring Plans for the year ended December 31, 2008.
(In millions)
Balance at January 1, 2008
Charges expensed during
the year
Payments made during
the year
Balance at December 31, 2008
E-LOAN 2007
E-LOAN 2008
Restructuring Plan Restructuring Plan
$8.8
(0.2)
(6.4)
$2.2
-
$3.1
(0.1)
$3.0
(In millions)
Personnel costs
Net occupancy expenses
Total restructuring costs
Impairment losses on long-lived assets
(a) Severance, retention bonuses and other benefits
(b) Lease terminations
(c) Leasehold improvements, furniture and equipment
December 31, 2008
$5.3 (a)
8.9 (b)
$14.2
5.5 (c)
$19.7
The following table presents the activity in the reserve for
restructuring costs associated with the BPNA Restructuring Plan.
(In millions)
Balance at January 1, 2008
Charges expensed during the year
Payments made during the year
Balance as of December 31, 2008
December 31, 2008
-
$14.2
(3.3)
$10.9
The reserve balances at December 31, 2008 were mostly related
to lease terminations.
E-LOAN 2007 and 2008 Restructuring Plan
As indicated in the 2007 Annual Report, in November 2007, the
Corporation approved an initial restructuring plan for E-LOAN
(the “E-LOAN 2007 Restructuring Plan”). This plan included a
substantial reduction of marketing and personnel costs at E-LOAN
and changes in E-LOAN’s business model. At that time, the
changes included 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 and lower liquidity in the
secondary markets for mortgage related products, in the fourth
quarter of 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.
These efforts implemented during 2007 and early 2008 proved
not to be sufficient given the unprecedented market conditions
and disappointing financial results. As previously explained, the
Corporation’s Board of Directors approved in October 2008 a
new restructuring plan for E-LOAN (the “E-LOAN 2008
Restructuring Plan”). This plan involved E-LOAN ceasing to
operate as a direct lender, an event that occurred in late 2008. E-
LOAN will continue to market deposit accounts under its name
for the benefit of BPNA and offer loan customers the option of
being referred to a trusted consumer lending partner. As part of
Note 5 - Securities purchased under agreements
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
2008
2007
$199,558
122,871
$322,429
$146,712
14,193
$160,905
The repledged securities were used as underlying securities
for repurchase agreement transactions.
110 POPULAR, INC. 2008 ANNUAL REPORT
Note 4 - Restrictions on cash and due from banks
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 other banks. Those required
average reserve balances were approximately $684 million at
December 31, 2008 (2007 - $678 million). 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, 2008 and 2007, the
Corporation had securities with a market value of $0.3 million
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, 2008 and 2007, the Corporation maintained
separately for its two international banking entities (“IBEs”),
$0.6 million 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, 2008 and 2007, the Corporation maintained
restricted cash of $2 million 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, 2008, the Corporation had restricted cash of
$3 million (2007 - $4 million) to support a letter of credit related
to a service settlement agreement.
At December 31, 2008, the Corporation had $10 million in
cash equivalents restricted as to its use for the potential payment
of obligations contained in a loan sales agreement that could arise
until November 3, 2009.
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, 2008 and 2007 (2006 - only
market value is presented) were as follows:
Amortized
cost
2008
Gross
unrealized
gains
(Dollars in thousands)
Gross
unrealized
losses
Weighted
average
yield
Market
value
U.S. Treasury securities
After 5 to 10 years
$456,551
$45,567
-
$502,118
3.83%
Obligations of
U.S. government
sponsored entities
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
123,315
4,361,775
27,811
26,877
4,539,778
2,855
262,184
1,097
1,094
267,230
-
-
-
-
-
126,170
4,623,959
28,908
27,971
4,807,008
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)
4,500
2,259
67,975
29,423
104,157
622
6,837
187,154
1,522,372
1,716,985
66
4
232
46
348
-
52
784
9,090
9,926
18,673
67,570
116,059
635,159
46
237
3,456
11,127
-
$6
3,269
240
3,515
3
12
3,903
67,277
71,195
8
150
226
3,438
4,566
2,257
64,938
29,229
100,990
619
6,877
184,035
1,464,185
1,655,716
18,711
67,657
119,289
642,848
837,461
14,866
3,822
848,505
5.22
19,581
61
9,492
10,150
5.01
$7,674,513
$337,998
$88,024
$7,924,487
4.01%
4.46
4.07
4.96
5.68
4.09
6.10
4.95
4.77
5.20
4.95
5.08
5.20
3.21
3.15
3.17
3.94
3.86
4.85
5.47
111
Weighted
average
yield
2006
Market
value
2007
Gross
Gross
Amortized unrealized unrealized Market
value
(Dollars in thousands)
losses
gains
cost
$9,993
-
466,111
476,104
$3
-
-
3
-
-
$5,011
5,011
$9,996
-
461,100
471,096
3.57%
-
3.83
3.82
-
$29,072
445,763
474,835
113
1,315,128
3,593,239 49,022
2,669
1,167
5,450,028 52,971
470,357
71,304
56
96
255
63
470
-
3
370
3,381
3,754
1
104
206
4,379
4,690
190
7,491
127,490
1,268,121
1,403,292
27,318
94,119
69,223
826,642
1,017,302
4,642
487
756
-
5,885
1,310,599
3,641,774
472,270
72,471
5,497,114
54
25
88
2,017
2,184
12,431
7,960
24,114
56,987
101,492
-
34
609
9,863
10,506
190
7,460
127,251
1,261,639
1,396,540
27,116
203
93,351
872
68,906
523
820,755
10,266
11,864 1,010,128
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
5.08
897,187
2,190,446
3,296,396
71,756
6,455,785
6,703
19,614
18,083
70,542
114,942
-
9,935
132,940
1,502,451
1,645,326
-
147,277
72,426
817,113
1,036,816
33,299
690
36
33,953
4.53
73,745
23
68
4,721
4,812
-
-
-
-
-
-
-
-
23
68
4,721
4,812
13.27
148
636
48,629
49,413
$8,488,043 $62,578
$35,486 $8,515,135
4.51% $9,850,862
U.S. Treasury securities
Within 1 year
After 1 to 5 years
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
12,429
7,889
23,947
58,941
103,206
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
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.
112 POPULAR, INC. 2008 ANNUAL REPORT
For 2007, the “other” category is composed substantially of
residual interests derived from off-balance sheet mortgage loan
securitizations that pertained to PFH’s operations.
The aggregate amortized cost and approximate market value
of investment securities available-for-sale at December 31, 2008,
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
$147,110
4,438,441
855,550
2,213,831
$7,654,932
19,581
$150,066
4,700,750
899,288
2,164,233
$7,914,337
10,150
$7,674,513
$7,924,487
Proceeds from the sale of investment securities available-for-
sale during 2008 were $2.4 billion (2007 - $58.2 million; 2006 -
$208.8 million). Gross realized gains and losses on securities
available-for-sale during 2008 were $29.6 million and $0.1 million,
respectively (2007 - $8.0 million and $4.3 million; 2006 - $22.9
million and $0.7 million).
The following table shows the Corporation’s gross unrealized
losses and market 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, 2008 and 2007:
December 31, 2008
(In thousands)
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
(In thousands)
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
Less than 12 months
Gross
Amortized Unrealized Market
Value
Losses
Cost
$34,795
544,783
109,298
19,541
$303
28,589
676
9,480
$34,492
516,194
108,622
10,061
$708,417
$39,048
$669,369
12 months or more
Gross
Amortized Unrealized Market
Value
Losses
Cost
$44,011
553,202
206,472
29
$3,212
42,606
3,146
12
$40,799
510,596
203,326
17
$803,714
$48,976
$754,738
(In thousands)
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Equity securities
Total
Gross
Amortized Unrealized Market
Value
Losses
Cost
$78,806
1,097,985
315,770
19,570
$3,515
71,195
3,822
9,492
$75,291
1,026,790
311,948
10,078
$1,512,131
$88,024
$1,424,107
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
(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
Gross
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
Gross
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
Total
Gross
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
As of December 31, 2008, “Obligations of Puerto Rico, States
and political subdivisions” include approximately $47 million in
C om mo nwe alt h of Puer to Ric o App ro pri at io n Bo nd s
(“Appropriation Bonds”) in the Corporation's investment securities
portfolios. 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, 2008, these Appropriation Bonds represented
113
CMOs, management analyzed the underlying mortgage loan
collateral for these bonds. Various statistics or metrics were
reviewed for each private label CMO, including among others the
weighted average loan-to-value, FICO score, and delinquency
and foreclosure rates. All of these CMOs securities were found to
be in good credit condition. Since no observable credit quality
issues were present in the Corporation’s CMOs at December 31,
2008, and management has the intent and ability to hold the
CMOs for a reasonable period of time for a forecasted recovery of
fair value up to (or beyond) the cost of these investments,
management considered the unrealized losses to be temporary.
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), in
which 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
2008
2007
Amortized
cost
Market
Value
Amortized
cost
Market
Value
$1,198,645
4,389,271
884,414
$1,197,648
4,651,249
875,493
$1,132,834
5,649,729
918,976
$1,128,544
5,693,170
913,609
approximately $3.2 million in unrealized losses in the
Corporation’s investment securities portfolios. The Corporation
is closely monitoring the political and economic situation of the
Island as part of its evaluation of its available-for-sale portfolio for
any declines in value that management may consider 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, 2008, the Corporation
recognized through earnings approximately $14.6 million (2007
- $65.2 million) in losses in the investment securities available-
for-sale portf olio t hat manage m ent co nside re d t o be
other-than-temporarily impaired. These realized losses were
associated with residual interests in mortgage securitizations
and equity securities.
The unrealized loss positions of available-for-sale securities
as of December 31, 2008 are primarily associated with
collateralized mortgage obligations (“CMOs”), and to a lesser
extent in equity securities, mortgage-backed securities and
obligations of Puerto Rico, state and political subdivisions. 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. All MBS held by the Corporation
and approximately 91% of the CMOs held as of December 31,
2008 are guaranteed by government sponsored entities. Valuations
are performed at least on a quarterly basis using third party
providers and dealer quotes. Management believes that the
unrealized losses in the Corporation’s portfolio of securities
available-for-sale at December 31, 2008 were temporary and were
substantially related to widening credit spreads and general lack
of liquidity in the marketplace, and not to the 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 CMOs accounted for approximately $71 million, or 81%,
of the total unrealized losses in the portfolio of securities available-
for-sale at December 31, 2008. Federal agency CMOs and private
label CMOs represented 91% and 9%, respectively, of the CMOs
portfolio available-for-sale at December 31, 2008. The securities
that made up the private label component of the CMO portfolio
available-for-sale are each rated AAA by either Moody’s and/or
Standard & Poor’s rating agencies. None of the securities are on
negative watch or outlook, nor have their ratings changed from
their respective issuance dates. The CMOs carrying value of the
private label available-for-sale at December 31, 2008 was about
$149 million, net of unrealized losses of $41 million. The losses
related primarily to adjustable rate mortgages with lower coupons.
In addition to verifying the credit ratings for the private label
114 POPULAR, INC. 2008 ANNUAL REPORT
Note 7 - Investment securities held-to-maturity:
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, 2008 and 2007 (2006 - only
amortized cost is presented) were as follows:
Obligations of
U.S. goverment
sponsored entities
Within 1 year
Gross
2007
Gross
Amortized unrealized unrealized Market
value
(Dollars in thousands)
losses
gains
cost
2006
Weighted
average Amortized
yield
cost
$395,974
$15
$1,497
$394,492
4.11%
$3,017
2008
Amortized unrealized
cost
gains
Gross
Gross
unrealized
losses
(Dollars in thousands)
Market
value
Weighted
average
yield
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
Obligations of
U.S. goverment
sponsored entities
Within 1 year
$1,499
$1
-
$1,500
1.00%
Obligations of Puerto Rico,
States and political
subdivisions
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
106,910
108,860
16,170
52,730
284,670
8
351
500
115
974
-
$367
116
5,141
5,624
106,918
108,844
16,554
47,704
280,020
2.82
5.50
5.75
5.56
4.52
Collateralized
mortgage obliga-
tions
After 10 years
Other
Within 1 year
After 1 to 5 years
244
-
13
231
5.45
6,584
1,750
8,334
$294,747
49
-
49
$1,024
-
-
-
$5,637
6,633
1,750
8,383
$290,134
6.04
3.90
5.59
4.53%
2
197
690
2,219
3,108
-
25
69
94
1
-
25
-
26
17
2
2
4
1,786
11,942
13,419
52,399
79,546
5.59
4.84
5.92
6.00
5.80
1,360
7,002
10,515
53,275
72,152
293
5.45
381
6,251
5,557
11,808
6.47
5.71
6.12
6,570
9,220
15,790
Collateralized
mortgage obliga-
tions
After 10 years
Other
Within 1 year
After 1 to 5 years
76,464
310
6,228
5,490
11,718
$484,466
$3,217
$1,544
$486,139
4.43%
$91,340
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
subject 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, 2008,
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
$115,051
110,594
16,554
47,935
$114,993
110,610
16,170
52,974
$294,747
$290,134
115
(In thousands)
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Other
Total
Gross
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
Management believes that the unrealized losses in the held-to-
maturity portfolio at December 31, 2008 are temporary and were
substantially related to widening credit spreads and general lack
of liquidity in the marketplace, and not to deterioration in the
creditworthiness of the issuers. Also, management has the intent
and ability to hold these investments until maturity.
Note 8 - Pledged assets:
At December 31, 2008 and 2007, 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 the
Corporation's pledged assets, in which the secured parties are
not permitted to sell or repledge the collateral, were as follows:
(In thousands)
Investment securities available-for-sale,
2008
2007
at fair value
$2,470,591
$2,944,643
Investment securities held-to-maturity,
at amortized cost
100,000
339
Loans held-for-sale measured at lower
of cost or market value
Loans held-in-portfolio
35,764
8,101,999
$10,708,354
42,428
8,489,814
$11,477,224
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.
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, 2008 and 2007:
December 31, 2008
(In thousands)
Obligations of Puerto Rico, States and
political subdivisions
Other
(In thousands)
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Other
(In thousands)
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations
Other
Less than 12 months
Gross
Amortized Unrealized Market
Value
Losses
Cost
$135,650
250
$135,900
$5,452
-
$5,452
$130,198
250
$130,448
12 months or more
Gross
Amortized Unrealized Market
Value
Losses
Cost
$9,535
244
250
$10,029
$172
13
-
$185
$9,363
231
250
$9,844
Total
Gross
Amortized Unrealized Market
Value
Losses
Cost
$145,185
244
500
$145,929
$5,624
13
-
$5,637
$139,561
231
500
$140,292
December 31, 2007
(In thousands)
Obligations of U.S. government
sponsored entities
Obligations of Puerto Rico, States and
political subdivisions
Other
(In thousands)
Collateralized mortgage obligations
Other
Less than 12 months
Gross
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
Gross
Amortized Unrealized Market
Value
Losses
Cost
$310
1,250
$1,560
$17
3
$20
$293
1,247
$1,540
116 POPULAR, INC. 2008 ANNUAL REPORT
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
3,403,822
Obligations of states and political subdivisions 507,188
404,595
Other
$25,857,237
2008
2007
$185,796
$134,116
131,418
7,973,500
4,110,953
2,400,230
1,251,206
16,053,103
10,061
4,605,815
872,653
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
3,820,457
582,310
447,073
$28,203,566
As of December 31, 2008, loans on which the accrual of interest
income had been discontinued amounted to $1.2 billion (2007 -
$771 million; 2006 - $718 million). If these loans had been accruing
interest, the additional interest income realized would have been
approximately $48.7 million (2007 - $71.0 million; 2006 - $58.2
million). Non-accruing loans as of December 31, 2008 include
$68 million (2007 - $49 million; 2006 - $48 million) in consumer
loans.
The commercial and mortgage loans that were considered
impaired based on SFAS No. 114 at December 31, and the related
disclosures follow:
(In thousands)
Impaired loans with a related allowance
Impaired loans that do not require allowance
Total impaired loans
Allowance for impaired loans
Average balance of impaired
loans during the year
Interest income recognized on
impaired loans during the year
December 31,
2008
$664,852
232,712
$897,564
2007
$174,029
147,653
$321,682
$194,722
$53,959
$619,073
$288,374
$8,834
$9,484
Note: Balances at December 31, 2008 include trouble debt restructured mortgage loans
amounting to $76 million.
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
if the impaired loan is collateral dependent 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
Recoveries
Charge-offs
Write-downs related to loans
2008
$548,832
-
991,384
45,540
(645,504)
2007
$522,232
7,290
341,219
57,904
(308,540)
2006
$461,707
-
187,556
55,713
(209,065)
transferred to loans held-for-sale
(12,430)
-
-
Change in allowance for loan
losses from discontinued
operations (a)
Balance at end of year
(45,015)
$882,807
(71,273)
$548,832
26,321
$522,232
(a) A positive amount represents higher provision for loan losses recorded during the
period compared to net charge-offs, and vice versa for a negative amount.
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
2008
$677,926
188,526
6,201
119,450
753,203
21,976
$731,227
2007
$1,050,011
211,473
9,000
172,680
1,097,804
25,648
$1,072,156
117
(2007 - $0.5 million) paid by the Corporation’s clients in
connection with commercial loan transactions and $27 thousand
(2007 - $50 thousand) 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 2008, this law firm made lease payments of approximately
$0.7 million (2007 - $0.9 million). It also engages BPPR as trustee
of its retirement plan and paid approximately $64 thousand for
these services in 2008 (2007 - $50 thousand).
For the year ended December 31, 2008, the Corporation made
contributions of approximately $1.8 million to Banco Popular
Foundations, which are not-for-profit corporations dedicated to
philanthropic work (2007 - $2.1 million).
Note 11 - Premises and equipment:
Premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
(In thousands)
Land
Buildings
Equipment
Leasehold improvements
Less - Accumulated depreciation
and amortization
Construction in progress
Useful life
in years
2008
2007
10-50
3-10
2-10
$97,639
433,986
509,887
100,901
1,044,774
574,264
470,510
52,658
$620,807
$80,254
400,808
579,842
107,497
1,088,147
624,959
463,188
44,721
$588,163
Depreciation and amortization of premises and equipment for
the year 2008 was $72.4 million (2007 - $76.2 million; 2006 -
$78.2 million), of which $26.2 million (2007 - $26.4 million;
2006 - $25.5 million) was charged to occupancy expense and
$46.2 million (2007 - $49.7 million; 2006 - $52.6 million) was
charged to equipment, communications and other operating
expenses. Occupancy expense is net of rental income of $32.1
million (2007 - $27.5 million; 2006 - $27.3 million).
At December 31, 2008, future minimum lease payments are
expected to be received as follows:
(In thousands)
2009
2010
2011
2012
2013 and thereafter
$262,892
164,060
118,475
80,894
51,605
$677,926
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, 2006
New loans
Payments
Other changes
Balance at December 31, 2007
New loans
Payments
Other changes
Balance at December 31, 2008
Executive
Officers Directors
$3,961
2,781
(2,199)
54
$4,597
2,740
(2,831)
(24)
$4,482
$25,103
34,897
(25,886)
(1,295)
$32,819
27,955
(19,435)
-
$41,339
Total
$29,064
37,678
(28,085)
(1,241)
$37,416
30,695
(22,266)
(24)
$45,821
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, 2008, the Corporation’s banking subsidiaries
held deposits from related parties amounting to $37 million (2007
- $38 million).
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 2008, 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 2008 amounted to approximately
$2.4 million (2007 - $2.0 million). These fees included $0.2 million
118 POPULAR, INC. 2008 ANNUAL REPORT
Note 12 - Goodwill and other intangible assets:
The changes in the carrying amount of goodwill for the years
ended December 31, 2008 and 2007, allocated by reportable
segments, were as follows (refer to Note 35 for the definition of
the Corporation’s reportable segments):
2008
(In thousands)
Banco Popular de Puerto Rico:
Balance at
January 1, Goodwill
acquired
2008
Purchase
accounting
adjustments Other
Balance at
December 31,
2008
Commercial Banking
Consumer and Retail Banking
Other Financial Services
Banco Popular North America:
$35,371
136,407
8 , 6 2 1
Banco Popular North America
E-LOAN
EVERTEC
404,237
-
46,125
-
-
$153
($3,631)
(17,794)
(444)
($11)
(1,613)
-
$31,729
117,000
8 , 3 3 0
-
-
-
-
-
7 8 5
-
-
(2,414)
404,237
-
44,496
Total Popular, Inc.
