10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2014

Commission File Number: 001-34084

 

 

POPULAR, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Puerto Rico   66-0667416

(State or other jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification Number)

Popular Center Building

209 Muñoz Rivera Avenue

Hato Rey, Puerto Rico

  00918
(Address of principal executive offices)   (Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 103,481,803 shares outstanding as of August 4, 2014.

 

 

 


Table of Contents

POPULAR, INC.

INDEX

 

     Page  
Part I – Financial Information       

Item 1. Financial Statements

  

Unaudited Consolidated Statements of Financial Condition at June 30, 2014 and December 31, 2013

     5   

Unaudited Consolidated Statements of Operations for the quarters and six months ended June 30, 2014 and 2013

     6   

Unaudited Consolidated Statements of Comprehensive (Loss) Income for the quarters and six months ended June  30, 2014 and 2013

     7   

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June  30, 2014 and 2013

     8   

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

     9   

Notes to Unaudited Consolidated Financial Statements

     10   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     147   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     221   

Item 4. Controls and Procedures

     222   

Part II – Other Information

  

Item 1. Legal Proceedings

     222   

Item 1A. Risk Factors

     222   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     224   

Item 6. Exhibits

     225   

Signatures

     226   

 

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Forward-Looking Information

The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc.’s (the “Corporation”, “Popular”, “we, “us”, “our”) financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict.

Various factors, some of which are beyond Popular’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 and employment levels, 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;

 

    changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios;

 

    the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;

 

    regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions;

 

    the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located;

 

    the performance of the stock and bond markets;

 

    competition in the financial services industry;

 

    additional Federal Deposit Insurance Corporation (“FDIC”) assessments;

 

    the resolution of our dispute with the FDIC under our loss share agreement entered into in connection with the Westernbank-FDIC assisted transaction; and

 

    possible legislative, tax or regulatory changes.

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 non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect our 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; our ability to grow our core businesses; decisions to downsize, sell or close units or otherwise change our business mix; and management’s ability to identify and manage these and other risks. Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

 

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All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and other than as required by law, including the requirements of applicable securities laws, we assume 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.

 

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Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

     June 30,     December 31,  

(In thousands, except share information)

   2014     2013  

Assets:

    

Cash and due from banks

   $ 362,572     $ 423,211  
  

 

 

   

 

 

 

Money market investments:

    

Federal funds sold

     —         5,055  

Securities purchased under agreements to resell

     192,490       175,965  

Time deposits with other banks

     1,474,454       677,433  
  

 

 

   

 

 

 

Total money market investments

     1,666,944       858,453  
  

 

 

   

 

 

 

Trading account securities, at fair value:

    

Pledged securities with creditors’ right to repledge

     255,990       308,978  

Other trading securities

     89,833       30,765  

Investment securities available-for-sale, at fair value:

    

Pledged securities with creditors’ right to repledge

     1,483,479       1,286,839  

Other investment securities available-for-sale

     4,170,513       4,007,961  

Investment securities held-to-maturity, at amortized cost (fair value 2014 - $103,501; 2013 - $120,688)

     114,280       140,496  

Other investment securities, at lower of cost or realizable value (realizable value 2014 - $170,700; 2013 - $184,526)

     168,125       181,752  

Loans held-for-sale, at lower of cost or fair value

     97,010       110,426  
  

 

 

   

 

 

 

Loans held-in-portfolio:

    

Loans not covered under loss sharing agreements with the FDIC

     19,726,234       21,704,010  

Loans covered under loss sharing agreements with the FDIC

     2,736,102       2,984,427  

Less – Unearned income

     91,010       92,144  

Allowance for loan losses

     624,911       640,555  
  

 

 

   

 

 

 

Total loans held-in-portfolio, net

     21,746,415       23,955,738  
  

 

 

   

 

 

 

FDIC loss share asset

     751,553       948,608  

Premises and equipment, net

     492,382       519,516  

Other real estate not covered under loss sharing agreements with the FDIC

     139,420       135,501  

Other real estate covered under loss sharing agreements with the FDIC

     155,805       168,007  

Accrued income receivable

     119,520       131,536  

Mortgage servicing assets, at fair value

     151,951       161,099  

Other assets

     2,292,360       1,687,558  

Goodwill

     461,246       647,757  

Other intangible assets

     40,122       45,132  

Assets from discontinued operations (Refer to Note 3)