$630,761
$153 ($21,084)
($4,038) $605,792
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:
$14,674
34,999
4 , 3 9 1
$20,697
101,408
3 , 7 8 8
Banco Popular North America
E-LOAN
EVERTEC
404,237
164,410
45,142
-
-
8 3 7
-
-
$442
-
-
3 2 9
-
-
-
$35,371
136,407
8 , 6 2 1
-
($164,410)
(183)
404,237
-
46,125
Total Popular, Inc.
$667,853
$126,730
$771
($164,593)
$630,761
In 2008, 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 at the BPPR reportable segment were mostly related
to the acquisition of Citibank’s retail branches in Puerto Rico
(acquisition completed in December 2007). The amount included
in the “other” category at the BPPR segment was mainly related to
goodwill impairment losses of $1.6 million associated with the
write-off of Popular Finance’s goodwill since the subsidiary ceased
originating loans during the fourth quarter of 2008. The reduction
in goodwill in the EVERTEC reportable segment during 2008
was mainly the result of the sale of substantially all assets of
EVERTEC’s health processing division during the third quarter
of 2008.
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. The amount
included in the “other” category was related mostly to goodwill
impairment losses of $164.4 million 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 2007
Restructuring Plan discussed in Note 3 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.
The Corporation performed the annual goodwill impairment
evaluation for the entire organization during the third quarter of
2008 using July 31, 2008 as the annual evaluation date. The
reporting units utilized for this evaluation were those that are one
level below the business segments, which basically are the legal
entities that compose the reportable segment. The Corporation
follows push-down accounting, as such all goodwill is assigned
to the reporting units when carrying out a business combination.
As indicated in Note 1 to the consolidated financial statements,
the goodwill 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 2 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.
The first step of the goodwill impairment test performed during
2008 showed that the carrying amount of the following reporting
units exceeded their respective fair values: BPNA, Popular Auto
and Popular Mortgage. As a result, the second step of the goodwill
impairment test was performed for those reporting units. At
December 31, 2008, the goodwill of these reporting units
amounted to $404 million for BPNA, $7 million for Popular Auto
and $4 million for Popular Mortgage. Only BPNA pertains to the
Corporation’s U.S. mainland operations.
As previously indicated, the second step compares the implied
fair value of the reporting unit goodwill with the carrying amount
of that goodwill. The implied fair value of goodwill shall be
determined in the same manner as the amount of goodwill
recognized in a business combination is determined. That is, an
entity shall allocate the fair value of a reporting unit to all of the
assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was
the price paid to acquire the reporting unit. The excess of the fair
value of a reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of goodwill. The fair value
119
of the assets and liabilities reflects market conditions, thus
volatility in prices could have a material impact on the
determination of the implied fair value of the reporting unit
goodwill at the impairment test date. Based on the results of the
second step, management concluded that there was no goodwill
impairment to be recognized by those reporting units. The analysis
of the results for the second step indicates that the reduction in
the fair value of these reporting units was mainly attributed to the
deterioration of the loan portfolios’ fair value and not to the fair
value of the reporting units as going concern entities.
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 transactions,
as well as 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 and capital raising
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;
For purposes of the market comparable approach, valuations
were determined by calculating average price multiples of relevant
value drivers from a group of companies that are comparable to
the reporting unit being analyzed and applying those price
multiples to the value 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 11.24% to 25.54% for the 2008
analysis.
For BPNA, the most significant of the subsidiaries that had
failed the first step of SFAS No. 142, the Corporation determined
the fair value of Step 1 utilizing a market value approach based on
a combination of price multiples from comparable companies and
multiples from capital raising transactions of comparable
companies. Additionally, the Corporation determined the reporting
unit fair value using a discounted cash flow analysis (“DCF”)
based on BPNA’s financial projections. The Step 1 fair value for
BPNA under both valuation approaches (market and DCF) was
below the carrying amount of its equity book value as of the
valuation date (July 31, 2008), requiring the completion of the
second step of SFAS No. 142. In accordance with SFAS No. 142,
the Corporation performed a valuation of all assets and liabilities
of BPNA, including any recognized and unrecognized intangible
assets, to determine the fair value of BPNA’s net assets. To complete
the second step of SFAS No. 142, the Corporation subtracted
from BPNA’s Step 1 fair values (determined based on the market
and DCF approaches) the determined fair value of the net assets to
arrive at the implied fair value of goodwill. The results of the Step
2 indicated that the implied fair value of goodwill exceeded the
goodwill carrying value of $404 million, resulting in no goodwill
impairment.
Furthermore, as part of the SFAS No. 142 analyses, management
performed a reconciliation of the aggregate fair values determined
for the reporting units to the market capitalization of Popular,
Inc. concluding that the fair value results determined for the
reporting units in the July 31, 2008 test were reasonable.
Management monitors events or changes in circumstances
between annual tests to determine if these events or changes in
circumstances would more likely than not reduce the fair value of
a reporting unit below its carrying amount. As previously
indicated, the annual test was performed during the third quarter
of 2008 using July 31, 2008 as the annual evaluation date. At that
time, the economic situation in the United States and Puerto
Rico continued its evolution into recessionary conditions,
including deterioration in the housing market and credit market.
These conditions have carried over to the end of the year.
Accordingly, management is closely monitoring the fair value of
the reporting units, particularly the reporting units that failed the
Step 1 test in the annual goodwill impairment evaluation. As part
of the monitoring process, management performed an assessment
for BPNA as of December 31, 2008. The Corporation determined
BPNA’s fair value utilizing the same valuation approaches (market
and DCF) used in the annual goodwill impairment test. The
determined fair value for BPNA as of December 31, 2008 continued
to be below its carrying amount under all valuation approaches.
The fair value determination of BPNA’s assets and liabilities was
updated as of December 31, 2008 utilizing valuation
methodologies consistent with the July 31, 2008 test. The results
of the assessment as of December 31, 2008 indicated that the
implied fair value of goodwill exceeded the goodwill carrying
amount, resulting in no goodwill impairment. The results obtained
in the December 31, 2008 assessment were consistent with the
results of the annual impairment test in that the reduction in the
fair value of BPNA was mainly attributable to a significant
reduction in the fair value of BPNA’s loan portfolio.
120 POPULAR, INC. 2008 ANNUAL REPORT
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.
At December 31, 2008, other than goodwill, the Corporation
had $6 million of identifiable intangibles with indefinite useful
lives, mostly associated with E-LOAN’s trademark (2007 - $17
million). During the fourth quarter of 2008, the Corporation
recognized impairment losses of $10.9 million related to E-LOAN’s
trademark (2007 - $47.4 million). There were no impairment losses
recognized in 2006 related to other intangible assets with
indefinite 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
2008
2007
Accumulated
Amount Amortization Amount Amortization
Accumulated Gross
Gross
$65,379
$24,130
$66,381
$23,171
8,839
3,037
4,585
1,725
10,375
8,164
4,131
5,385
consolidated statement of operations. E-LOAN’s other intangible
assets subject to amortization were fully written-off as of December
31, 2008.
Intangible assets with a gross amount of $10.0 million became
fully amortized during 2008 and, as such, their gross amount and
accumulated amortization were eliminated from the tabular
disclosure presented above. The table also excludes the E-LOAN
intangibles that were fully written-off during 2008.
The following table presents the estimated aggregate
amortization expense of the intangible assets with definite lives
that the Corporation has at December 31, 2008, for each of the
next five years:
(In thousands)
2009
2010
2011
2012
2013
$9,424
7,672
6,981
5,961
7,856
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
2008
2007
$5,500,190
$5,638,862
4,610,511
10,110,701
4,770,829
10,409,691
8,439,324
4,706,627
8,136,308
5,277,690
13,145,951
13,413,998
$23,256,652
$23,823,689
A summary of certificates of deposit by maturity at December
Total
$77,255
$30,440
$84,920
$32,687
31, 2008, follows:
During the year ended December 31, 2008, the Corporation
recognized $11.5 million in amortization expense related to other
intangible assets with definite lives (2007 - $10.4 million; 2006
- $12.0 million).
Also, in 2008, the Corporation recorded impairment losses
associated with the write-off of certain customer relationships
and other intangibles of $1.9 million and $0.2 million,
respectively, mainly pertained to E-LOAN (2007-$0.8 million
and $0.7 million, respectively). These write-offs were the result of
the E-LOAN Restructuring plans described in Note 3 to the
consolidated financial statements. These amounts are included in
the caption of impairment losses on long-lived assets on the
(In thousands)
2009
2010
2011
2012
2013
2014 and thereafter
$9,855,020
1,733,963
621,284
497,097
343,980
94,607
$13,145,951
At December 31, 2008, the Corporation had brokered deposits
amounting to $3.1 billion (2007 - $3.1 billion). Of these deposits
at December 31, 2008, $65 million are classified as money market
and the remaining $3.0 billion as certificates of deposits in the
121
“under $100,000” category. At December 31, 2007, there were no
brokered deposits classified as money market and $3.0 billion of
the brokered certificates of deposits were classified in the “under
$100,000” category.
The brokered deposits classified in the “under $100,000”
category represent certificates of deposits acquired in
denominations of $1,000 under various master certificates of
deposit.
The aggregate amount of overdrafts in demand deposit accounts
that were reclassified to loans was $123 million as of December
31, 2008 (2007- $144 million).
Note 14 - Federal funds purchased and assets sold
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)
2008
2007
2006
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
$144,471
$303,492
$1,276,818
3,407,137
$3,551,608
5,133,773
$5,437,265
4,485,627
$5,762,445
$5,697,842
$6,942,722
$8,963,244
$4,163,015
$5,272,476
$7,018,628
3.37%
1.45
5.19%
4.40
5.00%
5.12
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, 2008 and 2007.
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.
2008
Repurchase
liability
Carrying value
of collateral
Market value
of collateral
(Dollars in thousands)
Weighted
average
interest rate
Obligations of
U.S. government
sponsored entities
Overnight
Within 30 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
$5,622
565,870
152,309
723,801
1,725
8,294
60,083
522,732
592,834
46,914
591,652
221,491
609,396
$5,681
610,628
184,119
800,428
1,981
9,038
59,471
539,040
609,530
66,691
580,174
279,115
765,218
1,469,453
$2,786,088
1,691,198
$3,101,156
$5,681
610,628
184,119
800,428
1,981
9,038
59,471
539,040
609,530
66,691
580,174
279,115
765,218
1,691,198
$3,101,156
3.37%
2.31
4.82
2.85
5.34
1.00
3.12
4.52
4.33
3.89
2.73
3.04
4.34
3.48
3.50%
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
$4.0 billion). The weighted average interest rate of other short-
term borrowings at December 31, 2008 was 1.35% (2007 - 4.74%;
2006 - 5.36%). The average aggregate balance outstanding during
the year was approximately $952 million (2007 - $3.0 billion;
2006 - $3.4 billion). The weighted average interest rate during
the year was 2.92% (2007 - 4.95%; 2006 - 4.63%).
Note 17 presents additional information with respect to
available credit facilities.
122 POPULAR, INC. 2008 ANNUAL REPORT
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
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%
Note 15 - Other short-term borrowings:
Other short-term borrowings as of December 31, consisted of the
following:
(Dollars in thousands)
Advances with the FHLB paying interest monthly
at a fixed rate of 4.63%
Advances with the 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%
Unsecured borrowings with private investors
at fixed rates ranging from 0.40% to 3.13%
Commercial paper at rates ranging from 4.25% to 5.00%
Term funds purchased at a fixed rate of 4.92%
Other
-
-
-
$3,548
-
-
1,386
$4,934
$72,000
570,000
487,000
-
7,329
280,000
85,650
$1,501,979
The maximum aggregate balance outstanding at any month-
end was approximately $1.6 billion (2007 - $3.8 billion; 2006 -
Note 16 - Notes payable:
Notes payable outstanding at December 31, consisted of the
following:
(Dollars in thousands)
Advances with the FHLB:
- with maturities ranging from 2010 through 2015 paying
interest monthly at fixed rates ranging from 2.67% to 5.06%
(2007 - 2.51% to 6.98%)
- maturing in 2008 paying interest monthly at a floating rate
of 0.0075% over the 1-month LIBOR rate
- maturing in 2010 paying interest quarterly at a
fixed rate of 5.10% (2007 - 5.34% - 6.55%)
Advances under revolving lines of credit with maturities
ranging form 2008 through 2009 paying interest quarterly at
floating rates ranging from of 0.20% to 0.35%
over the 3-month LIBOR rate
Term notes maturing in 2030 paying interest monthly
at fixed rates ranging from 3.00% to 6.00%
Term notes with maturities ranging from 2009
through 2013 paying interest semiannually at
fixed rates ranging from 4.60% to 7.00%
(2007 - 3.60% to 6.85%)
Term notes with maturities ranging from 2009 through
2013 paying interest monthly at floating rates of 3.00%
over the 10-year U.S. Treasury Note rate
Term notes with maturities from 2009 through 2011 paying
interest quarterly at a floating rate of 0.40% to 3.25%
(2007 - 0.40%) over the 3-month LIBOR rate
Secured borrowings paying interest monthly at fixed rates
ranging from 6.04% to 7.04%
ranging from 0.32% to 3.12%
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
2008
2007
$1,050,741
$778,958
-
250,000
20,000
35,000
-
110,000
3,100
3,100
995,027
2,038,259
3,777
6,805
435,543
199,706
-
-
-
59,241
227,743
36,498
849,672
28,903
849,672
26,370
$4,621,352
Note: Key index rates as of December 31, 2008 and December 31, 2007, respectively,
were as follows: 1-month LIBOR rate = 0.44% and 4.60%; 3-month LIBOR rate =
1.43% and 4.70%; 10-year U.S. Treasury Note rate = 2.21% and 4.03%.
$3,386,763
2008 2007
Secured borrowings paying interest monthly at floating rates
123
The aggregate amounts of maturities of notes payable at
December 31, 2008 were as follows:
(In thousands)
Year
2009
2010
2011
2012
2013
Later years
Total
Notes
Payable
$802,689
336,455
696,529
531,532
138,289
881,269
$3,386,763
The holders of $25 million of the Corporation’s 6.66% fixed-
rate notes and $250 million of the Corporation’s floating rate
notes have the right to require the Corporation to purchase the
notes on each quarterly interest payment date beginning in March
2010. These notes were issued by the Corporation in 2008 and
mature in 2011.
Note 17 - Unused lines of credit and other funding
sources:
At December 31, 2008, the Corporation had borrowing facilities
available with the Federal Home Loan Banks (“FHLB”) whereby
the Corporation could borrow up to approximately $2.2 billion
based on the assets pledged with the FHLB at that date (2007 -
$2.6 billion). Refer to Notes 15 and 16 for the amounts of FHLB
advances outstanding under these facilities at December 31, 2008
and 2007.
The FHLB advances are collateralized with investment
securities, mortgage loans and commercial loans, and do not
have restrictive covenants or callable features. The maximum
borrowing potential with the FHLB is dependent on certain
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, there were $35 million in putable advances with fixed
rates ranging from 5.34% to 6.55% and maturities extending up
to 2010. These advances were terminated in December 2008.
The Corporation has established a borrowing facility at the
discount window of the Federal Reserve Bank of New York. At
December 31, 2008, the borrowing capacity at the discount
window approximated $3.4 billion, which remained unused at
December 31, 2008 (2007 - $3.0 billion). 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, 2007, the Corporation maintained a
committed line of credit with an unaffiliated bank under formal
agreement that provided for financing of consumer loans. The
maximum committed amount under this credit facility amounted
to $86.5 million 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 was based on LIBOR plus a spread. This
credit facility required compliance with certain financial and non-
financial covenants. 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
provided a maximum committed amount of $500 million 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 million during
2007, which was amortized to interest expense during the term of
the agreement. This agreement terminated in 2008. The interest
rate charged was based on LIBOR plus a spread. This credit facility
required 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 served as guarantors under the
agreement.
Note 18 – Trust preferred securities:
At December 31, 2008 and 2007, 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.
124 POPULAR, INC. 2008 ANNUAL REPORT
Financial data pertaining to the trusts follows:
(Dollars in thousands)
Issuer
Issuance date
Capital securities
Distribution rate
Common securities
Junior subordinated
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
debentures aggregate
liquidation amount
Stated maturity
$148,640
$309,279
$257,732
$134,021
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 million. The Corporation had reacquired $6
million 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.
(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:
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)
2008
($680,468)
Net (loss) income from continuing operations
(563,435)
Net loss from discontinued operations
34,815
Less: Preferred stock dividends
482
Less: Preferred discount amortization
Net (loss) income applicable to common stock ($1,279,200)
2007
$202,508
(267,001)
11,913
-
($76,406)
2006
$419,759
(62,083)
11,913
-
$345,763
Average common shares outstanding
Average potential common shares
Average common shares outstanding -
assuming dilution
281,079,201
-
279,494,150
58,352
278,468,552
235,372
281,079,201
279,552,502
278,703,924
Basic and diluted EPS from continuing
operations
Basic and diluted EPS from discontinued
operations
Basic and diluted EPS
($2.55)
(2.00)
($4.55)
$0.68
(0.95)
($0.27)
$1.46
(0.22)
$1.24
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. Warrants and 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 2008, there were 3,036,843 weighted average
antidilutive stock options outstanding (2007 - 2,431,830; 2006
- 1,896,057). Additionally, the Corporation issued 20,932,836
warrants to purchase shares of common stocks as part of the TARP
capital received. These warrants were not included in the dilutive
earnings per share computations since their inclusion would have
an antidilutive effect under the treasury stock method at December
31, 2008.
Note 20 - Stockholders’ equity:
The Corporation’s authorized preferred stock, which amounted
to 30,000,000 at December 31, 2008, 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.
125
The Corporation’s preferred stock issued and outstanding at
December 31, 2008 consists of:
• 6.375% non-cumulative monthly income preferred stock,
2003 Series A, no par value, liquidation preference value of
$25 per share. Holders of record of the 2003 Series A
Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors of the Corporation or an
authorized committee thereof, out of funds legally available,
non-cumulative cash dividends at the annual rate per share
of 6.375% of their liquidation preference value, or
$0.1328125 per share per month. These shares of preferred
stock are perpetual, nonconvertible, have no preferential
rights to purchase any securities of the Corporation and
are redeemable solely at the option of the Corporation with
the consent of the Board of Governors of the Federal Reserve
System 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. The shares of 2003 Series A Preferred Stock have
no voting rights, except for certain rights in instances
when the Corporation does not pay dividends for a defined
period. These shares are not subject to any sinking fund
requirement. The 2003 Series A Preferred Stock were
outstanding at December 31, 2008 and 2007. Cash
dividends declared and paid on the 2003 Series A Preferred
Stock amounted to $11.9 million for each of the years ended
December 31, 2008, 2007 and 2006.
• 8.25% non-cumulative monthly income preferred stock,
2008 Series B, no par value, liquidation preference value of
$25 per share. The shares of 2008 Series B Preferred Stock
were issued in May 2008. Holders of record of the 2008
Series B Preferred Stock are entitled to receive, when, as
and if declared by the Board of Directors of the Corporation
or an authorized committee thereof, out of funds legally
available, non-cumulative cash dividends at the annual rate
per share of 8.25% of their liquidation preferences, or
$0.171875 per share per month. These shares of preferred
stock are perpetual, nonconvertible, have no preferential
rights to purchase any securities of the Corporation and
are redeemable solely at the option of the Corporation with
the consent of the Board of Governors of the Federal Reserve
System beginning on May 28, 2013. The redemption price
per share is $25.50 from May 28, 2013 through May 28,
2014, $25.25 from May 28, 2014 through May 28, 2015
and $25.00 from May 28, 2015 and thereafter. The Series B
Preferred Stock was issued on May 28, 2008 at a purchase
price of $25 per share. Cash dividends declared and paid
on the 2008 Series B Preferred Stock amounted to $19.5
million for the year ended December 31, 2008.
• Fixed Rate Cumulative Perpetual Preferred Stock, Series
C issued under U.S. Treasury’s Troubled Asset Relief
Program (“TARP”) Capital Purchase Program. Dividends
accrued on the Series C Preferred Stock amounted to $3.4
million for the year ended December 31, 2008. Also, for the
same period the Corporation recognized $0.5 million of
the amortization of the discount on the preferred shares.
On December 5, 2008, the Corporation entered into a Letter
Agreement (the “Purchase Agreement”) with the United States
Department of the Treasury (“Treasury”) pursuant to which
Treasury invested $935 million in preferred stock of Popular
under Treasury’s TARP Capital Purchase Program. The transaction
closed on December 5, 2008. The Corporation issued and sold to
Treasury, (1) 935,000 shares of Popular’s Fixed Rate Cumulative
Perpetual Preferred Stock, Series C, $1,000 liquidation preference
per share (the “Series C Preferred Stock”), and (2) a warrant to
purchase 20,932,836, shares of Popular’s common stock at an
exercise price of $6.70 per share. The exercise price of the warrant
was determined based upon the average of the closing prices of
Popular’s common stock during the 20-trading day period ended
November 12, 2008, the last trading day prior to the date Popular’s
application to participate in the program was preliminarily
approved.
The allocated carrying values of the Series C Preferred Stock
and the warrant on the date of issuance (based on the relative fair
values) were $896 million and $39 million, respectively. The
Series C Preferred Stock will accrete to the redemption price of
$935 million over five years.
The shares of Series C Preferred Stock qualify as Tier I
regulatory capital and pay cumulative dividends quarterly at a
rate of 5% per annum for the first five years, and 9% per annum
thereafter. The Series C Preferred Stock is non-voting, other than
class voting rights on certain matters that could adversely affect
the preferred shares. If dividends on the Series C Preferred Stock
have not been paid for an aggregate of six quarterly divided periods
or more, whether consecutive or not, Popular’s authorized number
of directors will be automatically increased by two and the holders
of the preferred stock, voting together with holders of any then
outstanding voting parity stock will have the right to elect those
directors at Popular’s next annual meeting of stockholders or at a
special meeting of stockholders called for that purpose. These
preferred share directors will be elected annually and serve until all
accrued and unpaid dividends on the Series C Preferred Stock
have been paid.
The Series C Preferred Stock may be redeemed by Popular at
par after December 5, 2011. Prior to that date, the preferred shares
may only be redeemed by Popular at par in an amount up to the
126 POPULAR, INC. 2008 ANNUAL REPORT
cash proceeds received by Popular (minimum $233.75 million)
from qualifying equity offerings of any Tier 1 perpetual preferred
or common stock. Any redemption is subject to the consent of the
Board of Governors of the Federal Reserve System. Until December
5, 2011, or such earlier time as all preferred shares have been
redeemed or transferred by Treasury, Popular will not, without
Treasury’s consent, be able to increase its dividend rate per share
of common stock or repurchase its common stock.
The shares of Series C Preferred Stock are not subject to any
mandatory redemption, sinking fund or other similar provisions.
Holders of the shares Series C Preferred Stock will have no right
to require redemption or repurchase of any shares of Series C
Preferred Stock.
The warrant is immediately exercisable, subject to certain
restrictions, and has a 10-year term. The exercise price and number
of shares subject to the warrant are both subject to anti-dilution
adjustments. Treasury may not exercise voting power with respect
to shares of common stock issued upon exercise of the warrant. If
Popular receives aggregate gross cash proceeds of not less than
$935 million from one or more qualifying equity offerings of Tier
1-eligible perpetual preferred or common stock on or prior to
December 31, 2009, the number of shares of common stock
underlying the warrant then held by Treasury will be reduced by
one half of the original number of shares, taking into account all
adjustments, underlying the warrant. Treasury and other future
holders of the preferred shares, the warrant or the common stock
issued pursuant to the warrant also have piggyback and demand
registration rights with respect to the securities. Neither the
preferred shares nor the warrant nor the shares issuable upon
exercise of the warrant are subject to any contractual restriction
on transfer, except that the Treasury may only transfer or exercise
an aggregate of one-half of the warrant shares prior to December
31, 2009 unless Popular has received gross proceeds from qualified
equity offerings that are at least equal to the $935 million initially
received from Treasury.
The Corporation’s common stock ranks junior to all series of
preferred stock as to dividend rights and/or as to rights on
liquidation, dissolution or winding up of the Corporation. All
series of preferred stock are pari passu. Dividends on each series
of preferred stock are payable if declared.
The Corporation’s ability to declare or pay dividends on, or
purchase, redeem or otherwise acquire, its common stock is
subject to certain restrictions in the event that the Corporation
fails to pay or set aside full dividends on the preferred stock for
the latest dividend period.
The ability of the Corporation to pay dividends in the future is
limited by the previously mentioned TARP requirements, legal
availability of funds, the earnings, cash position, and capital
needs of the Corporation, general business conditions and other
factors deemed relevant by the Corporation’s Board of Directors.
The Corporation has a dividend reinvestment and stock
purchase plan under which holders of shares of common stock
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. No shares will be sold by the Corporation
to participants in the dividend reinvestment and stock purchase
plan at less than $6 per share, the par value of the Corporation’s
common stock.
During the year 2008, cash dividends of $0.48 (2007 - $0.64;
2006 - $0.64) per common share outstanding amounting to $134.9
million (2007 - $178.9 million; 2006 - $178.2 million) were
declared. Dividends payable to shareholders of common stock at
December 31, 2008 was $23 million (2007 and 2006 - $45 million).
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 $392 million at December 31, 2008 (2007 -
$374 million; 2006 - $346 million). During 2008, $18 million
(2007 - $28 million; 2006 - $30 million) was transferred to the
statutory reserve account. At December 31, 2008, 2007 and 2006,
BPPR was in compliance with the statutory reserve requirement.
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, 2008 and 2007, the Corporation exceeded all capital
adequacy requirements to which it is subject.
127
At December 31, 2008 and 2007, BPPR and BPNA were well-
capitalized under the regulatory framework for prompt corrective
action, and there are no conditions or events since December 31,
2008 that management believes have changed the institutions’
category.
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.
As previously mentioned, in December 2008, the Corporation
received $935 million as part of the TARP Capital Purchase
Program in exchange for senior preferred stock and warrants. The
$935 million of preferred stock issued under the TARP Capital
Purchase Program qualify as Tier I regulatory capital without
limitation.
The Corporation’s risk-based capital and leverage ratios at
December 31, were as follows:
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Actual
Capital adequacy minimum
requirement
(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
976,878
5.82
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
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:
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
2008
(Dollars in thousands)
2008
2007
Amount
Ratio
Amount
Ratio
$3,657,350
2,195,366
1,028,639
12.08%
11.28
10.17
$2,421,581
1,556,905
809,256
$3,272,375
1,518,140
899,443
10.81%
7.80
8.89
$1,210,790
778,453
404,628
$3,272,375
8.46%
1,518,140
899,443
6.07
7.23
$1,161,084
1,548,111
750,082
1,000,109
373,317
497,755
8%
8
8
4%
4
4
3%
4
3
4
3
4
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
$1,946,132
1,011,570
10%
10
$1,948,798
1,069,173
10%
10
$1,167,679
606,942
$1,250,136
622,194
6%
6
5%
5
$1,169,279
641,504
$1,287,357
647,055
6%
6
5%
5
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).
The Corporation recognizes the servicing rights of its banking
subsidiaries that are related to residential mortgage loans as a
class of servicing rights. The mortgage servicing rights (“MSRs”)
are measured at fair value. Prior to November 2008, PFH also held
servicing rights to residential mortgage loan portfolios. These
servicing rights were sold in the fourth quarter of 2008. The
128 POPULAR, INC. 2008 ANNUAL REPORT
MSRs are segregated between loans serviced by the Corporation’s
banking subsidiaries and by PFH. Fair value determination is
performed on a subsidiary basis, with assumptions varying in
accordance with the types of assets or markets served. As indicated
in Note 2, PFH no longer services third-party loans due to the
discontinuance of the business.
Classes of mortgage servicing rights were determined based
on the different markets or types of assets being serviced. 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.
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 million, which resulted in a
$10 million, net of tax, increase in the retained earnings account
of stockholders’ equity in 2007.
The Corporation uses a discounted cash flow model to estimate
the fair value of MSRs. 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, contractual servicing fee income, prepayment and late
fees, among other considerations. Prepayment speeds are adjusted
for the Corporation’s loan characteristics and portfolio behavior.
The following tables present the changes in MSRs measured
using the fair value method for the years ended December 31,
2008 and 2007.
(In thousands)
Fair value at January 1, 2008
Purchases
Servicing from securitizations
or asset transfers
Changes due to payments on
loans (1)
Banking subsidiaries
Residential MSRs - 2008
PFH
$81,012
-
$110,612
62,907
Total
$191,624
62,907
28,919
-
28,919
(10,851)
(20,298)
(31,149)
Changes in fair value due to
changes in valuation model
inputs or assumptions
(39,449)
(36,818)
Rights sold
Fair value at December 31, 2008
$176,034
(1) Represents changes due to collection / realization of expected cash flows over
time.
(15,553)
-
$176,034
(23,896)
(36,818)
-
Banking subsidiaries
Residential MSRs - 2007
PFH
$84,038
22,251
$91,431
4,256
Total
$175,469
26,507
22,817
26,048
48,865
(9,117)
(35,516)
(44,633)
(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
changes in valuation model
inputs or assumptions
Other changes
Fair value at December 31, 2007
(1) Represents changes due to collection / realization of expected cash flows over
(15,743)
(66)
$81,012
(14,530)
(54)
$191,624
1,213
12
$110,612
time.
Residential mortgage loans serviced for others were $17.6
billion as of December 31, 2008 (December 31, 2007 - $11.1
billion from banking operations and $9.4 billion from PFH). During
2008, the Corporation, through its subsidiary BPPR, completed
the acquisition of the rights to service over $5.1 billion in
mortgage loans for Freddie Mac and GNMA.
Net mortgage servicing fees, a component of other service
fees in the consolidated statements of operations, include the
changes from period to period in the 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 flows.
Mortgage servicing fees, excluding fair value adjustments, for
the Corporation’s continuing operations amounted to $31.8
million for the year ended December 31, 2008 (2007 - $26.0 million;
2006 - $22.1 million). The banking subsidiaries receive average
annual servicing fees based on a percentage of the outstanding
loan balance. In 2008, those weighted average servicing fees were
0.26% for mortgage loans serviced (2007 – 0.26%; 2006 - 0.27%).
Under these servicing agreements, the banking subsidiaries do
not earn significant prepayment penalty fees on the underlying
loans serviced.
Key economic assumptions used to estimate the fair value of
MSRs derived from sales and securitizations of mortgage loans
performed by the banking subsidiaries and the sensitivity to
immediate changes in those assumptions were as follows:
Originated MSRs
(In thousands)
Fair value of retained interests
Weighted average life
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
December 31,
2008
$104,614
10.2 years
9.9%
($4,734)
($8,033)
11.46%
($3,769)
December 31,
2007
$86,453
12.5 years
8.0%
($1,983)
($3,902)
10.83%
($2,980)
($6,142)
($5,795)
129
The banking subsidiaries also own servicing rights purchased
from other financial institutions. The fair value of purchased MSRs,
their related valuation assumptions and the sensitivity to
immediate changes in those assumptions as of period end were as
follows:
In 2008, weighted average servicing fees on the SBA serviced
loans were approximately 1.04% (2007 - 1.07%).
Key economic assumptions used to estimate the fair value of
SBA loans and the sensitivity to immediate changes in those
assumptions were as follows:
Purchased MSRs
SBA Loans
(In thousands)
Fair value of retained interests
Weighted average life
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
December 31,
2008
$71,420
7.0 years
14.4%
($3,880)
($7,096)
10.6%
($2,277)
December 31,
2007
$24,159
12.4 years
8.0%
($719)
($1,407)
10.8%
($956)
($4,054)
($1,846)
(In thousands)
Carrying amount of retained interests
Fair value of retained interests
Weighted average life
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
December 31,
2008
$4,272
$6,344
2.8 years
18.1%
($282)
($572)
13.0%
($171)
($350)
December 31,
2007
$5,021
$7,324
3.0 years
18.3%
($348)
($706)
13.0%
($209)
($427)
At December 31, 2008, the Corporation serviced $4.9 billion
(2007 - $3.4 billion) in residential mortgage loans with credit
recourse. Refer to Note 37 to the consolidated financial statements
for further information.
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, 2008, the Corporation had recorded
$61 million in mortgage loans under this buy-back option
program (2007 - $42 million).
The Corporation has also identified the rights to service a
portfolio of Small Business Administration (“SBA”) commercial
loans as another class of servicing rights. The SBA servicing
rights are measured at the lower of cost or fair value method. The
following table presents the activity in the balance of SBA servicing
rights and related valuation allowance for the years ended December
31:
(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
2008
$5,021
1,398
-
(2,147)
$4,272
-
$4,272
$6,344
2007
$4,860
2,051
3
(1,893)
$5,021
-
$5,021
$7,324
SBA loans serviced for others were $568 million at December
31, 2008 (2007 - $527 million).
As previously indicated, all of PFH’s MSRs were sold as of
December 31, 2008. The following tables provide information on
key economic assumptions used to estimate the fair value of PFH’s
MSRs and the sensitivity results to immediate changes in those
assumptions as of December 31, 2007. PFH derived MSRs from
loan securitizations and purchases from other institutions.
December 31, 2007
Originated MSRs
(Dollars in thousands)
Carrying amount of retained interests (fair value)
Weighted average life of collateral
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
Fixed-rate
loans
$47,243
4.3 years
20.7%
($192)
($886)
17.0%
($1,466)
($2,846)
December 31, 2007
Purchased MSRs
(Dollars in thousands)
Carrying amount of retained interests (fair value)
Weighted average life of collateral
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
Fixed-rate
loans
$7,808
4.7 years
18.3%
($329)
($631)
17.0%
($330)
($633)
ARM
loans
$11,335
2.6 years
30.0%
$272
$688
17.0%
($225)
($441)
ARM
loans
$14,626
3.4 years
25.2%
($719)
($1,377)
17.0%
($509)
($981)
PFH, as servicer, collected 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 had been partially offset by the benefit derived
from the prepayment penalties estimated to be collected.
130 POPULAR, INC. 2008 ANNUAL REPORT
The sensitivity analyses presented in the tables above for
servicing rights 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.
Quantitative information about delinquencies, net credit
losses, and components of securitized financial assets and other
assets managed together with them by the Corporation, including
its own loan portfolio, for the years ended December 31, 2008 and
2007, were as follows:
(In thousands)
Loans (owned and managed):
Commercial and
construction
Lease financing
Mortgage
Consumer
Less:
Loans securitized / sold
Loans held-for-sale
Loans held-in-portfolio
(In thousands)
Loans (owned and managed):
Commercial and
construction
Lease financing
Mortgage
Consumer
Less:
Loans securitized / sold
Loans held-for-sale
2008
Total principal
amount of loans,
net of unearned
Principal amount
60 days or more
past due
Net credit
losses
$15,909,532
1,080,810
9,524,463
4,648,784
$907,078
19,311
831,950
170,205
(4,894,658)
(536,058)
$25,732,873
(276,426)
-
$1,652,118
2007
$289,836
18,827
52,968
238,423
(90)
-
$599,964
Total principal
amount of loans,
net of unearned
Principal amount
60 days or more
past due
Net credit
losses
$15,746,646
1,164,439
16,026,827
5,684,600
$478,067
18,653
1,325,228
141,142
$78,557
15,027
160,319
186,173
(8,711,510)
(1,889,546)
(760,931)
-
(16,979)
-
Loans held-in-portfolio
$28,021,456
$1,202,159
$423,097
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
financial assets:
Banking subsidiaries
The Corporation’s banking subsidiaries retain servicing
responsibilities on the sale of wholesale mortgage loans and 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. To a lesser extent, the Corporation
also retains servicing responsibilities on the sale of SBA loans.
During 2008, the Corporation retained servicing rights on
guaranteed mortgage securitizations (FNMA and GNMA) and
whole sales of mortgage loans involving approximately $1.8
billion in principal balance outstanding. Gains of approximately
$58.9 million were realized on these transactions during 2008.
Also, the Corporation sold $98 million in SBA loans during 2008
and recognized gains of approximately $4.8 million on these
sales.
Key economic assumptions used in measuring the servicing
rights retained at the date of the residential mortgage loan
securitizations and whole loan sales by the banking subsidiaries
during the periods ended December 31, 2008 and December 31,
2007 were:
Residential Mortgage
Loans
SBA
Loans
Prepayment speed
Weighted average life
Discount rate (annual rate)
2008
11.6%
8.6 years
11.3%
2007
2008
2007
9.5% 18.1% to 18.6%
2.8 years
13.0%
10.6 years
10.7%
18.3%
3.0 years
13.0%
Refer to Note 22 for key economic assumptions used to estimate
the fair value of the banking subsidiaries’ servicing rights, as
well as the results on the fair value’s sensitivity to immediate
changes in the assumptions.
PFH Discontinued Operations
Prior to 2008, the Corporation, through its subsidiary PFH,
conducted mortgage loan securitizations in which it retained
mortgage servicing rights (“MSRs”) and residual interests on the
loans.
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
$461 million in adjustable (“ARM”) and fixed-rate loans were
securitized and sold by PFH as part of this off-balance sheet asset
securitization, realizing 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 the transactions as sales
under SFAS No. 140.
From 2001 through 2006, the Corporation, particularly PFH
or its subsidiary Equity One, 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 statements of 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) was 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.
The net impact of the recharacterization transaction was a pre-
tax loss of $90.1 million, which was included in the caption
“(Loss) gain on sale of loans and valuation adjustments on loans
held-for-sale” in the consolidated statement of operations included
in the 2007 Annual Report. This amount is included as part of the
“Net loss from discontinued operations, net of tax” in the 2007
comparative financial information included in the 2008 Annual
131
Report. The net loss on the recharacterization included the
following:
(In millions)
Lower of cost or market adjustment
at reclassification from loans held-in-
portfolio to loans held-for-sale
Gain upon completion of recharacterization
Total impact, pre-tax
For the year ended
December 31, 2007
($506.2)
416.1
($90.1)
The recharacterization involved a series of steps, which
included the following:
(i) reclassifying the loans as held-for-sale with the
corresponding lower of cost or market adjustment as of
the date of the transfer;
(ii) removing from the Corporation’s books approximately
$2.6 billion in mortgage loans recognized at fair value
after reclassification to the held-for-sale category (UPB of
$3.2 billion) and $3.1 billion in related liabilities
representing secured borrowings;
(iii)recognizing 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) recognizing mortgage servicing rights, which represent
the fair value of PFH’s right to continue to service the
mortgage loans transferred to the securitization trusts.
At the date of reclassification of the loans as held-for-sale,
which was simultaneous with the date in which the pooling and
servicing agreements were amended, management assessed the
adequacy of the allowance for loan losses related to the loan
portfolio at hand, which amounted to $74 million and represented
approximately 2.3% of the subprime mortgage loan portfolio.
The allowance for loan losses was based on expectations of the
inherent losses in the loan portfolio for a twelve-month period.
Furthermore, management determined the fair value of the loans
at the date of reclassification using a new securitization capital
structure methodology. Given that historically PFH relied on
securitization transactions to dispose of assets originated,
management believed that the securitization market was PFH’s
principal market for purposes of determining fair value. The
classes of securities created under the capital structure were valued
based on expected yields required by investors for each bond and
residual class created. In order to value each class of securities,
the valuation considered estimated credit spreads required by
investors to purchase the different classes of bonds created in the
securitization and prepayment curves, loss estimates, and loss
timing curves to derive bond cash flows.
132 POPULAR, INC. 2008 ANNUAL REPORT
The fair value analysis indicated an estimated fair value of the
loan portfolio of $2.6 billion which, compared to the carrying
value of the loans, after considering the allowance for loan losses,
resulted in the $506.2 million loss. The significant unfavorable
fair value adjustment in the loan portfolio was in part associated
to adverse market and liquidity conditions in the subprime market
at the time and the weakness in the housing sector. These factors
resulted in a higher discount rate; that is, a higher rate of return
expected by an investor in a securitization’s market. Market
liquidity for subprime assets declined considerably during 2007.