     1,828,382       —    
  

 

 

   

 

 

 

Total assets

   $ 36,587,902     $ 35,749,333  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Non-interest bearing

   $ 5,666,685     $ 5,922,682  

Interest bearing

     19,234,467       20,788,463  
  

 

 

   

 

 

 

Total deposits

     24,901,152       26,711,145  
  

 

 

   

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

     2,074,676       1,659,292  

Other short-term borrowings

     31,200       401,200  

Notes payable

     2,360,089       1,584,754  

Other liabilities

     880,602       766,792  

Liabilities from discontinued operations (Refer to Note 3)

     2,079,742       —    
  

 

 

   

 

 

 

Total liabilities

     32,327,461       31,123,183  
  

 

 

   

 

 

 

Commitments and contingencies (Refer to Note 24)

    

Stockholders’ equity:

    

Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding

     50,160       50,160  

Common stock, $0.01 par value; 170,000,000 shares authorized; 103,539,383 shares issued (2013 – 103,435,967) and 103,472,979 shares outstanding (2013 – 103,397,699)

     1,035       1,034  

Surplus

     4,173,616       4,170,152  

Retained earnings

     167,663       594,430  

Treasury stock – at cost, 66,404 shares (2013 – 38,268)

     (1,742     (881

Accumulated other comprehensive loss, net of tax

     (130,291     (188,745
  

 

 

   

 

 

 

Total stockholders’ equity

     4,260,441       4,626,150  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 36,587,902     $ 35,749,333  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Quarters ended June 30,     Six months ended June 30,  

(In thousands, except per share information)

   2014     2013     2014     2013  

Interest income:

  

   

Loans

   $ 380,986     $ 370,298     $ 758,588     $ 730,814  

Money market investments

     1,131       829       2,104       1,784  

Investment securities

     33,989       36,106       69,116       73,929  

Trading account securities

     5,344       5,456       10,601       10,970  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     421,450       412,689       840,409       817,497  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     26,223       32,445       53,081       67,061  

Short-term borrowings

     8,892       9,767       17,932       19,548  

Long-term debt

     445,716       36,066       477,606       71,833  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     480,831       78,278       548,619       158,442  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income

     (59,381     334,411       291,790       659,055  

Provision for loan losses—non-covered loans

     50,074       228,975       104,196       438,068  

Provision for loan losses—covered loans

     11,604       25,500       37,318       43,056  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income after provision for loan losses

     (121,059     79,936       150,276       177,931  
  

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     39,237       41,378       78,596       82,539  

Other service fees (Refer to Note 30)

     56,468       57,279       109,286       112,223  

Mortgage banking activities (Refer to Note 12)

     3,788       18,081       7,466       38,378  

Net gain and valuation adjustments on investment securities

     —         5,856       —         5,856  

Trading account profit (loss)

     1,055       (4,345     3,032       (5,329

Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale

     9,659       4,291       14,052       (58,428

Adjustments (expense) to indemnity reserves on loans sold

     (7,454     (11,632     (17,801     (27,775

FDIC loss share expense (Refer to Note 31)

     (55,261     (3,755     (79,467     (30,021

Other operating income

     15,297       181,565       43,657       201,585  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     62,789       288,718       158,821       319,028  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Personnel costs

     99,100       106,359       203,401       213,940  

Net occupancy expenses

     20,267       21,059       41,627       41,551  

Equipment expenses

     12,044       11,485       23,456       23,105  

Other taxes

     13,543       15,225       27,206       26,753  

Professional fees

     67,024       67,015       134,023       134,752  

Communications

     6,425       6,395       13,110       12,946  

Business promotion

     16,038       15,357       27,424       27,942  

FDIC deposit insurance

     10,480       18,557       21,458       26,913  

Other real estate owned (OREO) expenses

     3,410       7,657       9,850       53,524  

Other operating expenses

     20,509       22,766       42,858       43,684  

Amortization of intangibles

     2,025       1,989       4,051       3,979  

Restructuring costs (Refer to Note 4)

     4,574       —         4,574       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     275,439       293,864       553,038       609,089  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income tax

     (333,709     74,790       (243,941     (112,130

Income tax (benefit) expense

     (4,124     (237,380     19,140       (294,257
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (329,585     312,170       (263,081     182,127  