During 2007, the subprime sector in general was experiencing
(1) deteriorating credit performance trends, (2) continued turmoil
with subprime lenders (increases in losses, bankruptcies,
downgrades), (3) lower levels of home price appreciation, and (4)
a general tightening of credit standards that may had adversely
affected the ability of borrowers to refinance their existing
mortgages. Given the very uncertain conditions in the subprime
market and lack of trading activity, price level indications were
reflective of relatively low values with high internal rates of return.
The fair value measurement also considers cumulative losses
expected throughout the life of the loans, which exceeded the
inherent losses in the portfolio considered for the allowance for
loan losses determination. Lower levels of home price appreciation,
declining demand for housing units leading to rising inventories,
housing affordability challenges and general tightening of
underwriting standards were expected to lead to higher cumulative
credit losses.
After reclassifying the loans to held-for-sale at fair value, the
Corporation proceeded to simultaneously account for the transfers
as sales upon recharacterization. The accounting entries at
recharacterization entailed the removal from the Corporation’s
books of the $2.6 billion in mortgage loans measured at fair value,
the $3.1 billion in secured borrowings (which represent the bond
certificates due to investors in the securitizations that are
collateralized by the mortgage loans), and other assets and
liabilities related to the securitization, including for example,
accrued interest. Upon sale accounting, the Corporation also
recognized residual interests of $38 million and MSRs of $18
million, which represented the Corporation’s retained interests.
T h e r e s i d u a l i n t e r e s t s r e p r e s e n t e d t h e f a i r v a l u e a t
recharacterization date of residual interest certificates that were
issued by the securitization trusts and retained by PFH, and the
MSRs represented the fair value of PFH’s right to continue to
service the mortgage loans transferred to the securitization trusts.
At the recharacterization date, the secured borrowings carrying
amount was in excess of the mortgage loans de-recognized
principally due to the fact that the accounting basis for the secured
borrowings was amortized cost and the mortgage loans de-
recognized were accounted at the lower of cost or market as
described above. This fact and the recognition of the residual
interests and MSRs led to the $416.1 million gain upon
recharacterization. Under generally accepted accounting
principles, the secured borrowings related to the on-balance sheet
securitizations were recognized as a liability measured at
“amortized cost”. The balance of these “secured borrowings” was
reduced monthly only by the amounts remitted by the servicer to
the trustee for distribution to the certificateholders. These amounts
consisted principally of collections on the securitized mortgage
loans, proceeds from the sale of other real estate properties and
servicing advances.
On the closing date for each of the subject securitizations, the
Corporation, through its subsidiaries, received cash for the sold
loans (legally the securitization qualified as a sale since inception).
Upon the recharacterization, the Corporation retained the residual
beneficial interests, derecognized the loans and was not obligated
to return to the related trust funds any of the cash proceeds
previously received at the related closings. In addition, from an
accounting perspective, the recharacterization had the effect of
releasing the Corporation from its securitization related liabilities
to the related trust funds.
As indicated earlier, before the recharacterization, the
underlying loans and secured borrowings were included as assets
and liabilities of the Corporation. However, the maximum risk to
the Corporation was limited to the amount of overcollateralization
in each subject transaction (effectively, the value of the residual
beneficial interest retained by the Corporation). After a subject
transaction’s overcollaterization reduces to zero, the risk of loss
on the securitized mortgage loans is entirely borne by the non-
residual certificateholders. However, by reflecting the loans as
“owned” by the Corporation, investors could have viewed the
Corporation’s credit exposure to this portfolio as significantly
larger than it actually was. Recharacterization of these transactions
as sales eliminated the loans from the Corporation’s books and,
therefore, better portrayed the Corporation’s legal rights and
obligations in these transactions. Besides the servicing rights
and related assets associated with servicing the trust assets, such
as servicing and escrow advances, after the recharacterization
transaction, the Corporation only retained in its accounting
records the residual interests that were accounted at fair value and
which represented the maximum risk of loss to the Corporation.
In November 2008, the Corporation sold all residual interests
and mortgage servicing rights related to all securitization
transactions completed by PFH. Therefore, the Corporation does
not retain any interest on the securitizations’ trust assets from a
legal or accounting standpoint as of December 31, 2008.
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”).
133
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:
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
were subordinated to investors’ interests. Their value was subject
to credit, prepayment and interest rate risks on the transferred
financial assets. The securitization related assets recorded in the
statement of condition at December 31, 2007 were as follows:
(In thousands)
Residual interests
MSRs
Servicing advances
2007
$45,009
58,578
167,610
All PFH’s securitization related assets, including residual
interests, MSRs and servicing advances were sold in November
2008.
Refer to Note 22 for key economic assumptions used to estimate
the fair value of PFH’s MSRs, as well as the results on the fair
value’s sensitivity to immediate changes in the assumptions, at
December 31, 2007.
The Corporation, through its subsidiary PFH, did not execute
any on-balance sheet securitization transaction during 2007 and
2008.
Under SFAS No. 140, residual interests, 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 were
classified as investment securities available-for-sale and were
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. The residual interests
of PFH were sold in November 2008. The Corporation recognized
other-than-temporary impairment losses on these residual interests
of $5.4 million for the year ended December 31, 2008 (2007 -
$45.4 million) and are classified as part of “Loss on discontinued
operations, net of tax” in the consolidated statement of operations.
During 2008 and 2007, all declines in fair value in residual interests
classified as available-for-sale were 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. Residual interests
from PFH’s securitizations and recharacterization accounted for
as trading securities amounted to $40 million at December 31,
2007. All residual interests of PFH were sold in November 2008.
The Corporation recognized trading losses on these residual
interests of $43.5 million for the year ended December 31, 2008
(2007 - $39.7 million) and are classified as part of “Loss from
discontinued operations, net of tax” in the consolidated statement
of operations.
134 POPULAR, INC. 2008 ANNUAL REPORT
At December 31, 2007, key economic assumptions used to
estimate the fair value of the residual interests derived from PFH’s
securitizations 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 collateral 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
Residual
interests
$45,009
$45,009
7.6 years
20.7% (Fixed-rate
loans)
30% (ARM loans)
$5,031
$6,766
Note 24 - Other assets:
The caption of other assets in the consolidated statements of
condition consists of the following major categories:
(In thousands)
Net deferred tax assets
(net of valuation allowance)
Bank-owned life insurance
program
Prepaid expenses
Derivative assets
Investments under the equity
method
Trade receivables from brokers
and counterparties
Securitization advances and
related assets
Others
Total
2008 (1)
$357,507
2007
Change
$525,369
($167,862)
224,634
136,236
109,656
215,171
188,237
76,958
9,463
(52,001)
32,698
92,412
89,870
2,542
1,686
1,160
526
-
193,466
168,599
191,630
(168,599)
1,836
$1,115,597
$1,456,994
($341,397)
(1) Other assets from discontinued operations at December 31, 2008 are presented as part of “Assets from
discontinued operations” in the consolidated statement of condition. Refer to Note 2 to the consolidated
Weighted average discount rate (annual rate)
40.0%
financial statements for further information on the discontinued operations.
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
Cumulative credit losses
Impact on fair value of 10%
adverse change
Impact on fair value of 20%
adverse change
($2,884)
($5,427)
3.35% to 11.03%
($8,829)
($15,950)
Certain cash flows received from and paid to securitization
trusts for the year ended December 31, 2007 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
Note 25 - 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. 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, when necessary, in amounts which
provide for all benefits as they become due under the plans.
135
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 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
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
Others
2008
53%
41
6
100%
2007
69%
31
-
100%
The plans’ target allocation based on market value for 2008
and 2007, by asset category, considered:
Equity
Fixed / variable income
Cash and cash equivalents
Allocation
range
0 - 70%
0 - 100%
0 - 100%
Maximum
allotment
70%
100%
100%
At December 31, 2008, these plans included 2,745,720 shares
(2007 - 2,745,720) of the Corporation’s common stock with a
market value of approximately $14.2 million (2007 - $29.1
million). Dividends paid on shares of the Corporation’s common
stock held by the plan during 2008 amounted to $1.5 million
(2007 - $1.8 million).
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
Settlement (gain) loss
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
2008
Total
$555,333
9,261
34,444
-
21,643
(24,192)
$29,065
729
1,843
(24)
229
(623)
$584,398
9,990
36,287
(24)
21,872
(24,815)
$596,489
$31,219
$627,708
$526,090
(133,861)
5,672
(24,192)
$20,400
(5,388)
1,527
(623)
$546,490
(139,249)
7,199
(24,815)
end of year
$373,709
$15,916
$389,625
Amounts recognized in
accumulated other
comprehensive loss
under SFAS No. 158:
Net prior service cost
Net loss
Accumulated other
$864
241,059
($304)
15,321
$560
256,380
comprehensive loss (AOCL)
$241,923
$15,017
$256,940
Reconciliation of net (liability) / asset:
Net (liability) / asset at beginning
of year
($29,243)
($8,665)
($37,908)
Amount recognized in AOCL at
beginning of year, pre-tax
46,009
8,353
54,362
(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
16,766
(3,295)
-
5,672
19,143
(241,923)
($222,780)
$553,923
(312)
(1,525)
24
1,527
(286)
(15,017)
($15,303)
$26,939
16,454
(4,820)
24
7,199
18,857
(256,940)
($238,083)
$580,862
136 POPULAR, INC. 2008 ANNUAL REPORT
Pension Plans
Benefit
Restoration Plans
2007
The change in accumulated other comprehensive loss
Total
(“AOCL”), pre-tax for the plans was as follows:
(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
$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
Reconciliation of net (liability) / asset:
Net (liability) / asset at beginning
of year
($32,602)
($12,141)
($44,743)
Amount recognized in AOCL at
2008
Benefit
(In thousands)
Pension Plans
Restoration Plans
Total
Accumulated other comprehensive
loss at January 1, 2008
$46,009
$8,353
$54,362
Increase (decrease) in AOCL:
Recognized during the year:
Prior service (cost) / credit
Actuarial (losses) / gains
Ocurring during the year:
Net actuarial losses / (gains)
Total increase in AOCL
Accumulated other comprehensive
(266)
-
196,180
195,914
53
(686)
7,297
6,664
(213)
(686)
203,477
202,578
loss at December 31, 2008
$241,923
$15,017
$256,940
2007
Benefit
(In thousands)
Pension Plans
Restoration Plans
Total
Accumulated other comprehensive
loss at January 1, 2007
$49,078
$12,457
$61,535
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)
beginning of year, pre-tax
49,078
12,457
61,535
loss at December 31, 2007
$46,009
$8,353
$54,362
(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
The amounts in accumulated other comprehensive loss that
are expected to be recognized as components of net periodic
benefit cost (credit) during 2009 are as follows:
(In thousands)
Net prior service cost (credit)
Net loss
Pension Plans Benefit Restoration Plans
$266
18,691
($53)
1,506
Of the total liabilities of the pension plans and benefit
restoration plans as of December 31, 2008, approximately $3.7
million and $29 thousand, respectively, were considered current
liabilities (2007 - $3.5 million and $0.3 million, respectively).
Information for plans with an accumulated benefit obligation
in excess of plan assets for the years ended December 31, follows:
(In thousands)
Pension Plans
2007
2008
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$596,489
553,923
373,709
$13,075
13,075
9,616
Benefit
Restoration Plans
2007
2008
$31,219
26,939
15,916
$29,065
24,438
20,400
137
Information for plans with plan assets in excess of the
accumulated benefit obligation for the years ended December 31,
follows:
The components of net periodic pension cost for the years
ended December 31, were as follows:
Pension Plans
Benefit
Restoration Plans
Pension Plans
(In thousands)
2008
2007
2006
2008
2007
2006
(In thousands)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2008
-
-
-
2007
$542,258
499,163
516,474
The actuarial assumptions used to determine benefit
obligations for the years ended December 31, were as follows:
Discount rate:
P.R. Plan
U.S. Plan
Rate of compensation
increase - weighted average:
P.R. Plan
U.S. Plan
2008
6.10%
4.00%
4.50%
-
2007
6.40%
4.50% *
4.60%
-
* 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.
The actuarial assumptions used to determine the components
of net periodic pension cost for the years ended December 31,
were as follows:
Pension Plans
2007
2006
2008
Benefit
Restoration Plans
2006
2008 2007
Discount rate:
P.R. Plan
U.S. Plan
Expected return on
plan assets
Rate of compensation
increase - weighted average:
P.R. Plan
U.S. Plan
6.40% 5.75% 5.50%
4.52% 4.50% 5.50%
6.40% 5.75% 5.50%
5.75% 5.75% 5.50%
8.00% 8.00% 8.00%
8.00% 8.00% 8.00%
4.60% 4.80% 4.20%
5.00% 5.00%
-
4.60% 4.80% 4.20%
5.00% 5.00%
-
Components of net
periodic pension cost:
Service cost
Interest cost
Expected return
on plan assets
Amortization of
prior service cost
Amortization of
net loss
Net periodic
cost (benefit)
Settlement (gain) loss
Curtailment loss (gain)
Total cost
$9,261
34,444
$11,023
31,850
$12,509
30,558
$729
1,843
$898
1,677
$1,047
1,601
(40,676)
(42,121)
(39,901)
(1,680)
(1,473)
(1,056)
266
-
3,295
-
-
$3,295
207
177
(53)
(53)
(55)
-
1,946
686
991
1,100
959
-
(247)
$712
5,289
-
-
$5,289
1,525
(24)
-
$1,501
2,040
-
(258)
$1,782
2,637
-
-
$2,637
During 2009, the Corporation expects to contribute $15.9
million to the pension plans and $2.3 million to the benefit
restoration plans.
The following benefit payments, attributable to past and
estimated future service, as appropriate, are expected to be paid:
(In thousands)
2009
2010
2011
2012
2013
2014 - 2018
Pension
$44,564
29,440
30,914
32,436
33,994
193,806
Benefit
Restoration Plans
$614
886
1,144
1,379
1,612
11,729
In February 2009, BPPR’s non-contributory, defined benefit
retirement plan (“Pension Plan”) was frozen with regards to all
future benefit accruals after April 30, 2009. This action was taken
by the Corporation to generate significant cost savings in light
of the severe economic downturn and decline in the Corporation’s
financial performance; this measure will be reviewed periodically
as economic conditions and the Corporation’s financial situation
improve. The Pension Plan had previously been closed to new
hires and was frozen as of December 31, 2005 to employees who
were under 30 years of age or were credited with less than 10 years
of benefit service. The aforementioned Pension Plan freezes apply
to the Benefit Restoration Plans as well.
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
138 POPULAR, INC. 2008 ANNUAL REPORT
become eligible for health care benefits, provided they reach
retirement age while working for BPPR.
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
2009 are as follows:
(In thousands)
Net prior service cost (credit)
2009
($1,046)
The status of the Corporation’s unfunded postretirement benefit
plan at December 31, was as follows:
The change in accumulated other comprehensive income, pre-
tax for the postretirement plan was as follows:
(In thousands)
2008
2007
Accumulated other comprehensive (income) loss at beginning
of year
($3,223)
$7,725
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 loss (income) at end of year
1,046
5,446
6,492
$3,269
1,046
(11,994)
(10,948)
($3,223)
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning
of the year
Service cost
Interest cost
Benefits paid
Actuarial loss (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
comprehensive loss ( income)
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 (loss) income
Net (liability) / asset at end of year
2008
2007
$126,046
2,142
8,219
(5,910)
5,446
$135,943
$134,606
2,312
7,556
(6,434)
(11,994)
$126,046
($135,943)
-
($135,943)
($126,046)
-
($126,046)
($3,253)
6,522
($4,299)
1,076
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation at December 31,
2008 was 6.10% (2007 - 6.40%).
The weighted average discount rate used to determine the
components of net periodic postretirement benefit cost for the
year ended December 31, 2008 was 6.40% (2007 - 5.75%; 2006 -
5.50%).
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
2008
$2,142
8,219
(1,046)
-
$9,315
2007
$2,312
7,556
(1,046)
-
$8,822
2006
$2,797
7,707
(1,046)
958
$10,416
$3,269
($3,223)
The assumed health care cost trend rates at December 31, were
($126,046)
($134,606)
as follows:
To determine postretirement benefit obligation:
(3,223)
(129,269)
(9,315)
5,910
(132,674)
7,725
(126,881)
(8,822)
6,434
(129,269)
(3,269)
($135,943)
3,223
($126,046)
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:
2008
7.50%
5.00%
2014
2008
8.00%
5.00%
2011
2007
8.00%
5.00%
2011
2007
9.00%
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.
Of the total postretirement liabilities as of December 31, 2008,
approximately $6.1 million were considered current liabilities
(2007 - $6.3 million).
Initial health care cost trend rate
Ultimate health care cost trend rate
Year that the ultimate trend
rate is reached
139
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)
Effect on total service cost and
interest cost components
Effect on postretirement
benefit obligation
1-Percentage
Point Increase
1-Percentage
Point Decrease
$449
6,532
($396)
(5,734)
The Corporation expects to contribute $6.1 million to the
postretirement benefit plan in 2009 to fund current benefit payment
requirements.
The following benefit payments, attributable to past and
estimated future service, as appropriate, are expected to be paid:
(In thousands)
2009
2010
2011
2012
2013
2014 - 2018
$6,140
6,565
6,985
7,376
7,771
45,098
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 2008 was $18.8 million (2007 - $17.4 million;
2006 - $27.3 million).
The plans held 17,254,175 (2007 - 14,972,919; 2006 -
14,483,925) shares of common stock of the Corporation with a
market value of approximately $89.0 million at December 31,
2008 (2007 - $158.7 million; 2006 - $260.0 million).
In February 2009, the Corporation suspended its matching
contributions to the Puerto Rico and U.S. subsidiaries savings
and investment plans as part of the actions taken to control costs
during the current economic crisis. This decision will be reviewed
periodically as economic conditions and the Corporation’s
financial situation improve.
Note 26 - 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, 2008 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.
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, 2008:
Exercise
Price
Range
per Share
$14.39 - $18.50
$19.25 - $27.20
Options
Outstanding
1,461,849
1,503,994
Weighted-
Average
Exercise
Price of
Options
Outstanding
$15.83
$25.23
Weighted-
Average
Remaining
Life of Options
Outstanding
in Years
3.74
5.48
Options
Exercisable
(fully vested)
1,461,849
1,191,265
Weighted-
Average
Exercise
Price of
Options
Exercisable
$15.83
$25.04
$14.39 - $27.20
2,965,843
$20.59
4.62
2,653,114
$19.96
The aggregate intrinsic value of options outstanding as of
December 31, 2008 was $1.6 million (2007 - $7.3 million; 2006
- $24.1 million). There was no intrinsic value of options exercisable
as of December 31, 2008 and 2007.
140 POPULAR, INC. 2008 ANNUAL REPORT
The following table summarizes the stock option activity and
related information:
Outstanding at January 1, 2006
Granted
Exercised
Forfeited
Expired
Outstanding as of December 31, 2006
Granted
Exercised
Forfeited
Expired
Outstanding as of December 31, 2007
Granted
Exercised
Forfeited
Expired
Options
Outstanding
3,223,703
-
(39,449)
(37,818)
(1,637)
3,144,799
-
(10,064)
(19,063)
(23,480)
3,092,192
-
-
(40,842)
(85,507)
Weighted-Average
Exercise Price
$20.63
-
15.78
23.75
24.05
$20.65
-
15.83
25.50
20.08
$20.64
-
-
26.29
19.67
Outstanding as of December 31, 2008
2,965,843
$20.59
The stock options exercisable at December 31, 2008 totaled
2,653,114 (2007 - 2,402,481; 2006 - 1,949,522). There were no
stock options exercised during the year ended December 31,
2008 (2007 - 10,064; 2006 - 39,449). Thus, there was no intrinsic
value of options exercised during the year ended December 31,
2008 (2007 - $28 thousand; 2006 - $86 thousand). The cash
received from the stock options exercised during the year ended
December 31, 2007 amounted to $0.2 million.
There were no new stock option grants issued by the
Corporation under the Stock Option Plan during 2008 and 2007.
During the year ended December 31, 2008, the Corporation
recognized $1.1 million in stock options expense, with a tax
benefit of $0.4 million (2007 - $1.8 million, with a tax benefit of
$0.7 million; 2006 - $3.0 million, with a tax benefit of $1.2
million). The total unrecognized compensation cost as of
December 31, 2008 related to non-vested stock option awards
was $0.5 million and is expected to be recognized over a
weighted-average period of 1 year.