(Loss) income from discontinued operations, net of tax (Refer to Note 3)

     (181,729     15,298       (161,824     25,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income

   $ (511,314   $ 327,468     $ (424,905   $ 207,161  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income Applicable to Common Stock

   $ (512,245   $ 326,537     $ (426,767   $ 205,300  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income per Common Share – Basic

        

Net (loss) income from continuing operations

   $ (3.21     3.03       (2.58     1.76  

Net (loss) income from discontinued operations

     (1.77     0.15       (1.57     0.24  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income per Common Share – Basic

   $ (4.98   $ 3.18     $ (4.15   $ 2.00  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income per Common Share – Diluted

        

Net (loss) income from continuing operations

   $ (3.21     3.02       (2.58     1.75  

Net (loss) income from discontinued operations

     (1.77     0.15       (1.57     0.24  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income per Common Share – Diluted

   $ (4.98   $ 3.17     $ (4.15   $ 1.99  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

 

     Quarters ended,     Six months ended,  
     June 30,     June 30,  

(In thousands)

   2014     2013     2014     2013  

Net (loss) income

   $ (511,314   $ 327,468     $ (424,905   $ 207,161  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before tax:

        

Foreign currency translation adjustment

     (603     (2,653     (2,718     (1,929

Reclassification adjustment for losses included in net income

     —         —         7,718       —    

Amortization of net losses of pension and postretirement benefit plans

     2,126       6,169       4,252       12,338  

Amortization of prior service cost of pension and postretirement benefit plans

     (950     —         (1,900     —    

Unrealized holding gains (losses) on investments arising during the period

     27,084       (115,514     54,666       (144,469

Unrealized net (losses) gains on cash flow hedges

     (2,548     5,882       (4,273     5,782  

Reclassification adjustment for net (gains) losses included in net income

     1,800       (3,045     3,624       (3,196
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before tax

     26,909       (109,161     61,369       (131,474

Income tax (expense) benefit

     (925     5,130       (2,915     8,303  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     25,984       (104,031     58,454       (123,171
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income, net of tax

   $ (485,330   $ 223,437     $ (366,451   $ 83,990  
  

 

 

   

 

 

   

 

 

   

 

 

 

Tax effect allocated to each component of other comprehensive loss:

        
     Quarters ended     Six months ended,  
     June 30,     June 30,  

(In thousands)

   2014     2013     2014     2013  

Amortization of net losses of pension and postretirement benefit plans

   $ (829   $ (2,962   $ (1,658   $ (4,813

Amortization of prior service cost of pension and postretirement benefit plans

     370       —         741       —    

Unrealized holding gains (losses) on investments arising during the period

     (758     8,942       (2,251     13,891  

Unrealized net (losses) gains on cash flow hedges

     994       (1,764     1,666       (1,734

Reclassification adjustment for net (gains) losses included in net income

     (702     914       (1,413     959  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (expense) benefit

   $ (925   $ 5,130     $ (2,915   $ 8,303  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(In thousands)

   Common
stock
     Preferred
stock
     Surplus      Retained
earnings
    Treasury
stock
    Accumulated
other
comprehensive
loss
    Total  

Balance at December 31, 2012

   $ 1,032      $ 50,160      $ 4,150,294      $ 11,826     $ (444   $ (102,868   $ 4,110,000  

Net income

              207,161           207,161  

Issuance of stock

     1           3,231              3,232  

Dividends declared:

                 

Preferred stock

              (1,861         (1,861

Common stock purchases

                (325       (325

Other comprehensive loss, net of tax

                  (123,171     (123,171
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 1,033      $ 50,160      $ 4,153,525      $ 217,126     $ (769   $ (226,039   $ 4,195,036  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 1,034      $ 50,160      $ 4,170,152      $ 594,430     $ (881   $ (188,745   $ 4,626,150  

Net loss

              (424,905         (424,905

Issuance of stock

     1           3,047              3,048  

Tax windfall benefit on vesting of restricted stock

           417              417  

Dividends declared:

                 

Preferred stock

              (1,862         (1,862

Common stock purchases

                (872       (872

Common stock reissuance

                11         11  

Other comprehensive income, net of tax

                  58,454       58,454  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 1,035      $ 50,160      $ 4,173,616      $ 167,663     $ (1,742   $ (130,291   $ 4,260,441  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Disclosure of changes in number of shares:

                                    June 30, 2014     June 30, 2013  

Preferred Stock:

                 

Balance at beginning and end of period

                  2,006,391       2,006,391  
               

 

 

   

 

 

 

Common Stock – Issued:

                 

Balance at beginning of period

                  103,435,967       103,193,303  

Issuance of stock

                  103,416       117,849  
               

 

 

   

 

 

 

Balance at end of the period

                  103,539,383       103,311,152  

Treasury stock

                  (66,404     (35,021
               

 

 

   

 

 

 

Common Stock – Outstanding

                  103,472,979       103,276,131  
               

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six months ended June 30,  

(In thousands)

   2014     2013  

Cash flows from operating activities:

    

Net (loss) income

   $ (424,905   $ 207,161  
  

 

 

   

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Provision for loan losses

     134,750       473,264  

Goodwill impairment losses

     186,511       —    

Amortization of intangibles

     5,007       4,935  

Depreciation and amortization of premises and equipment

     23,832       25,009  

Net accretion of discounts and amortization of premiums and deferred fees

     324,779       (29,525

Fair value adjustments on mortgage servicing rights

     15,836       10,741  

FDIC loss share expense

     79,467       30,021  

Adjustments (expense) to indemnity reserves on loans sold

     17,801       27,775  

Earnings from investments under the equity method

     (24,355     (34,214

Deferred income tax expense (benefit)

     2,689       (321,854

Loss (gain) on:

    

Disposition of premises and equipment

     (2,551     (2,347

Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities

     (42,413     44,577  

Sale of stock in equity method investee

     —         (136,722

Sale of foreclosed assets, including write-downs

     (2,035     35,006  

Acquisitions of loans held-for-sale

     (159,727     (15,335

Proceeds from sale of loans held-for-sale

     72,757       119,003  

Net originations on loans held-for-sale

     (338,672     (867,917

Net (increase) decrease in:

    

Trading securities

     459,792       858,092  

Accrued income receivable

     6,721       (18,177

Other assets

     (48,455     2,103  

Net increase (decrease) in:

    

Interest payable

     633       (2,570

Pension and other postretirement benefit obligation

     (3,096     3,786  

Other liabilities

     30,260       4,055  
  

 

 

   

 

 

 

Total adjustments

     739,531       209,706  
  

 

 

   

 

 

 

Net cash provided by operating activities

     314,626       416,867  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net (increase) decrease in money market investments

     (808,491     13,641  

Purchases of investment securities:

    

Available-for-sale

     (1,079,586     (1,490,647

Other

     (51,097     (116,731

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

    

Available-for-sale

     816,830       1,378,311  

Held-to-maturity

     27,029       2,359  

Other

     64,724       83,592  

Net repayments on loans

     473,336       624,262  

Proceeds from sale of loans

     87,983       295,237  

Acquisition of loan portfolios

     (289,292     (1,520,088

Net payments from (to) FDIC under loss sharing agreements

     110,618       (107

Return of capital from equity method investments

     —         438  

Proceeds from sale of stock in equity method investee

     —         166,332  

Mortgage servicing rights purchased

     —         (45

Acquisition of premises and equipment

     (20,333     (19,774

Proceeds from sale of:

    

Premises and equipment

     8,631       5,891  

Foreclosed assets

     81,010       120,365  
  

 

 

   

 

 

 

Net cash used in investing activities

     (578,638     (456,964
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in:

    

Deposits

     252,715       (259,950

Federal funds purchased and assets sold under agreements to repurchase

     418,381       (344,047

Other short-term borrowings

     (370,000     590,000  

Payments of notes payable

     (111,030     (48,458

Proceeds from issuance of notes payable

     31,905       49,874  

Proceeds from issuance of common stock

     3,048       3,232  

Dividends paid

     (1,862     (1,551

Net payments for repurchase of common stock

     (861     (325
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     222,296       (11,225
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (41,716     (51,322

Cash and due from banks at beginning of period

     423,211       439,363  
  

 

 

   

 

 

 

Cash and due from banks at end of period, including discontinued operations

     381,495       388,041  

Less: cash from discontinued operations

     18,923       —    
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 362,572     $ 388,041  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

The Consolidated Statements of Cash Flows for the periods ended June 30, 2014 and 2013 include the cash flows from operating, investing and financing activities associated with discontinued operations.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Note 1 -