Incentive Plan
The Incentive Plan permits the granting of incentive awards in
the form of Annual Incentive Awards, Long-term Performance Unit
Awards, Stock 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 restricted
shares, which become vested based on the employees’ continued
service with Popular. Unless otherwise stated in an agreement,
the compensation cost associated with the shares of restricted
stock is determined based on a two-prong vesting schedule. 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.
The following table summarizes the restricted stock activity
under the Incentive Plan and related information to members of
management:
Nonvested at January 1, 2006
Granted
Vested
Forfeited
Nonvested as of December 31, 2006
Granted
Vested
Forfeited
Nonvested as of December 31, 2007
Granted
Vested
Forfeited
Nonvested as of December 31, 2008
Restricted
Stock
172,622
444,036
-
(5,188)
611,470
-
(304,003)
(3,781)
303,686
-
(50,648)
(4,699)
248,339
Weighted-Average
Grant Date Fair Value
$27.65
20.54
-
19.95
$22.55
-
22.76
19.95
$22.37
-
20.33
19.95
$22.83
During the year ended December 31, 2008 and 2007, no shares
of restricted stock were awarded to management under the
Incentive Plan (2006 - 444,036).
Beginning in 2007, the Corporation authorized the issuance
of performance shares, in addition to restricted shares, under the
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, except when the participant’s employment is
terminated by the Corporation without cause. In such case, the
participant will receive a pro-rata amount of shares calculated as
if the Corporation would have met the performance goal for the
performance period. As of December 31, 2008, 7,106 shares have
been granted under this plan.
During the year ended December 31, 2008, the Corporation
recognized $2.2 million of restricted stock expense related to
141
Note 27 - Rental expense and commitments:
At December 31, 2008, 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
2009
2010
2011
2012
2013
Later years
Minimum
payments
Sublease
rentals
Net
(In thousands)
$42,804
37,398
32,815
30,969
33,011
200,492
$377,489
$907
559
521
481
925
369
$3,762
$41,897
36,839
32,294
30,488
32,086
200,123
$373,727
Total rental expense for the year ended December 31, 2008
was $79.5 million (2007 - $71.1 million; 2006 - $58.3 million),
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.
Note 28 - Income tax:
The components of income tax expense for the continuing
operations for the years ended December 31, are summarized below.
(In thousands)
2008
2007
2006
Current income tax expense:
Puerto Rico
Federal and States
Subtotal
Deferred income tax (benefit) expense:
Puerto Rico
Federal and States
Valuation allowance - beginning of
the year
Subtotal
Total income tax (benefit) expense
$91,609
5,106
96,715
(70,403)
2,507
432,715
364,819
$461,534
$157,436
7,302
164,738
(11,982)
(62,592)
-
(74,574)
$90,164
$131,687
35,656
167,343
(6,596)
(21,053)
-
(27,649)
$139,694
management incentive awards, with a tax benefit of $0.9 million
(2007 - $2.4 million, with a tax benefit of $0.9 million; 2006 -
$2.3 million, with a tax benefit of $0.9 million). The fair market
value of the restricted stock vested was $2 million at grant date
and $0.8 million at vesting date. This triggers a shortfall of $0.8
million that was recorded as an additional income tax expense
since the Corporation does not have any surplus due to windfalls.
The fair market value of the restricted stock earned was $7
thousand. During the year ended December 31, 2008, the
Corporation recognized $0.9 million of performance shares
expense, with a tax benefit of $0.4 million. The total unrecognized
compensation cost related to non-vested restricted stock awards
and performance shares to members of management as of December
31, 2008 was $5.4 million and is expected to be recognized over
a weighted-average period of 2.5 years.
The following table summarizes the restricted stock under the
Incentive Plan and related information to members of the Board of
Directors:
Non-vested at January 1, 2006
Granted
Vested
Forfeited
Non-vested as of December 31, 2006
Granted
Vested
Forfeited
Non-vested as of December 31, 2007
Granted
Vested
Forfeited
Non-vested as of December 31, 2008
Restricted
Stock
46,948
32,267
(2,601)
-
76,614
38,427
(115,041)
-
-
56,025
(56,025)
-
-
Weighted-Average
Grant Date Fair Value
$23.61
19.82
23.54
-
$22.02
15.89
19.97
-
-
10.75
10.75
-
-
During the year ended December 31, 2008, the Corporation
granted 56,025 (2007 - 38,427; 2006 - 32,267) 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 $0.5 million of restricted stock expense
related to these restricted stock grants, with a tax benefit of $0.2
million (2007 - $0.5 million, with a tax benefit of $0.2 million;
2006 - $0.6 million, with a tax benefit of $0.2 million). The fair
value at vesting date of the restricted stock vested during the
year ended December 31, 2008 for directors was $0.6 million.
142 POPULAR, INC. 2008 ANNUAL REPORT
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:
2008
2007
2006
% of
pre-tax
loss
% of
pre-tax
income Amount
% of
pre-tax
income
Amount
(Dollars in thousands)
Amount
Computed income tax at
statutory rates
($85,384)
39% $114,142
39%
$243,362
43.5%
Benefits of net tax exempt
interest income
(62,600)
29
(60,304)
(21)
(70,250)
(13)
Effect of income subject to
capital gain tax rate
Non deductible goodwill
(17,905)
8
(24,555)
(9)
(2,426)
impairment
-
-
57,544
20
Deferred tax asset valuation
allowance
643,011
(294)
-
Difference in tax rates due to
multiple jurisdictions
16,398
(8)
10,391
-
4
States taxes
and other
(31,986)
15
(7,054)
Income tax (benefit) expense $461,534
(211%)
$90,164
(2)
31%
(10,377)
(2)
$139,694
24.5%
-
-
-
-
-
(20,615)
(4)
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:
(In thousands)
Deferred tax assets:
Tax credits available for carryforward
Net operating loss and donation
carryforward available
Deferred compensation
Postretirement and pension benefits
SFAS 159 - Fair value option
Deferred loan origination fees
Allowance for loan losses
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
Other temporary differences
Total gross deferred tax liabilities
Valuation allowance
Net deferred tax asset
2008
2007
$74,676
$20,132
670,326
2,628
149,027
13,132
8,603
368,690
600
18,307
500
-
11,263
34,223
1,351,975
21,017
78,761
11,228
9,348
13,232
133,586
861,018
175,349
5,052
62,548
-
8,333
214,544
1,488
16,355
932
66,105
17,017
14,204
602,059
26,073
19,426
9,938
10,346
16,266
82,049
39
$357,371
$519,971
The net deferred tax asset shown in the table above at December
31, 2008 is reflected in the consolidated statements of condition
as $357.5 million in deferred tax assets (in the “other assets”
caption) (2007 - $525.4 million) and $136 thousand in deferred
tax liabilities (in the “other liabilities” caption) (2007 - $5.4
million), reflecting the aggregate deferred tax assets or liabilities
of individual tax-paying subsidiaries of the Corporation.
At December 31, 2008, the Corporation had total credits of
$74.7 million that will reduce the regular income tax liability in
future years expiring in annual installments through the year 2016.
143
The net operating loss carryforwards (“NOLs”) outstanding at
December 31, 2008 expire as follows:
(In thousands)
2013
2014
2015
2016
2017
2018
2019
2021
2022
2023
2026
2027
2028
$1,842
1,376
2,395
7,263
8,542
14,640
1
76
971
1,248
492
144,439
487,041
$670,326
SFAS No.109 states that a deferred tax asset should be reduced
by a valuation allowance if based on the weight of all available
evidence, it is more likely than not (a likelihood of more than
50%) that some portion or the entire deferred tax asset will not be
realized. The valuation allowance should be sufficient to reduce
the deferred tax asset to the amount that is more likely than not to
be realized. The determination of whether a deferred tax asset is
realizable is based on weighting all available evidence, including
both positive and negative evidence. SFAS No. 109 provides that
the realization of deferred tax assets, including carryforwards and
deductible temporary differences, depends upon the existence of
sufficient taxable income of the same character during the
carryback or carryforward period. SFAS No.109 requires the
consideration of all sources of taxable income available to realize
the deferred tax asset, including the future reversal of existing
temporary differences, future taxable income exclusive of reversing
temporary differences and carryforwards, taxable income in
carryback years and tax-planning strategies.
The Corporation’s U.S. mainland operations are in a cumulative
loss position for the three-year period ended December 31, 2008.
For purposes of assessing the realization of the deferred tax assets
in the U.S. mainland, this cumulative taxable loss position is
considered significant negative evidence and has caused us to
conclude that the Corporation will not be able to realize the deferred
tax assets in the future. As of December 31, 2008, the Corporation
recorded a full valuation allowance of $861 million on the deferred
tax assets of the Corporation’s U.S. operations.
The full valuation allowance in the Corporation’s U.S.
operations was recorded in consideration of the requirements of
SFAS No.109. As previously indicated, the Corporation’s U.S.
mainland operations are in a cumulative loss position for the
three-year period ended December 31, 2008. For purposes of
assessing the realization of the deferred tax assets in the U.S.
mainland, this cumulative taxable loss position, along with the
evaluation of all sources of taxable income available to realize the
deferred tax asset, has caused management to conclude that the
Corporation will not be able to fully realize the deferred tax assets
in the future, considering solely the criteria of SFAS No. 109.
At September 30, 2008, the Corporation’s U.S. mainland
operations’ deferred tax assets amounted to $683 million with a
valuation allowance of $360 million. At that time, the Corporation
assessed the realization of the deferred tax assets by weighting all
available negative and positive evidence, including future
profitability, taxable income on carryback years and tax planning
strategies. The Corporation’s U.S. mainland operations were also
in a cumulative loss position for the three-year period ended
September 30, 2008. For purposes of assessing the realization of
the deferred tax assets in the U.S. mainland, this cumulative taxable
loss position was considered significant negative evidence and
caused management to conclude that at September 30, 2008, the
Corporation would not be able to fully realize the deferred tax
assets in the future. However, at that time, management also
concluded that $322 million of the U.S. deferred tax assets would
be realized. In making this analysis, management evaluated the
factors that contributed to these losses in order to assess whether
these factors were temporary or indicative of a permanent decline
in the earnings of the U.S. mainland operations. Based on the
analysis performed, management determined that the cumulative
loss position was caused primarily by a significant increase in
credit losses in two of its main businesses due to the unprecedented
current credit market conditions, losses related to the PFH
discontinued business, and restructuring charges. In assessing
the realization of the deferred tax assets, management considered
all four sources of taxable income mentioned in SFAS No. 109,
including its forecast of future taxable income, which included
assumptions about the unprecedented deterioration in the economy
and in credit quality. The forecast included cost reductions
initiated in connection with the reorganization of the U.S.
mainland operations, future earnings projections for BPNA and
two tax-planning strategies. The two strategies considered in
management’s analysis at September 30, 2008 included reducing
the level of interest expense in the U.S. operations by transferring
such debt to the Puerto Rico operations and the transfer of a
profitable line of business from the Puerto Rico operations to the
U.S. mainland operations. Also, management’s analyses considered
the past earnings history of BPNA and the discontinuance of one
of the subsidiaries causing significant operating losses.
Furthermore, management considered the long carryforward
period for use of the net operating losses which extends up to 20
years. At September 30, 2008, management concluded that it was
more likely than not that the Corporation would not be able to
fully realize the benefit of these deferred tax assets and thus, a
valuation allowance for $360 million was recorded during that
144 POPULAR, INC. 2008 ANNUAL REPORT
period, which was supported by specific computations based on
factors such as financial projections and expected benefits derived
from tax planning strategies as described above.
“controlled” subsidiaries subject to taxation in Puerto Rico and
85% on dividends received from other taxable domestic
corporations.
The valuation of deferred tax assets requires judgment based
on the weight of all available evidence. Certain events transpired
in the fourth quarter of 2008 that led management to reassess its
expectations of the realization of the deferred tax assets of the
U.S. mainland operations and to conclude that a full valuation
allowance was necessary. These circumstances included a
significant increase in the provision for loan losses for the Popular
North America (“PNA”) operations. The provision for loans losses
for PNA consolidated amounted to $208.9 million for the fourth
quarter of 2008, compared with $133.8 million for the third quarter
of 2008. Actual loan net charge-offs were $105.7 million for the
fourth quarter of 2008, compared with $70.2 million in the third
quarter. This sharp increase has triggered an increase in the
estimated provision for loan losses for 2009. Management had
also considered during the third quarter further actions expected
from the U.S. Government with respect to the acquisition of
troubled assets under the TARP, that did not materialize in the
fourth quarter of 2008.
Additional uncertainty in an expected rebound in the economy
and banking industry, based on most recent economic outlooks,
forced management to place no reliance on forecasted income. A
tax strategy considered in the September 30, 2008 analysis
included the transfer of borrowings from PNA holding company
to the Puerto Rico operations, particularly the parent company
Popular, Inc. holding company. This tax planning strategy
continues to be prudent and feasible but its benefit has been sharply
reduced after the credit rating agencies downgraded Popular, Inc.’s
debt, which was expected to occur since the end of 2008 and was
confirmed in January 2009. The rating downgrade would increase
the cost of making any debt transfer, and accordingly, reduce the
benefit of such action. The other tax strategy was the transfer of a
profitable line of business from BPPR to BPNA. Although that
strategy is still feasible, given the reduced profitability levels in
the BPPR operations, which were reduced in the fourth quarter
due to significant increased credit losses, management is less
certain as to whether it is prudent to transfer a profitable business
to the U.S. operations at this time.
Management will reassess the realization of the deferred tax
assets based on the criteria of SFAS No. 109 each reporting period.
To the extent that the financial results of the U.S. operations
improve and the deferred tax asset becomes realizable, the
Corporation will be able to reduce the valuation allowance through
earnings.
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
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. As of December 31, 2008, the
Corporation had no current or accumulated earnings and profits
on its combined U.S. subsidiaries’ operations.
The Corporation’s federal income tax (benefit) provision for
2008 was $436.9 million (2007 - ($196.5 million); 2006 - $27.0
million). 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 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 2007
Additions for tax positions of prior years
Reductions for tax positions of prior years
Balance as of December 31, 2007
Additions for tax positions related to 2008
Additions for tax positions of prior years
Balance as of December 31, 2008
Total
$20.4
5.9
0.2
(4.3)
$22.2
12.9
10.1
$45.2
As of December 31, 2008, the related accrued interest
approximated $4.7 million (2007 - $2.9 million). The interest
expense recognized during 2008 was $1.8 million ($480 thousand
in 2007). Management determined that as of December 31, 2008
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 $43.7 million as of December 31, 2008 (2007
- $20.9 million).
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, 2008, the following years remain subject to
examination: U.S. Federal jurisdiction – 2006 through 2008 and
Puerto Rico – 2004 through 2008. The U.S. Internal Revenue
Service (“IRS”) commenced an examination of the Corporation’s
U.S. operations tax returns for 2006 and 2007 that is anticipated
to be finished by the end of 2009. As of December 31, 2008, 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. As a result of examinations the Corporation
anticipates a reduction in the total amount of unrecognized tax
benefits within the next 12 months, which could be approximately
$15 million.
N o t e 2 9 - 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
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.
145
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:
2008
2007
Credit card lines
Commercial lines of credit
Other unused credit commitments
Commercial letters of credit
Standby letters of credit
Commitments to originate mortgage loans
$3,571,404
2,960,174
585,399
18,572
181,223
71,297
$3,143,717
4,259,851
506,680
25,584
174,080
112,704
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
letters of credit is essentially the same as that involved in extending
loan facilities to customers.
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, 2008, the Corporation also maintained other
non-credit commitments for $10 million, primarily for the
acquisition of other investments (2007 - $39 million).
146 POPULAR, INC. 2008 ANNUAL REPORT
Geographic concentration
As of December 31, 2008, the Corporation had no significant
concentrations of credit risk and no significant exposure to highly
leveraged transactions in its loan portfolio. Note 35 provides
further information on the asset composition of the Corporation
by geographical area as of December 31, 2008 and 2007.
Included in total assets of Puerto Rico are investments in
obligations of the U.S. Treasury and U.S. Government agencies
amounting to $4.7 billion in 2008 (2007 - $5.4 billion).
Note 30 - Fair value option:
During 2008 and upon adoption of SFAS No. 159, the Corporation
elected to measure at fair value certain loans and borrowings
outstanding at January 1, 2008. These financial instruments, which
pertained to Popular Financial Holdings, were as follows:
• Approximately $1.2 billion of whole loans held-in-portfolio
by PFH that were outstanding as of December 31, 2007.
These whole loans consisted principally of first lien and closed-
end second lien residential mortgage loans that were
originated through the exited origination channels of PFH
(e.g. asset acquisition, broker and retail channels), and home
equity lines of credit that had been originated by E-LOAN,
but sold to PFH as part of the Corporation’s 2007 U.S.
reorganization whereby E-LOAN became a subsidiary of
BPNA. Also, to a lesser extent, the loan portfolio included
mixed-used / multi-family loans (small commercial category)
and manufactured housing loans.
• Approximately $287 million of “owned-in-trust” loans and
$287 million of bond certificates associated with PFH
securitization activities that were outstanding as of December
31, 2007. The “owned-in-trust” loans were pledged as
collateral for the bond certificates as a financing vehicle
through on-balance sheet securitization transactions. These
loan securitizations conducted by the Corporation had not
met the sale criteria under SFAS No. 140; accordingly, the
transactions were treated as on-balance sheet securitizations
for accounting purposes. The “owned-in-trust” loans include
first lien and closed-end second lien residential mortgage
loans, mixed-used / multi-family loans (small commercial
category) and manufactured housing loans. The majority of
the portfolio was comprised of first lien residential mortgage
loans. Upon the adoption of SFAS No. 159, the loans and
related bonds were both measured at fair value, thus their net
position better portrayed the credit risk born by the
Corporation.
Management believed upon adoption of the accounting standard
that accounting for these loans at fair value provided a more relevant
and transparent measurement of the realizable value of the assets
and differentiated the PFH portfolio from the loan portfolios that
the Corporation continued to originate through channels other
than PFH.
Excluding the PFH loans elected for the fair value option as
described above, PFH held approximately $1.8 billion of
additional loans at the time of the fair value option election on
January 1, 2008. Of these remaining loans, at adoption date, $1.4
billion were classified as loans held-for-sale and were not subject
to the fair value option as the loans were intended to be sold to an
institutional buyer during the first quarter of 2008. These loans
were sold in March 2008. The remaining $0.4 billion in other
loans held-in-portfolio at PFH as of that same date consisted
principally of a small portfolio of auto loans that was acquired
from E-LOAN, warehousing revolving lines of credit with monthly
advances and pay-downs, and construction credit agreements in
which the permanent financing was to be provided by a lender
other than PFH.
There were no other assets or liabilities elected for the fair
value option after January 1, 2008.
PFH, which held the SFAS No. 159 loan portfolio, was financed
primarily by advances from its holding company, Popular North
America (“PNA”). In turn, PNA depended totally on the capital
markets to raise financing to meet its financial obligations. Given
the mounting pressure to address PNA’s liquidity needs in the
second half of 2008 and the continuing problems with accessing
the U.S. capital markets given the current unprecedented market
conditions, management decided that the only viable option
available to permanently raise the liquidity required by PNA was
to sell PFH assets, which included the SFAS No. 159 financial
instruments.
As described in Note 2 to the consolidated financial statements,
during the third and fourth quarters of 2008, the Corporation
substantially sold all of PFH’s assets. The sale of assets included
the sale of the implied residual interest on the on-balance sheet
securitizations transferring all rights and obligations to the third
party with no continuing involvement whatsoever of the
Corporation with respect to the transferred assets. As such, the
Corporation achieved sale accounting with respect to those
securitizations and derecognized the associated loans and the
bond certificates which had been measured at fair value pursuant
to the SFAS No. 159 election described before.
At December 31, 2008, there were only $5 million in loans
measured at fair value pursuant to SFAS No. 159, with unrealized
losses of $37 million. Non-performing loans measured pursuant
to SFAS No. 159 were fair valued at $1 million at December 31,
2008, resulting in unrealized losses of approximately $10 million
compared to an unpaid principal balance of $11 million. The
loans are past due 90 days or more as of the end of 2008. As of
December 31, 2008, there was no debt outstanding measured at
fair value pursuant to SFAS No. 159.