  Organization, consolidation and basis of presentation      11   

Note 2 -

 

New accounting pronouncements

     12   

Note 3 -

 

Discontinued operations

     15   

Note 4 -

 

Restructuring plan

     17   

Note 5 -

 

Restrictions on cash and due from banks and certain securities

     18   

Note 6 -

 

Pledged assets

     19   

Note 7 -

 

Investment securities available-for-sale

     20   

Note 8 -

 

Investment securities held-to-maturity

     24   

Note 9 -

 

Loans

     26   

Note 10 -

 

Allowance for loan losses

     37   

Note 11 -

 

FDIC loss share asset and true-up payment obligation

     62   

Note 12 -

 

Mortgage banking activities

     64   

Note 13 -

 

Transfers of financial assets and mortgage servicing assets

     65   

Note 14 -

 

Other real estate owned

     69   

Note 15 -

 

Other assets

     70   

Note 16 -

 

Goodwill and other intangible assets

     71   

Note 17 -

 

Deposits

     74   

Note 18 -

 

Borrowings

     75   

Note 19 -

 

Offsetting of financial assets and liabilities

     78   

Note 20 -

 

Trust preferred securities

     80   

Note 21 -

 

Stockholders’ equity

     82   

Note 22 -

 

Other comprehensive loss

     83   

Note 23 -

 

Guarantees

     85   

Note 24 -

 

Commitments and contingencies

     88   

Note 25 -

 

Non-consolidated variable interest entities

     92   

Note 26 -

 

Related party transactions with affiliated company / joint venture

     96   

Note 27 -

 

Fair value measurement

     100   

Note 28 -

 

Fair value of financial instruments

     106   

Note 29 -

 

Net (loss) income per common share

     112   

Note 30 -

 

Other service fees

     113   

Note 31 -

 

FDIC loss share (expense) income

     114   

Note 32 -

 

Pension and postretirement benefits

     115   

Note 33 -

 

Stock-based compensation

     116   

Note 34 -

 

Income taxes

     119   

Note 35 -

 

Supplemental disclosure on the consolidated statements of cash flows

     123   

Note 36 -

 

Segment reporting

     124   

Note 37 -

 

Subsequent events

     130   

Note 38 -

 

Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities

     131   

 

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Note 1 – Organization, consolidation and basis of presentation

Nature of Operations

Popular, Inc. (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 has operations in Puerto Rico, the United States and the Caribbean. In Puerto Rico, the Corporation provides retail, including mortgage loan originations, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. The Corporation’s mortgage origination business is conducted under the brand name Popular Mortgage, a division of BPPR. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. The BPNA branches operate under the name of Popular Community Bank. Note 36 to the consolidated financial statements presents information about the Corporation’s business segments. Note 37 presents information regarding definitive agreements entered into by BPNA sell its regional operations in California, Illinois and Central Florida.

Principles of Consolidation and Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2013 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain reclassifications have been made to the 2013 consolidated financial statements and notes to the financial statements to conform with the 2014 presentation. As discussed in Note 3, current and prior periods presented in the consolidated statement of operations as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. The consolidated statement of financial condition and related note disclosure for prior periods do not reflect the reclassification of BPNA’s assets and liabilities to discontinued operations.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2013, included in the Corporation’s 2013 Annual Report (the “2013 Annual Report”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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.

 

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Note 2 – New accounting pronouncements

FASB Accounting Standards Update 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”)

The FASB issued ASU 2014-12 in June 2014, which intends to resolve the diverse accounting treatment of awards with a performance target that could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved.

The amendments of the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award.

Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.

The amendments in the ASU are effective in the first quarter of 2016. Early adoption is permitted. The amendments of this ASU can be applied (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets outstanding at the beginning of the period of adoption and to all new or modified awards thereafter.

The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”)

The FASB issued ASU 2014-11 in June 2014, which requires two accounting changes. First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.

The amendments in this Update require disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a sale and (2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction.

The accounting changes in this ASU are effective in the first quarter of 2015. Early application is prohibited. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.