During the year ended December 31, 2008, the Corporation
recognized $198.9 million in losses attributable to changes in
the fair value of loans and notes payable (bond certificates). These
losses were included in the caption “Loss from discontinued
operations, net of tax” in the consolidated statement of operations.
It is the Corporation’s policy to recognize interest income
separately from other changes in the fair value of loans. Interest
income is included as part of net interest income.
Upon adoption of SFAS No. 159, the Corporation recognized
a $262 million negative after-tax adjustment ($409 million before
tax) to beginning retained earnings due to the transitional
adjustment for electing the fair value option, as detailed in the
table below.
January 1, 2008
(Carrying value)
prior to adoption)
$1,481,297
Cumulative effect
adjustment to
January 1, 2008
retained earnings -
Gain (Loss)
($494,180)
January 1, 2008
Fair value
(Carrying value
after adoption)
$987,117
($286,611)
$85,625
($200,986)
($408,555)
146,724
($261,831)
(In thousands)
Loans
Notes payable
(bond certificates)
Pre-tax cumulative effect
of adopting fair value
option accounting
Net increase in deferred
tax asset
After-tax cumulative effect of
adopting fair value option
accounting
On January 1, 2008, the Corporation eliminated $37 million
in allowance for loan losses associated to the loan portfolio
measured at fair value pursuant to SFAS No. 159 and recognized
the amount as part of the cumulative effect adjustment.
147
SFAS No. 157 establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value into
three levels in order to increase consistency and comparability in
fair value measurements and disclosures. The classification of
assets and liabilities within the hierarchy is based on whether the
inputs to the valuation methodology used for the fair value
measurement are observable or unobservable. Observable inputs
reflect the assumptions market participants would use in pricing
the asset or liability based on market data obtained from
independent sources. Unobservable inputs reflect the Corporation’s
estimates about assumptions that market participants would use
in pricing the asset or liability based on the best information
available. The hierarchy is broken down into three levels based on
the reliability of inputs as follows:
• Level 1- Unadjusted quoted prices in active markets for
identical assets or liabilities that the Corporation has the
ability to access at the measurement date. Valuation on these
instruments does not necessitate a significant degree of
judgment since valuations are based on quoted prices that
are readily available in an active market.
• Level 2- Quoted prices other than those included in Level 1
that are observable either directly or indirectly. Level 2 inputs
include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and other inputs
that are observable or that can be corroborated by observable
market data for substantially the full term of the financial
instrument.
• Level 3- Inputs are unobservable and significant to the fair
value measurement. Unobservable inputs reflect the
Corporation’s own assumptions about assumptions that
market participants would use in pricing the asset or liability.
Note 31 - Fair value measurement:
As indicated in Note 1 to the consolidated financial statements,
effective January 1, 2008, the Corporation adopted SFAS No.
157, which provides a framework for measuring fair value under
accounting principles generally accepted.
Under SFAS No. 157, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the
measurement date. A fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in the
principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market for the asset or
liability.
The Corporation maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the
observable inputs be used when available. Fair value is based upon
quoted market prices when available. If listed price or quotes are
not available, the Corporation employs internally-developed
models that primarily use market-based inputs including yield
curves, interest rates, volatilities, and credit curves, among
others. Valuation adjustments are limited to those necessary to
ensure that the financial instrument’s fair value is adequately
representative of the price that would be received or paid in the
marketplace. These adjustments include amounts that reflect
counterparty credit quality, the Corporation’s credit standing,
148 POPULAR, INC. 2008 ANNUAL REPORT
constraints on liquidity and unobservable parameters that are
applied consistently.
The estimated fair value may be subjective in nature and may
involve uncertainties and matters of significant judgment for
certain financial instruments. Changes in the underlying
assumptions used in calculating fair value could significantly
affect the results.
Fair Value on a Recurring Basis
The following fair value hierarchy table presents information about
the Corporation’s assets and liabilities measured at fair value on a
recurring basis at December 31, 2008:
2008
Quoted prices
in active
markets for
Significant
other
identical assets observable unobservable
inputs
Level 2
or liabilities
Level 1
inputs
Level 3
Significant
Balance as
of
December 31,
2008
(In millions)
Assets
Continuing Operations
Investment securities
available-for-sale
Trading account securities
Derivatives
Mortgage servicing rights
Discontinued Operations
Loans measured at fair value
(SFAS No. 159)
Total
Liabilities
Continuing Operations
Derivatives
Total
$5
-
-
-
-
$5
-
-
$7,883
346
110
-
-
$8,339
$37
300
-
176
$7,925
646
110
176
5
$518
5
$8,862
($117)
($117)
-
-
($117)
($117)
The following tables present the changes in Level 3 assets and
liabilities measured at fair value on a recurring basis for the year
ended December 31, 2008:
(In millions)
Assets from Continuing Operations
Balance as of January 1, 2008
Gains (losses) included in
earnings
Gains (losses) included in
other comprehensive
income
Increase (decrease) in accrued
interest receivable / payable
Purchases, sales, issuances,
settlements, paydowns and
maturities (net)
Balance as of December 31, 2008
Investments
securities
available-
for-sale
Trading Mortgage
servicing
account
rights
securities
$39
$233
$111
-
1
-
7(a)
(27) (b)
-
-
-
-
(3)
$37
60
$300
92
$176
Changes in unrealized gains
(losses) included in earnings
related to assets and liabilities
still held as of December 31, 2008
($16)
(a) Gains (losses) are included in “Trading account profit (loss)” in
the statement of operations.
(b) Gains (losses) are included in “Other service fees” in the statement
of operations.
$5
-
Loans measured
at fair value
(SFAS No. 159)
Residual Mortgage
servicing
interests
rights
trading
Residual
interests
available-
for-sale
(In millions)
Assets from Discontinued
Operations
Balance as of January 1, 2008
Gains (losses) included in
earnings (a)
Gains (losses) included in other
comprehensive income
Increase (decrease) in accrued
interest receivable / payable
Purchases, sales, issuances,
settlements, paydowns
and maturities (net)
Balance as of December 31, 2008
$987
(188)
-
(13)
(781)
$5
$40
(32)
-
-
(8)
-
$81
(44)
-
-
(37)
-
$4
(4)
-
-
-
-
Changes in unrealized gains
(losses) included in earnings
related to assets and liabilities
still held as of December 31, 2008
(a) Gains (losses) are included in “Loss from discontinued operations, net of tax” in
($38)
-
-
-
the statement of operations.
(In millions)
Liabilities from Discontinued
Operations
Balance as of January 1, 2008
Gain (losses) included in earnings (a)
Gain (losses) included in other
comprehensive income
Increase (decrease) in accrued interest
receivable / payable
Purchases, sales, issuances, settlements,
paydowns and maturities (net)
Balance as of December 31, 2008
Notes payable
measured at
fair value
(SFAS No. 159)
($201)
(11)
-
-
212
-
Changes in unrealized gains (losses)
included in earnings related to
assets and liabilities still held as of
December 31, 2008
(a) Gains (losses) are included in “Loss from discontinued operations,
net of tax” in the statement of operations.
-
There were no transfers in and / or out of Level 3 for financial
instruments measured at fair value on a recurring basis during the
year ended December 31, 2008.
Gains and losses (realized and unrealized) included in earnings
for the year ended December 31, 2008 for Level 3 assets and
liabilities included in the previous tables are reported in the
consolidated statement of operations as follows:
Changes in unrealized gains
or losses relating to assets /
Total gains (losses)
included in earnings
liabilities still held at
reporting date
(In millions)
Continuing Operations
Other service fees
Trading account loss
Discontinued Operations (1)
Interest income
Other service fees
Net loss on sale and valuation
adjustments of investment
securities
Trading account loss
Losses from changes in fair value
related to instruments measured at
fair value pursuant to SFAS No. 159
($27)
7
12
(44)
(5)
(43)
($16)
5
-
-
-
-
(199)
(38)
Total
(1) All income statement amounts for the discontinued operations disclosed in this
table are aggregated and included in the line item “Loss from discontinued operations,
net of tax” in the consolidated statement of operations.
($299)
($49)
Additionally, the Corporation may be required to measure
certain assets at fair value on a nonrecurring basis in accordance
with generally accepted accounting principles. The adjustments
149
to fair value usually result from the application of lower of cost or
market accounting, identification of impaired loans requiring
specific reserves under SFAS No. 114, or write-downs of individual
assets. The following table presents those financial assets that
were subject to a fair value measurement on a non-recurring basis
during the year ended December 31, 2008 and which are still
included in the consolidated statement of condition as of December
31, 2008. The amounts disclosed represent the aggregate of the
fair value measurements of those assets as of the end of the reporting
period.
Quoted prices
in active
markets for
Significant
other
identical assets observable unobservable
inputs
Level 2
or liabilities
Level 1
inputs
Level 3
Significant
Balance as
of
December 31,
2008
-
-
-
-
$523
364
$523
364
(In millions)
Assets
Continuing Operations
Loans (1)
Loans held-for-sale (2)
Discontinued Operations
-
-
2
2
Loans held-for-sale (2)
(1) Relates primarily to certain impaired collateral dependent loans. The impairment
was measured based on the fair value of the collateral, which is derived from appraisals
that take into consideration prices in observed transactions involving similar assets in
similar locations, in accordance with the provisions of SFAS No. 114 (as amended by
SFAS No. 118).
(2) Relates principally to lower of cost or market adjustments of loans held-for-sale
and of loans transferred from loans held-in-portfolio to loans held-for-sale. These
adjustments were principally determined based on negotiated price terms for the loans.
Following is a description of the Corporation’s valuation
methodologies used for assets and liabilities measured at fair value.
The disclosure requirements exclude certain financial instruments
and all non-financial instruments. Accordingly, the aggregate
fair value amounts of the financial instruments presented in Note
31 do not represent management’s estimate of the underlying
value of the Corporation.
Trading Account Securities and Investment Securities Available-
for-Sale
• U.S. Treasury securities: The fair value of U.S. Treasury
securities is based on yields that are interpolated from the
constant maturity treasury curve. These securities are
classified as Level 2.
• Obligations of U.S. Government sponsored entities: The
Obligations of U.S. Government sponsored entities include
U.S. agency securities. The fair value of U.S. agency
securities is based on an active exchange market and is
150 POPULAR, INC. 2008 ANNUAL REPORT
based on quoted market prices for similar securities. The
U.S. agency securities are classified as Level 2.
also affect the price. Corporate securities that trade less
frequently or are in distress are classified as Level 3.
• Obligations of Puerto Rico, States and political
subdivisions: Obligations of Puerto Rico, States and
political subdivisions include municipal bonds. The bonds
are segregated and the like characteristics divided into
specific sectors. Market inputs used in the evaluation
process include all or some of the following: trades, bid
price or spread, two sided markets, quotes, benchmark
curves including but not limited to Treasury benchmarks,
LIBOR and swap curves, market data feeds such as MSRB,
discount and capital rates, and trustee reports. The municipal
bonds are classified as Level 2.
• Mortgage-backed securities: Certain agency mortgage-
backed securities (“MBS”) are priced based on a bond’s
theoretical value from similar bonds defined by credit quality
and market sector. Their fair value incorporates an option
adjusted spread. The agency MBS are classified as Level 2.
Other agency MBS such as GNMA Puerto Rico Serials are
priced using an internally-prepared pricing matrix with
quoted prices from local brokers dealers. These particular
MBS are classified as Level 3.
• Collateralized mortgage obligations: Agency and private
collateralized mortgage obligations (“CMOs”) are priced
based on a bond’s theoretical value from similar bonds defined
by credit quality and market sector and for which fair value
incorporates an option adjusted spread. The option adjusted
spread model includes prepayment and volatility
assumptions, ratings (whole loans collateral) and spread
adjustments. These investment securities are classified as
Level 2.
• Equity securities: Equity securities with quoted market
prices obtained from an active exchange market are classified
as Level 1.
• Corporate securities and mutual funds: Quoted prices for
these security types are obtained from broker dealers. Given
that the quoted prices are for similar instruments or do not
trade in highly liquid markets, the corporate securities and
mutual funds are classified as Level 2. The important
variables in determining the prices of Puerto Rico tax-
exempt mutual fund shares are net asset value, dividend
yield and type of assets in the fund. All funds trade based on
a relevant dividend yield taking into consideration the
aforementioned variables. In addition, demand and supply
Derivatives
Interest rate swaps, interest rate caps and index options are traded
in over-the-counter active markets. These derivatives are indexed
to an observable interest rate benchmark, such as LIBOR or equity
indexes, and are priced using an income approach based on present
value and option pricing models using observable inputs. Other
derivatives are exchange-traded, such as futures and options, or
are liquid and have quoted prices, such as forward contracts or “to
be announced securities” (“TBAs”). All of these derivatives are
classified as Level 2. The non-performance risk is determined
using internally-developed models that consider the collateral held,
the remaining term, and the creditworthiness of the entity that
bears the risk, and uses available public data or internally-
developed data related to current spreads that denote their
probability of default.
Mortgage servicing rights
Mortgage servicing rights (“MSRs”) do not trade in an active
market with readily observable prices. MSRs are priced internally
using a discounted cash flow model. The valuation model
considers servicing fees, portfolio characteristics, prepayments
assumptions, delinquency rates, late charges, other ancillary
revenues, cost to service and other economic factors. Due to the
unobservable nature of certain valuation inputs, the MSRs are
classified as Level 3.
Loans measured at fair value pursuant to SFAS No. 159
The fair value of loans measured at fair value pursuant to the SFAS
No. 159 election was estimated based on a liquidation analysis of
the portfolio or market indexes reflective of market prices for
similar credit exposure. The liquidation analysis considered
factors such as nature of the collateral, lien position and loss
severity experience. Due to the subprime characteristics of the
loan portfolio measured at fair value, the lack of trading activity
in that market, and the nature of the valuation inputs, these loans
are classified as Level 3.
Loans held-in-portfolio considered impaired under SFAS No. 114
that are collateral dependent
The impairment is measured based on the fair value of the collateral,
which is derived from appraisals that take into consideration
prices in observed transactions involving similar assets in similar
locations, in accordance with the provisions of SFAS No. 114 (as
amended by SFAS No. 118). Currently, the associated loans
considered impaired are classified as Level 3.
151
Loans measured at fair value pursuant to lower of cost or fair
value adjustments
Loans measured at fair value on a nonrecurrent basis pursuant to
lower of cost or fair value were priced based on bids received from
potential buyers, secondary market prices, and discounting cash
flow models which incorporate internally developed assumptions
for prepayments and credit loss estimates. These loans were
classified as Level 3.
Note 32 - Disclosures about fair value of financial
instruments:
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
value of derivative instruments refer to Note 33 to the consolidated
financial statements.
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, 2008
and 2007, 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, 2008 and 2007:
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 6, 7 and 33.
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 interest rate terms, credit quality
and vintage. Generally, the fair values were estimated by
discounting scheduled cash flows for the segmented groups of
loans using interest rates based on consideration of secondary
market yields for similar types of loans. Additionally, prepayment,
default and recovery assumptions have been applied in the mortgage
loan portfolio valuations. Generally accepted accounting
principles do not require 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 being offered on
certificates with similar maturities. The value of these deposits
in a transaction between willing parties is in part dependent of the
buyer’s ability to reduce the servicing cost and the attrition that
sometimes occurs. Therefore, the amount a buyer would be willing
to pay for these deposits could vary significantly from the presented
fair value.
152 POPULAR, INC. 2008 ANNUAL REPORT
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, 2008 and 2007, respectively.
As part of the fair value estimation procedures of certain
liabilities, including repurchase agreements (regular and
structured) and FHLB advances, the Corporation considered, where
applicable, the collaterization levels as part of its evaluation of
non-performance risk.
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. The fair value of letters of credit is based on
fees currently charged on similar agreements.
Carrying or notional amounts, as applicable, and estimated
fair values for financial instruments at December 31, were:
(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
2008
2007
Carrying
amount
Fair
value
Carrying
amount
Fair
value
$1,579,641
645,903
$1,579,641
645,903
$1,825,537
767,955
$1,825,537
767,955
7,924,487
7,924,487
8,515,135
8,515,135
294,747
290,133
484,466
486,139
217,667
536,058
24,850,066
217,861
541,576
17,383,956
216,585
1,889,546
27,472,624
216,819
1,983,502
27,511,573
$27,550,205
144,471
$27,793,826
144,471
$28,334,478
303,492
$28,432,009
303,492
3,407,137
4,934
3,386,763
Notional
amount
3,592,236
4,934
3,257,491
5,133,773
1,501,979
4,621,352
Fair
value
Notional
amount
5,149,571
1,501,979
4,536,434
Fair
value
$7,116,977
199,795
$943
3,938
$7,910,248
199,664
$17,199
1,960
Note: Amounts as of December 31, 2008 exclude the discontinued operations.
N o t e 3 3 - 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
activities:
The following discussion and tables provide a description of the
derivative instruments used as part of the Corporation’s interest
rate risk management strategies. The use of derivatives is
incorporated 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
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.
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. The credit risk of the counterparty resulted in a
reduction of derivative assets by $7.1 million at December 31,
2008. In the other hand, when the fair value of a derivative contract
is negative, the Corporation owes the counterparty and, therefore,
the fair value of derivatives liabilities incorporates nonperformance
risk or the risk that the obligation will not be fulfilled. The
incorporation of the Corporation’s own credit risk resulted in a
reduction of derivative liabilities by $8.9 million at December
31, 2008. These credit risks adjustments resulted in an earnings
gain of $1.8 million. Credit risks related to derivatives was not
significant at December 31, 2007.
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
153
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, 2008 and 2007, there were no derivatives
designated as fair value hedges.
Trading and Non-Hedging Activities
The fair value and notional amounts of non-hedging derivatives
at December 31, 2008, and 2007 were:
December 31, 2008
Fair Values
Notional Amount Derivative Assets Derivative Liabilities
$272,301
$38
$4,733
(In thousands)
Forward contracts
Interest rate swaps
associated with:
- swaps with corporate
clients
- swaps offsetting position
of corporate client swaps
Foreign currency and
1,038,908
100,668
1,038,908
-
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
Bifurcated embedded options
377
373
128,284
128,284
208,557
178,608
18
16
89
-
8,821
-
-
98,437
15
16
-
89
-
8,584
Total
$2,994,600
$109,650
$111,874
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, 2008, and 2007 are presented
below:
2008
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Equity
OCI
Ineffectiveness
(In thousands)
Asset Hedges
Forward commitments
$112,500
Liability Hedges
Interest rate swaps
Total
$200,000
$312,500
$2,255
($1,169)
($332)
$2,380
$4,635
($2,380)
($3,549)
-
($332)
$6
-
$6
2007
(In thousands)
Asset Hedges
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Equity
OCI
Ineffectiveness
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)
-
-
-
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 77 days.
The Corporation also has an 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. This interest rate swap has a maximum remaining
maturity of 3.2 months.
154 POPULAR, INC. 2008 ANNUAL REPORT
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
Forward Contracts
The Corporation has forward contracts to sell mortgage-backed
securities with terms lasting less than a month, which are
accounted for as trading derivatives. Changes in their fair value
are recognized in trading gains and losses.
During 2007 and most of 2008, the Corporation also had
forward loan sale commitments to economically hedge the changes
in fair value of mortgage loans held for sale and mortgage pipeline
associated with interest rate locks commitments through
mandatory and best effort sale agreements. These contracts were
recognized at fair value with changes reported as part of the gain
on sale of loans. At December 31, 2008, the Corporation did not
have these forward loan sale commitments outstanding since they
were entered mostly as part of a business strategy that was
discontinued during 2008.
Interest Rates Swaps and Foreign Currency and Exchange Rate
Commitments
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.
During 2007 and part of 2008, the Corporation had interest
rate swaps to economically hedge the cost of certain short-term
borrowings and to economically hedge the payments of bond
certificates offered as part of on-balance sheet securitizations,
which were terminated and deconsolidated, respectively, during
2008 as a result of the discontinued operations. Changes in their
fair value were recognized as part of interest expense.
Interest Rate Caps
The Corporation enters into interest rate caps as an intermediary
on behalf of its customers and simultaneously takes offsetting
positions under the same terms and conditions thus minimizing
its market and credit risks.
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
The Corporation had mortgage rate lock commitments during
2007 and most of 2008 to fund loans at interest rates previously
agreed for a specified period of time which were accounted for as
derivatives as per SFAS No. 133, as amended. The Corporation
did not have any mortgage rate lock commitments outstanding at
December 31, 2008.
155
N o t e 3 4 - S u p p l e m e n t a l d i s c l o s u r e o n t h e
consolidated statements of cash flows:
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 following table reflects the effect in the Consolidated
Statements of Cash Flows of the change in reporting period of
certain of the Corporation's non-banking subsidiaries for the year
ended December 31, 2006:
(In thousands)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash and due from banks
2006
($80,906)
(104,732)
197,552
$11,914
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
2008
$81,115
1,165,930
2007
$160,271
1,673,768
2006
$194,423
1,604,054
Non-cash activities:
Loans transferred to other real estate
Loans transferred to other property
112,870
83,833
Total loans transferred to foreclosed assets
196,703
Assets and liabilities removed as part of the
recharacterization of on-balance sheet
203,965
36,337
240,302
116,250
34,340
150,590
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)
473,442
1,580,821
23,634
Transfers from loans held-for-sale to
loans held-in-portfolio
65,793
Loans securitized into trading securities (b)
1,686,141
244,675
1,321,655
591,365
1,398,342
Recognition of mortgage servicing rights on
securitizations or asset transfers
28,919
48,865
62,877
Recognition of residual interests on
securitizations
Business acquisitions:
Fair value of loans and other assets acquired
Goodwill and other intangible assets acquired
Deposits and other liabilities assumed
-
-
-
-
42,975
36,927
225,972
149,123
(1,094,699)
-
4,005
(971)
(a) In 2008 it excludes $375 million (2007 - $0; 2006 - $589 million) in individual mortgage loans
transferred to held-for-sale and sold as well as $232 million (2007 - $0; 2006 - $613 million) securitized
into trading securities and inmmediately sold. 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.
(b) Includes loans securitized into trading securities and subsequently sold before year end.
Note 35 - Segment reporting:
The Corporation’s corporate structure consists of three reportable
segments – Banco Popular de Puerto Rico, Banco Popular North
America and EVERTEC. These reportable segments pertain only
to the continuing operations of Popular, Inc. As previously
indicated in Note 2 to the consolidated financial statements, the
operations of Popular Financial Holdings that were considered a
reportable segment were classified as discontinued operations in
the third quarter of 2008. Also, a corporate group has been defined
to support the reportable segments. The Corporation
retrospectively adjusted information in the statements of
operations to exclude results from discontinued operations from
2007 and 2006 periods to conform to the 2008 presentation.
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, 2008, 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 Mortgage
and Popular Finance. This latter subsidiary ceased
originating loans during the fourth quarter of 2008. These
three subsidiaries focus 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.
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,
and Communications. 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.
For segment reporting purposes, the impact of recording the
valuation allowance on deferred tax assets of the U.S. operations
was assigned to each legal entity within PNA (including PNA
holding company as an entity) based on each entity’s net deferred
tax asset at December 31, 2008, except for PFH. The impact of
recording the valuation allowance at PFH was allocated among
continuing and discontinued operations. The portion attributed
to the continuing operations was based on PFH’s net deferred tax
asset balance at January 1, 2008. The valuation allowance on
deferred taxes as it relates to the operating losses of PFH for the
year 2008 was assigned to the discontinued operations.
The tax impact in results of operations for PFH attributed to
the recording of the valuation allowance assigned to continuing
operations was included as part of the Corporate group for segment
reporting purposes since it does not relate to any of the legal
entities of the BPNA reportable segment. PFH is no longer
considered a reportable segment.
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.
156 POPULAR, INC. 2008 ANNUAL REPORT
• 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., Popular Risk Services,
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 retail branch network in the U.S. mainland, while E-
LOAN supports BPNA’s deposit gathering through its online
platform. All direct lending activities at E-LOAN were ceased
during the fourth quarter of 2008, as described in Note 3 to the
consolidated financial statements. Popular Insurance Agency,
U.S.A. offers investment and insurance services across the BPNA
branch network. Popular Equipment Finance, Inc. ceased
originating loans as part of the BPNA restructuring plan
implemented in late 2008.
Due to the significant losses in the E-LOAN operations during
2007 and 2008, impacted in part by the restructuring charges and
impairment losses that resulted from the restructuring plan effected
in 2007, management has determined to provide as additional
disclosure the results of E-LOAN apart from the other BPNA
subsidiaries.
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. (“CONTADO”) 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
157
(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 expense (benefit)
Net income
Segment assets
At December 31, 2007
Total
Reportable
Segments
$1,327,604
339,213
771,639
211,750
10,445
73,843
1,198,751
102,276
Corporate
Eliminations
($26,444)
2,006
117,981
$4,498
(15,925)
2,368
55,944
(10,569)
(7,639)
(1,543)
Total
Popular, Inc.
$1,305,658
341,219
873,695
211,750
10,445
76,211
1,247,056
90,164
$162,965
$40,327,710
$41,788
$10,456,031 (a)
($2,245)
($6,372,304)
$202,508
$44,411,437
(a) Includes $3.9 billion in assets from PFH.
Popular, Inc.
2006
At December 31, 2006
(In thousands)
Net interest income (loss)
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
(In thousands)
Net interest income (loss)
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Other operating expenses
Impact of change in fiscal period
Income tax expense (benefit)
Banco Popular
de Puerto Rico
Banco Popular
North America
$914,907
141,083
431,940
2,540
43,556
679,892
(2,072)
125,985
$355,863
$379,977
46,473
218,591
8,882
15,811
422,640
37,279
$67,483
$25,501,522
$13,565,992
At December 31, 2006
EVERTEC
($1,894)
229,237
599
16,599
169,117
15,052
$25,976
$223,384
Total
Reportable
Segments
$1,292,990
187,556
741,124
12,021
75,894
1,132,486
(2,072)
178,377
Corporate
Eliminations
($39,388)
$1,129
36,642
(7,257)
2,335
57,342
3,495
(37,515)
(5,407)
2,137
(1,168)
Intersegment
Eliminations
($138,644)
(72)
(139,163)
61
$530
($579,655)
Total
Popular, Inc.
$1,254,731
187,556
770,509
12,021
78,229
1,184,421
3,560
139,694
EVERTEC
($823)
Intersegment
Eliminations
Net income (loss)
Segment assets
$449,852
$38,711,243
($28,403)
$14,773,413 (b)
($1,690)
($6,080,669)
$419,759
$47,403,987
(b) Includes $8.4 billion in assets from PFH.
241,627
($141,498)
934
16,162
174,877
17,547
$31,284
$228,746
(72)
(141,159)
(105)
($162)
($367,835)
During the year ended December 31, 2008, the Corporation’s
holding companies realized net losses on sale and valuation of
investment securities, including investments accounted under
the equity method, of approximately $36.0 million (2007 and
2006 - net gains of $95.5 million and $13.9 million, respectively).
These losses / gains are included as part of “non-interest income”
within the Corporate group.
The results of operations included in the tables below for the
years ended December 31, 2008, 2007 and 2006 exclude the results
of operations of the discontinued business of PFH. Segment assets
as of December 31, 2008 also exclude the assets of the
discontinued operations.
2008
At December 31, 2008
Popular, Inc.
(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 expense
Net income (loss)
Segment assets
(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
Net loss
Segment assets
Banco Popular
de Puerto Rico
Banco Popular
North America
$959,215
519,045
620,685
1,623
4,975
41,825
751,930
21,375
$351,519
472,299
141,006
10,857
5,643
14,027
399,867
114,670
$239,127
($524,838)
$25,931,855
$12,441,612
At December 31, 2008
Intersegment
Eliminations
EVERTEC
($723)
263,258
($150,620)
891
14,286
184,264
19,450
$43,644
$270,524
(73)
(149,139)
(549)
($859)
($64,850)
Total
Reportable
Segments
$1,310,011
991,344
874,329
12,480
11,509
70,065
1,186,922
154,946
Corporate
Eliminations
($32,013)
40
(32,630)
$1,206
(11,725)
2,325
62,774
305,619
(9,347)
969
Total
Popular, Inc.
$1,279,204
991,384
829,974
12,480
11,509
72,390
1,240,349
461,534
($242,926)
$38,579,141
($435,401)
$6,295,760
($2,141)
($6,004,719)
($680,468)
$38,870,182
2007
At December 31, 2007
Popular, Inc.
(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 expense (benefit)
Net income (loss)
Segment assets
Banco Popular
de Puerto Rico
Banco Popular
North America
$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)
$327,282
($195,439)
$27,102,493
$13,364,306
158 POPULAR, INC. 2008 ANNUAL REPORT
Additional disclosures with respect to the Banco Popular de
Additional disclosures with respect to the Banco Popular North
Puerto Rico reportable segment are as follows:
America reportable segment are as follows:
Banco Popular de Puerto Rico
Banco Popular North America
2008
At December 31, 2008
2008
At December 31, 2008
(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Goodwill impairment losses
Amortization of intangibles
Depreciation expense
Other operating expenses
Income tax expense
Net income
Segment assets
Commercial
Banking
$347,952
348,998
114,844
212
17,805
194,589
(60,769)
Consumer
and Retail
Banking
$598,622
170,047
406,547
1,623
4,113
22,742
492,995
66,674
Other Financial
Services
Eliminations
$12,097
$544
99,502
(208)
650
1,278
64,642
15,158
(296)
312
$320
Total
Banco Popular
de Puerto Rico
$959,215
519,045
620,685
1,623
4,975
41,825
751,930
21,375
$239,127
($38,039)
$246,975
$29,871
$11,148,150
$18,903,624
$579,463 ($4,699,382)
$25,931,855
2007
At December 31, 2007
Banco Popular de Puerto Rico
(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
Segment assets
Commercial
Banking
$379,673
79,810
91,596
565
14,457
178,193
56,613
$141,631
Consumer
and Retail
Banking
$566,635
163,917
303,945
860
26,001
470,184
46,812
$162,806
Other Financial
Services
Eliminations
$10,909
$605
90,969
484
1,226
66,466
10,860
$22,842
(962)
(386)
26
$3
Total
Banco Popular
de Puerto Rico
$957,822
243,727
485,548
1,909
41,684
714,457
114,311
$327,282
$11,601,186
$19,407,327
$478,252 ($4,384,272)
$27,102,493
Banco Popular de Puerto Rico
2006
At December 31, 2006
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
$143,008
$187,847
$25,467
(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
E-LOAN
Eliminations
(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
Income tax expense
Net loss
Segment assets
Banco Popular
North America
$328,713
346,000
127,903
4,144
12,172
327,736
57,521
$21,458
126,299
13,915
10,857
1,499
1,855
72,117
56,618
($290,957)
$12,913,337
($233,872)
$759,082
2007
At December 31, 2007
Banco Popular North America
(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
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
$13,595,461
$20,925
17,654
74,270
211,750
2,792
3,234
162,706
(57,218)
($245,723)
$1,178,438
Banco Popular North America
2006
At December 31, 2006
($1,230,807)
$12,441,612
Total
Banco Popular
North America
$351,519
472,299
141,006
10,857
5,643
14,027
399,867
114,670
($524,838)
Total
Banco Popular
North America
$370,605
95,486
185,962
211,750
7,602
16,069
450,576
(29,477)
($195,439)
$1,348
(812)
14
531
($9)
$952
(1,262)
39
(122)
($227)
($1,409,593)
$13,364,306
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)
Banco Popular
North America
$363,249
37,835
127,698
6,042
12,917
272,158
60,706
$101,289
E-LOAN
Eliminations
$16,601
8,638
92,188
2,840
2,894
150,482
(23,018)
($33,047)
$127
(1,295)
(409)
($759)
Total
Banco Popular
North America
$379,977
46,473
218,591
8,882
15,811
422,640
37,279
$67,483
Segment assets
$12,259,704
$1,308,263
($1,975)
$13,565,992
$11,283,178
$17,935,610
$581,981 ($4,299,247)
$25,501,522
Net income (loss)
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
Total intersegment revenues from
2008
$820
1,932
(230)
(149,784)
(2,730)
(628)
2007
2006
$1,532
3,339
(449)
(140,949)
(4,971)
($619)
(1,409)
(326)
(138,172)
1,950
(68)
continuing operations
($150,620)
($141,498)
($138,644)
* 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) 2008 2007
Revenues*:
Puerto Rico
United States
Other
Total consolidated revenues from
$1,568,837
432,008
108,333
$1,567,276
523,685
88,392
2006
$1,396,714
550,158
78,368
continuing operations
$2,109,178
$2,179,353
$2,025,240
* 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
2008
2007
2006
$24,886,736
15,160,033
16,737,693
$26,017,716
15,679,181
17,341,601
$24,621,684
14,735,092
13,504,860
$12,713,357
10,417,840
9,662,690
$17,093,929
13,517,728
9,737,996
$21,570,276
17,363,382
9,735,264
$1,270,089
691,058
1,149,822
$1,299,792
714,093
1,254,881
$1,212,027
638,465
1,198,207
* *Does not include balance sheet information of the discontinued operations as of December 31,
2008.
Note 36 - 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.
159
Note 37 - 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
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. At December 31, 2008 and 2007, the Corporation
recorded a liability of $0.7 million and $0.6 million, respectively,
which represents the unamortized balance of the obligations
undertaken in issuing the guarantees under the standby letters of
credit issued or modified after December 31, 2002. In accordance
with the provisions of FIN No. 45, the Corporation recognizes at
fair value the obligation at inception of the standby letters of
credit. 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,
2008 and 2007, shown in Note 29, 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, 2008, the Corporation serviced $4.9 billion
(2007 - $3.4 billion) in residential mortgage loans with credit
160 POPULAR, INC. 2008 ANNUAL REPORT
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 residential mortgage loans
serviced. In the event of 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, 2008, the Corporation had
reserves of approximately $14 million (2007 - $5 million) to
cover the estimated credit loss exposure. At December 31, 2008,
the Corporation also serviced $12.7 billion (2007 - $17.1 billion)
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, 2008, SBA loans serviced with recourse amounted
to $10 million (2007 - $119 million). Due to the guaranteed nature
of the SBA loans sold, the Corporation’s exposure to loss under
these agreements should not be significant.
During 2008, in connection with certain sales of assets by the
discontinued operations of PFH which approximated $2.7 billion
in principal balance of loans, the Corporation provided
indemnifications for the breach of certain representations or
warranties. Generally, the primary indemnifications included:
• Indemnification for breaches of certain key representations
and warranties, including corporate authority, due
organization, required consents, no liens or encumbrances,
compliance with laws as to origination and servicing, no
litigation relating to violation of consumer lending laws,
and absence of fraud.
• Indemnification for breaches of all other representations
including general litigation, general compliance with laws,
ownership of all relevant licenses and permits, compliance
with the seller’s obligations under the pooling and servicing
agreements, lawful assignment of contracts, valid security
interest, good title and all files and documents are true and
complete in all material respects, among others.
Also, one of PFH’s 2008 sale agreements included a repurchase
obligation for defaulted loans, which was limited and extended
only for loans originated within 120 days prior to the transaction
closing date and under which the borrower failed to make the first
schedule monthly payment due within 45 days after such closing
date. This obligation had expired as of December 31, 2008. Also,
the same agreement provided for reimbursement of premium on
loans that prepaid prior to the first anniversary date of the
transaction closing date, which is March 1, 2009. The premium
amount declined monthly over a 12-month term. As of December
31, 2008, the exposure under this obligation was not significant.
Certain of the representations and warranties covered under
the indemnifications expire within a definite time period; others
survive until the expiration of the applicable statute of limitations,
and others do not expire. Certain of the indemnifications are
subject to a cap or maximum aggregate liability defined as a
percentage of the purchase price. In the event of a breach of a
representation, the Corporation may be required to repurchase
the loan. The indemnifications outstanding at December 31, 2008
do not require repurchase of loans under credit recourse
obligations.
Under certain sale agreements, the repurchase obligation may
be subject to (1) an obligation on the part of the buyer to confer
with the Corporation on possible strategies for mitigating or
curing the issue which resulted in the repurchase demand being
made; (2) an obligation to pursue commercially reasonable efforts
to pursue such mitigation strategies; and (3) buyer’s obligation
to secure a bonafide, arms-length bid from a third party to acquire
such loan, in which case the seller would have the right to either
(1) acquire the loan from buyer, or (2) agree to have the loan sold
at bid and pay to buyer the shortfall between the original purchase
price for the loan and the bid price.
At December 31, 2008, the Corporation has recorded a liability
reserve for potential future claims under the indemnities of
approximately $16 million. If there is a breach of a representation
or warranty, the Corporation may be required to repurchase the
loan and bear any subsequent loss related to the loan. Popular, Inc.
Holding Company and Popular North America have agreed to
guarantee certain obligations of PFH with respect to the
indemnification obligations. In addition, the Corporation has
agreed to restrict $10 million in cash or cash equivalents for a
period of one year expiring in November 2009 to cover any such
obligations related to the major sale transaction that involved the
sale of loans representing approximately $1.0 billion in principal
balance.
Popular, Inc. Holding Company (“PIHC”) fully and
unconditionally guarantees certain borrowing obligations issued
by certain of its wholly-owned consolidated subsidiaries totaling
$1.7 billion at December 31, 2008 (2007 - $2.9 billion). In
addition, at December 31, 2008 and 2007, PIHC fully and
unconditionally guaranteed $824 million of Capital Securities
issued by four wholly-owned issuing trust entities that have been
161
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, 2008 approximated $2 million (2007 - $6 million). 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.
Note 38 - Other service fees:
The caption of other service fees in the consolidated statements
of income consists of the following major categories:
(In thousands)
Debit card fees
Credit card fees and discounts
Processing fees
Insurance fees
Sale and administration of
investment products
Mortgage servicing fees, net of
amortization and fair value adjustments
Other
Total
Year ended December 31,
2007
2008
2006
$108,274
107,713
51,731
50,417
$76,573
102,176
47,476
53,097
$61,643
89,827
44,050
52,045
34,373
30,453
27,873
25,987
37,668
17,981
37,855
5,215
37,206
$416,163
$365,611
$317,859
Note 39 - Popular, Inc. (Holding Company only)
financial information:
The following condensed financial information presents the
financial position of Holding Company only as of December 31,
2008 and 2007, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 2008.
Statements of Condition
(In thousands)
ASSETS
Cash
Money market investments
Investments securities available-for-sale, at
market value
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
Federal funds purchased
Other short-term borrowings
Notes payable
Accrued expenses and other liabilities
Stockholders’ equity
December 31,
2008
2007
$1,391
46,400
$2
89,694
188,893
431,499
626,129
14,425
1,899,839
14,425
1,817,354
436,234
274,980
814,600
10,000
2,684
60
22,057
37,298
767,608
232,972
712,500
10,000
2,926
60
23,772
42,969
$4,222,145
$4,298,386
$44,471
42,769
793,300
73,241
3,268,364
$165,000
480,117
71,387
3,581,882
Total liabilities and stockholders’ equity
$4,222,145
$4,298,386
162 POPULAR, INC. 2008 ANNUAL REPORT
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
Year ended December 31,
2007
2008
2006
$179,900
$383,100
$247,899
32,642
(15)
19,812
1,022
173
233,534
42,061
40
2,614
44,715
188,819
366
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
312,775
36,154
1,057
37,211
275,564
1,648
188,453
496,108
273,916
Equity in undistributed (losses) earnings
of subsidiaries
Net (loss) income
(1,432,356)
($1,243,903)
(560,601)
($64,493)
83,760
$357,676
(83,760)
(290)
(427)
(54)
(2,507)
684
(9,192)
(569)
647
10,158
269,683
2,646
17,781
(36,000)
(442,400)
459
(4,939)
99
(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
Year ended December 31,
2007
2006
2008
($1,243,903)
($64,493)
$357,676
1,432,356
40
560,601
2,007
(115,567)
accretion of discounts on investments
(1,791)
(8,244)
Net amortization of premiums and
deferred loan origination fees and costs
Losses (earnings) from investments under
the equity method
Stock options expense
Net decrease (increase) in other assets
Deferred income taxes
Net (decrease) increase in interest payable
Net increase in other liabilities
110
412
2,435
(444)
(1,982)
9,511
(4,612)
568
28,340
1,156
1,508
4,354
Total adjustments
1,440,647
470,111
(85,310)
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
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
196,744
405,618
272,366
(43,294)
(37,700)
221,300
(188,673)
(605,079)
(6,808)
(4,087,972)
(269,683)
801,500
3,900,087
Capital contribution to subsidiaries
Net change in advances to subsidiaries
(251,512)
and affiliates
Net repayments on loans
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
(1,302,100)
156
(664)
5,783
245,484
(260,100)
337
(522)
11
Net cash used in investing activities
(1,589,666)
(241,400)
(241,054)
Cash flows from financing activities:
Net increase in federal funds purchased
Net (decrease) 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
Proceeds from issuance of
44,471
(122,232)
(31,152)
350,297
(188,644)
14,213
(5,000)
397
(190,617)
150,787
(50,450)
393
(188,321)
17,712
20,414
55,678
preferred stock and associated warrants 1,321,142
(61)
Treasury stock acquired
(2,236)
(93)
Net cash provided by (used in)
financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
1,391,533
(162,829)
(32,006)
(1,389)
1,391
$2
1,389
2
$1,391
(694)
696
$2
A source of income for the Holding Company consists of
dividends from BPPR. As members subject to the regulations of
the Federal Reserve System, BPPR and BPNA must obtain the
163
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, 2008, BPPR could have declared a dividend of approximately
$31.6 million (2007 - $45.0 million; 2006 - $208.1 million)
without the approval of the Federal Reserve Board. At December
31, 2008 and 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.