The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606); (“ASU 2014-09”)

The FASB issued ASU 2014-09 in May 2014, which clarifies the principles for recognizing revenue and develop a common revenue standard that would (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information to users of financial statement through improved disclosure requirements and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 amends the ASC Codification and creates a new Topic 606, Revenue from Contracts with Customers.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

In addition, the new guidance requires disclosures to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contract with customers, significant judgments and changes in judgments, and assets recognized from the cost to obtain or fulfill a contract.

The amendments in this ASU are effective in the first quarter of 2017. Early adoption is not permitted.

The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity (“ASU 2014-08”)

The FASB issued ASU 2014-08 in April 2014, which changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity investment.

In addition, the new guidance requires expanded disclosures about discontinued operations that will include more information about the assets, liabilities, income, and expenses of discontinued operations.

The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide information about the ongoing trends in the reporting organization’s results from continuing operations.

The amendments in the ASU are effective in the first quarter of 2015. Early adoption is permitted.

 

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The Corporation is currently evaluating the impact that the adoption of this guidance will have on the presentation and disclosures in its consolidated financial statements.

FASB Accounting Standards Update 2014-04, Receivables-Troubled Debt Restructuring by Creditors (SubTopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”)

The FASB issued ASU 2014-04 in January 2014 which clarifies when a creditor should be considered to have received physical possession of a residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.

The amendments of this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.

The amendment of this guidance requires interim and annual disclosures of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.

ASU 2014-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2014. The amendments in this ASU can be elected using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”)

The FASB issued ASU 2013-11 in July 2013 which requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. When a net operating loss, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. Currently, there is no explicit guidance under U.S. GAAP on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment of this guidance does not require new recurring disclosures.

ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.

The Corporation adopted this guidance in the first quarter of 2014 and it did not have a material effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”)

The FASB issued ASU 2013-05 in March 2013 which clarifies the applicable guidance for the release of the cumulative translation adjustment. When a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in ASC subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets has resided.

 

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For an equity method investment that is a foreign entity, the partial sale guidance in ASC Section 830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

Additionally, the amendments in this ASU clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events.

ASU 2013-05 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted.

The Corporation adopted this guidance on the first quarter of 2014 and recognized a loss of approximately $7.7 million resulting from the reclassification from other comprehensive loss into earnings of the cumulative foreign translation adjustment related to the dilution on its equity investment in BHD. Refer to note 15 for additional information.

 

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Table of Contents

Note 3 – Discontinued operations

On April 22, 2014, BPNA, the Corporation’s U.S. mainland banking subsidiary, entered into definitive agreements to sell California, Illinois and Central Florida regional operations to three different buyers. BPNA completed the sale of its Illinois regional operations on August 8, 2014. The remaining transactions are expected to be completed by the end of the fourth quarter of 2014. In connection with these transactions, the Corporation intends to centralize certain back office operations in Puerto Rico and New York. The operations subject to these three definitive agreements each constituted a business, as defined in ASC 805-10-55. Accordingly, the decision to sell these businesses resulted in the discontinuance of each of these respective operations and classification as held-for-sale. For financial reporting purposes, the results of the discontinued operations are presented as “Assets / Liabilities from discontinued operations” in the consolidated statement of condition and “(Loss) income from discontinued operations, net of tax” in the consolidated statement of operations. As required by ASC 205-20, current and prior periods presented in the consolidated statement of operations as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. The consolidated statement of financial condition and related note disclosure for prior periods do not reflect the reclassification of these assets and liabilities to discontinued operations.

During the quarter ended June 30, 2014, the Corporation recorded a non-cash goodwill impairment charge of $187 million, related to the goodwill allocated, on a relative fair value basis, to these operations. However, this non-cash charge had no impact on the Corporation’s tangible capital or regulatory capital ratios. Refer to Note 16, for additional information on the goodwill impairment charge. The Corporation expects to realize a net premium estimated at approximately $24 million, before customary transaction costs, upon the closing of these transactions.

The Corporation estimates that it will incur in restructuring charges of approximately $54 million, comprised of $32 million in severance, retention and employee related costs and $22 million in operational set-up costs and lease cancelations, of which approximately $5 million where incurred during the second quarter of 2014. Refer to Note 4, for restructuring charges incurred during the quarter ended June 30, 2014.