N o t e 4 0 - 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
guaranteed securities:
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, 2008 and 2007, and the results
of their operations and cash flows for each of the years ended
December 31, 2008, 2007 and 2006, respectively.
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, T.I.I.
Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.
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., Popular Insurance Agency,
U.S.A., Popular FS, LLC, and E-LOAN;
• Popular Insurance, Inc.; and
• EVERTEC USA, Inc.
PIHC fully and unconditionally guarantees all registered debt
securities and preferred stock issued by PIBI and PNA.
164 POPULAR, INC. 2008 ANNUAL REPORT
Condensed Consolidating Statement of Condition
At December 31, 2008
(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 fair 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
Assets from discontinued operations
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
Liabilities from discontinued operations
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Preferred stock
Common stock
Surplus
Retained deficit
Treasury stock, at cost
Accumulated other comprehensive (loss) income,
net of tax
$2
89,694
188,893
431,499
14,425
2,611,053
827,284
60
827,224
22,057
47
1,033
35,664
554
$89
40,614
5,243
1,250
1
324,412
474
64,881
$7,668
450,246
12,392
1,348,241
12,800
12,800
128
1,861
21,532
$4,222,145
$436,964
$1,854,868
$44,471
42,769
793,300
73,241
953,781
1,483,525
1,773,792
613,085
(365,694)
(207,515)
(28,829)
3,268,364
$4,222,145
$500
1,488,942
68,490
1,557,932
$117
117
3,961
2,301,193
(1,797,175)
2
2,184,964
(1,865,418)
(71,132)
436,847
$436,964
(22,612)
296,936
$1,854,868
33,460
3,550,210
$38,586,431
($766)
(580,421)
$777,994
794,521
645,903
7,730,351
291,998
(430,000)
190,849
536,058
25,885,773
124,364
882,747
24,878,662
598,622
89,674
204,955
180,306
995,550
605,792
52,609
12,587
$38,586,431
$4,294,221
23,747,393
28,041,614
3,596,817
828,285
1,106,521
430,000
1,008,318
24,557
35,036,112
109
52,318
4,050,514
(585,705)
(377)
(4,283,706)
(868,620)
(868,620)
(52,096)
(2,030)
($6,217,639)
($668)
(490,741)
(491,409)
(89,680)
(866,620)
(2,000)
(430,000)
(53,937)
(1,933,646)
(56,281)
(8,527,877)
4,239,504
377
60,284
(4,283,993)
($6,217,639)
$784,987
794,654
645,903
7,924,487
294,747
217,667
536,058
25,857,237
124,364
882,807
24,850,066
620,807
89,721
156,227
180,306
1,115,597
605,792
53,163
12,587
$38,882,769
$4,293,553
23,256,652
27,550,205
3,551,608
4,934
3,386,763
1,096,229
24,557
35,614,296
109
1,483,525
1,773,792
621,879
(374,488)
(207,515)
(28,829)
3,268,364
$38,882,769
165
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 fair 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
$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
(10,298)
3,787,405
$44,165,746
($1,797)
(123,351)
(319)
$818,455
1,083,212
768,274
8,483,430
287,087
(430,000)
189,766
1,889,546
28,282,440
182,110
548,772
27,551,558
564,260
81,410
215,719
196,645
1,336,674
630,761
68,949
$44,165,746
$4,512,527
23,824,140
28,336,667
5,391,273
1,707,184
3,669,216
430,000
843,892
40,378,232
109
51,619
2,709,595
1,037,153
(664)
(5,184,477)
(3,807,978)
(3,807,978)
(15,613)
(28,444)
($9,591,979)
($1,738)
(451)
(2,189)
(122,900)
(1,525,978)
(2,282,320)
(430,000)
(43,082)
(4,406,469)
(55,582)
(4,290,751)
(895,451)
664
55,610
(5,185,510)
($9,591,979)
$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
166 POPULAR, INC. 2008 ANNUAL REPORT
Condensed Consolidating Statement of Operations
(In thousands)
INTEREST AND DIVIDEND INCOME:
Dividend income from subsidiaries
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 (loss) gain on sale and valuation adjustments
of investment securities
Trading account profit
Gain on sale of loans and valuation adjustments
on loans held-for-sale
Other operating (loss) 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
Impairment losses on long-lived assets
Other operating expenses
Goodwill and trademark impairment losses
Amortization of intangibles
Income (loss) before income tax and equity in
losses of subsidiaries
Income tax expense
Income (loss) before equity in losses
of subsidiaries
Equity in undistributed losses of subsidiaries
Net loss from continuing operations
Net loss from discontinued operations, net of tax
Equity in undistributed losses of
Year ended December 31, 2008
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
$179,900
21,007
1,730
30,912
233,549
2,943
39,118
42,061
191,488
40
191,448
$219
1,073
766
2,058
2,058
$89,167
1,918
894
91,979
18,818
120,605
139,423
(47,444)
2,058
(47,444)
(9,147)
(15)
191,433
11,844
4,755
(31,447)
(78,891)
22,363
4,816
27,179
2,582
3,697
2,590
19,573
314
1,621
70
395
75
470
29
12
19
3
(24)
37
(55,012)
(401)
(954)
2,614
188,819
366
188,453
(868,921)
(680,468)
129
4,626
4,626
(929,637)
(925,011)
(938)
(77,953)
12,962
(90,915)
(849,432)
(940,347)
($179,900)
(110,648)
(5,795)
(28,063)
(324,406)
(2,736)
(34,750)
(108,174)
(145,660)
(178,746)
(178,746)
(8,808)
(4,267)
(191,821)
(2,009)
(73)
(2,082)
(5,669)
(1,596)
(9,347)
(182,474)
476
(182,950)
2,647,990
2,465,040
$1,868,717
19,056
339,059
44,111
2,270,943
702,858
181,059
75,178
959,095
1,311,848
991,344
320,504
206,957
424,971
78,863
43,645
6,018
111,360
1,192,318
464,971
117,927
582,898
117,842
107,781
50,209
107,253
51,016
61,110
14,380
13,491
214,301
12,480
11,509
1,344,270
(151,952)
447,730
(599,682)
(599,682)
(563,435)
$1,868,462
17,982
343,568
44,111
2,274,123
700,122
168,070
126,727
994,919
1,279,204
991,384
287,820
206,957
416,163
69,716
43,645
6,018
87,475
1,117,794
485,720
122,745
608,465
120,456
111,478
52,799
121,145
51,386
62,731
14,450
13,491
156,338
12,480
11,509
1,336,728
(218,934)
461,534
(680,468)
(680,468)
(563,435)
discontinued operations
(563,435)
(563,435)
(563,435)
NET LOSS
($1,243,903)
($1,488,446)
($1,503,782)
($1,163,117)
1,690,305
$4,155,345
($1,243,903)
Condensed Consolidating Statement of Operations
167
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 AND DIVIDEND INCOME:
Dividend income from subsidiaries
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 adjustments
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
Goodwill and trademark impairment losses
Amortization of intangibles
Income (loss) before income tax and equity in
losses of subsidiaries
Income tax expense (benefit)
Income (loss) before equity in losses
of subsidiaries
Equity in undistributed losses of subsidiaries
Net income (loss) from continuing operations
Net loss from discontinued operations, net of tax
Equity in undistributed losses of
$383,100
20,640
1,147
37,408
442,295
3,644
33,451
37,095
405,200
2,007
403,193
$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
528,622
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)
2,226
526,396
30,288
496,108
(293,600)
202,508
107
(2,267)
(2,267)
(237,145)
(239,412)
3
3
47
1
446
500
(51,898)
(18,164)
(33,734)
(206,477)
(240,211)
discontinued operations
NET LOSS
(267,001)
($64,493)
(267,001)
($506,413)
(267,001)
($507,212)
$2,045,405
29,612
430,285
39,000
2,544,302
766,945
441,133
6,577
1,214,655
1,329,647
339,212
990,435
196,072
370,270
5,385
37,197
60,046
92,605
1,752,010
465,366
130,100
595,466
106,985
115,324
46,932
110,493
57,574
107,141
15,527
10,478
161,416
211,750
10,445
1,549,531
202,479
77,602
124,877
124,877
(267,001)
($383,100)
(178,461)
(5,991)
(28,779)
(596,331)
(1,151)
(80,048)
(133,236)
(214,435)
(381,896)
(381,896)
(4,659)
(2,385)
(388,940)
(1,639)
(465)
(2,104)
(3,140)
(1,658)
(6,902)
(382,038)
438
(382,476)
737,222
354,746
801,003
$2,046,437
25,190
441,608
39,000
2,552,235
765,794
424,530
56,253
1,246,577
1,305,658
341,219
964,439
196,072
365,611
100,869
37,197
60,046
113,900
1,838,134
485,178
135,582
620,760
109,344
117,082
48,489
119,523
58,092
109,909
15,603
10,478
113,987
211,750
10,445
1,545,462
292,672
90,164
202,508
202,508
(267,001)
($142,124)
$1,155,749
($64,493)
168 POPULAR, INC. 2008 ANNUAL REPORT
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:
Dividend income from subsidiaries
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 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
Income (loss) from continuing operations before
income tax and equity in earnings of subsidiaries
Income tax expense (benefit)
Income (loss) from continuing operations before
equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income from continuing operations
Net loss from discontinued operations, net of tax
Equity in undistributed losses of
$247,899
7,782
2,199
37,087
294,967
537
35,617
36,154
258,813
$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)
258,813
302
(52,778)
290
13,598
17,518
276,621
7,006
20,906
(271)
(53,049)
379
66
445
14
8
46
19,812
5,487
25,299
2,341
1,820
1,218
14,631
621
4,590
70
(49,533)
(399)
1,057
275,564
1,648
273,916
145,843
419,759
114
20,792
20,792
19,673
40,465
2
12
225
1
436
3,495
4,171
(57,220)
(15,363)
(41,857)
59,481
17,624
discontinued operations
NET INCOME (LOSS)
(62,083)
$357,676
(62,083)
($21,618)
(62,083)
($44,459)
$1,884,278
32,104
496,917
28,714
2,442,013
580,116
509,202
57,547
1,146,865
1,295,148
187,556
1,107,592
190,079
321,070
8,232
36,258
76,337
105,212
1,844,780
441,003
128,055
569,058
97,242
118,605
42,095
102,873
56,311
114,092
14,969
149,737
(2,072)
12,021
1,274,931
569,849
154,148
415,701
415,701
(62,083)
$353,618
($247,899)
(152,906)
(5,340)
(28,225)
(434,370)
(22)
(29,609)
(157,985)
(187,616)
(246,754)
(246,754)
(3,211)
(1,609)
(251,574)
(2,217)
(610)
(2,827)
(273)
(1,079)
2,137
(2,042)
(249,532)
(739)
(248,793)
(224,997)
(473,790)
186,249
($287,541)
$1,888,320
29,626
508,579
28,714
2,455,239
580,094
508,174
112,240
1,200,508
1,254,731
187,556
1,067,175
190,079
317,859
22,120
36,258
76,337
127,856
1,837,684
458,977
132,998
591,975
99,599
120,445
43,313
117,502
56,932
118,682
15,040
99,162
3,560
12,021
1,278,231
559,453
139,694
419,759
419,759
(62,083)
$357,676
Condensed Consolidating Statement of Cash Flows
169
Popular, Inc.
Holding Co.
($1,243,903)
1,432,356
Year ended December 31, 2008
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
($1,488,446)
($1,503,782)
($1,163,117)
$4,155,345
($1,243,903)
1,493,072
1,412,867
(4,338,295)
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net
cash provided by (used in) 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 loss (gain) on sale and valuation
adjustment of investment securities
Losses from changes in fair value related to instruments
measured at fair value pursuant to SFAS No. 159
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
Fair value adjustment of other assets held for sale
Losses (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 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 (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
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net decrease in deposits
Net increase (decrease) in federal funds purchased and
assets sold under agreements to repurchase
Net decrease in other short-term borrowings
Payments of notes payable
Proceeds from issuance of notes payable
Dividends paid
Proceeds from issuance of common stock
Proceeds from issuance of preferred stock and
associated warrants
Treasury stock acquired
Capital contribution from parent
Net cash provided by (used in) financing activities
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
2,321
40
57
(1,791)
110
412
642
(585)
(1,982)
(444)
9,511
1,440,647
196,744
(43,294)
(188,673)
(605,079)
801,500
(1,301,944)
(251,512)
(664)
(1,589,666)
44,471
(122,232)
(61,152)
380,297
(188,644)
17,712
1,321,142
(61)
1,391,533
(1,389)
1,391
$2
(550,095)
237,491
608,270
212,058
3
9,147
(11,845)
4,546
(1,383)
7,067
(15,934)
12,962
(26,835)
1,393,293
(110,489)
(412)
5,245
1
1,495,208
6,762
(40,314)
(181)
8,296
25,150
2,054,214
(250,000)
(246,800)
(257,049)
1,257,319
(117,692)
(6,473)
(1,273,568)
8,171
250,000
250,000
(287)
376
$89
250,000
(1,139,562)
7,268
400
$7,668
70,764
1,010,335
12,480
17,445
11,509
52,174
(73,443)
198,880
(25,961)
83,056
21,675
52,495
120,789
26
687
(2,302,189)
(431,789)
1,492,870
1,754,419
59,787
99,482
(39,665)
366,733
3,405
(44,293)
2,511,671
1,348,554
73,088
1,010,375
12,480
17,445
11,509
52,174
(64,296)
198,880
(25,904)
83,056
19,884
52,495
120,789
(8,916)
1,099
(2,302,189)
(431,789)
1,492,870
1,754,100
59,459
86,073
(58,406)
379,726
3,405
(35,986)
2,501,421
1,257,518
(1,753)
(319)
825
(25,136)
(825)
475
25,630
(4,339,398)
(184,053)
(3,887,030)
(4,481,090)
(193,820)
2,491,732
4,476,373
192,588
2,437,214
49,489
(991,266)
2,426,491
(4,505)
(42,331)
(145,476)
60,058
166,683
2,792,601
(4,075,884)
(5,086,169)
(193,820)
2,491,732
5,277,873
192,588
2,445,510
49,489
(1,093,437)
2,426,491
(4,505)
(42,331)
(146,140)
60,058
166,683
2,680,196
(879,591)
748,312
476,991
(164,957)
(589,220)
(754,177)
(1,794,455)
(892,692)
(2,069,253)
671,630
(179,900)
(300)
248,311
(4,181,616)
(40,461)
818,455
$777,994
(17,980)
(475,648)
1,387,559
(32,000)
179,900
3,793
(748,311)
(291,907)
1,031
(1,797)
($766)
(1,885,656)
(1,497,045)
(2,016,414)
1,028,098
(188,644)
17,712
1,324,935
(361)
(3,971,552)
(33,838)
818,825
$784,987
170 POPULAR, INC. 2008 ANNUAL REPORT
Condensed Consolidating Statement of Cash Flows
Popular, Inc.
Holding Co.
(8,244)
560,601
($64,493)
2,365
2,007
(115,567)
1
(617)
26,591
1,508
1,156
(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) losses from investments under the equity method (4,612)
Stock options expense
568
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
Net cash (used in) provided by 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
(162,829)
1,389
2
$1,391
5,783
245,484
(259,763)
(190,617)
20,414
(2,236)
4,354
470,111
405,618
(6,808)
(4,087,972)
14,213
(5,000)
397
(522)
11
(241,400)
3,900,087
(37,700)
Year ended December 31, 2007
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
($506,413)
($507,212)
($142,124)
$1,155,749
($64,493)
504,146
473,478
(1,538,225)
3
20,083
7
(15,410)
1,592
(2,690)
(8,339)
(7,762)
(18,164)
8,180
446,298
(60,914)
865
(129,969)
2,402
(664,268)
(886,267)
(25,232,314)
(111,180)
(928)
(51)
4,005
55
512,835
6,422
775
(2)
900
17,572
2
(25,150)
(300)
76,195
560,643
211,750
12,344
10,445
61,110
40,325
(12,297)
38,970
28,468
90,511
(1,293)
1,195
(4,803,927)
(550,392)
4,127,794
1,222,266
11,630
(116,729)
14,827
(195,283)
2,388
46,795
877,735
735,611
2,344,225
25,034,574
44,185
34,812
1
(954,507)
415,256
(22,312)
719,604
(26,507)
(104,344)
63,444
175,974
830,376
2,887,952
(270,843)
(2,776,773)
(2,216,143)
1,061,496
(383,100)
(289)
300
(1,697,400)
(131,413)
949,868
$818,455
(6,203)
(127,630)
9,063
260,815
(444,583)
363,327
188,622
78
322
$400
219
157
$376
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
7
(1,624)
319
3,560
257
(3,560)
(11,449)
12,191
(1,538,524)
(382,775)
60,223
732,365
(735,548)
(88,536)
300
(31,196)
1,572
2,889,524
(63,400)
(111,056)
202,449
383,100
(300)
412,365
(1,606)
(191)
($1,797)
(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
Condensed Consolidating Statement of Cash Flows
171
Popular, Inc.
Holding Co.
Year ended December 31, 2006
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
(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
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 (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
Net cash (used in) provided by 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
$357,676
($21,618)
($44,459)
$353,618
($287,541)
$357,676
357,676
(21,618)
(2,271)
(42,188)
(2,638)
356,256
(1,220)
(286,321)
(6,129)
363,805
(83,760)
2,333
42,410
2,602
2
(290)
4
(427)
(54)
(2,507)
684
(527)
(11,002)
647
(569)
10,158
(85,310)
272,366
221,300
(269,683)
269,683
2,646
17,781
(441,941)
(13,598)
14
(118)
(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)
(36,000)
(4,000)
(4,127)
(4,939)
99
(241,054)
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
82,053
287,760
14,239
12,377
7,232
62,819
9,529
(25,933)
(117,421)
24,449
130,145
(1,286)
2,322
(6,580,246)
(1,503,017)
6,782,081
1,368,975
(4,437)
32,636
28,796
(45,810)
4,112
(89,662)
481,713
837,969
38,748
(1,482)
(229)
(1,128)
229
35,642
(34,387)
37,393
(248,928)
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
392,321
(229,018)
381,421
(708,142)
(20,593,684)
(53,016)
473,786
(254,930)
(20,863,367)
(66,026)
2,338,508
20,656,164
85,668
162,359
(1,344,539)
938,862
(448,708)
(3,034)
(23,769)
(99,790)
87,913
138,604
1,525,717
1,792,122
(3,305,135)
1,012,175
(2,611,892)
1,023,059
(247,899)
(274)
8,127
(2,329,717)
19,484
53,453
896,415
$949,868
(472,410)
326,237
44,127
136
142,858
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
(2,460)
1,789,662
233,839
(425,734)
99,975
(2,768)
247,899
168
(44,127)
106,792
(7,648)
(6,926)
6,735
($191)
(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
P.O. Box 362708
San Juan, Puerto Rico
00936-2708