Assets and liabilities of discontinued operations, which are mostly classified as held-for-sale, are detailed below:

 

(In thousands)

   June 30, 2014  

Cash

   $ 18,923  

Loans held-for-sale

     1,783,998  

Premises and equipment, net

     17,553  

Other assets

     7,908  
  

 

 

 

Total assets

   $ 1,828,382  
  

 

 

 

Deposits

   $ 2,058,309  

Short-term borrowings

     2,998  

Other liabilities

     18,435  
  

 

 

 

Total liabilities

   $ 2,079,742  
  

 

 

 

Net liabilities

   $ (251,360
  

 

 

 

 

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The following table provides the components of net (loss) income from the discontinued operations for the quarter and six months ended June 30, 2014 and 2013.

 

     Quarter ended     Six months ended  

(In thousands)

   June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

Net interest income

   $ 19,092     $ 21,308     $ 40,889     $ 42,977  

Provision (reversal) for loan losses

     —         (5,067     (6,764     (7,860

Non-interest income

     9,388       4,645        19,921       8,392  

Personnel costs

     12,117       8,320       20,969       16,728  

Net occupancy expenses

     2,845       3,049       7,176       6,030  

Professional fees

     5,903       2,949       8,696       5,709  

Goodwill impairment charge

     186,511       —         186,511       —    

Other operating expenses

     2,833       1,404       6,046       5,728  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income from discontinued operations

   $ (181,729   $ 15,298     $ (161,824   $ 25,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 4 – Restructuring plan

As discussed in Note 3, in connection with the sale of the operations of the California, Illinois and Central Florida regions, the Corporation intends to centralize certain back office operations, previously conducted on these regions, in Puerto Rico and New York. The Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) to eliminate and re-locate employment positions, terminate contracts and incur other costs associated with moving the operations to Puerto Rico and New York. The Corporation estimates that it will incur in restructuring charges of approximately $54 million, comprised of $32 million in severance and retention payments and $22 million in operational set-up costs and lease cancelations, of which approximately $5 million where incurred during the second quarter of 2014. The remaining costs will be recognized during the third and fourth quarter of 2014 and early 2015.

Full-time equivalent employees at the California, Illinois and Central Florida regions were 363 as of June 30, 2014, compared with 365 as of December 31, 2013. Some of the employees at these regions will be transferred to the acquiring entities. The remaining employees at these regions are expected to be transferred to other of the Corporation’s U.S. mainland or Puerto Rico operations or depart by mid- 2015.

The following table details the expenses recorded by the Corporation that were associated with the PCB restructuring plan:

 

(In thousands)

   Quarter ended June 30, 2014  

Personnel costs

   $ 3,630  

Net occupancy expenses

     271  

Equipment expenses

     190  

Professional fees

     448  

Other operating expenses

     35  
  

 

 

 

Total restructuring costs

   $ 4,574  
  

 

 

 

At June 30, 2014, the accrual for the PCB restructuring costs amounted to $3 million.

 

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Note 5 – Restrictions on cash and due from banks and certain securities

The Corporation’s banking subsidiaries, BPPR and BPNA, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $ 1.0 billion at June 30, 2014 (December 31, 2013 - $992 million). Cash and due from banks, as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

At June 30, 2014, the Corporation held $43 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2013 - $44 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

 

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Note 6 – Pledged assets

Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available, derivative positions, and loan servicing agreements. 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:

 

     June 30,      December 31,  

(In thousands)

   2014      2013  

Investment securities available-for-sale, at fair value

   $ 2,264,948      $ 1,638,558  

Investment securities held-to-maturity, at amortized cost

     10,000        35,000  

Loans held-for-sale measured at lower of cost or fair value

     216        363  

Loans held-in-portfolio covered under loss sharing agreements with the FDIC

     365,432        407,257  

Loans held-in-portfolio not covered under loss sharing agreements with the FDIC

     8,447,919        9,108,984  
  

 

 

    

 

 

 

Total pledged assets

   $ 11,088,515      $ 11,190,162  
  

 

 

    

 

 

 

Pledged assets from discontinued operations are presented as part of “Assets from Discontinued Operations” in the Consolidated Statement of Condition. Refer to Note 3 to the consolidated financial statements for further information on the discontinued operations.

Pledged securities that the creditor has the right by custom or contract to repledge are presented separately on the consolidated statements of financial condition.

At June 30, 2014, the Corporation had $ 1.2 billion in investment securities available-for-sale and $ 0.6 billion in loans that served as collateral to secure public funds (December 31, 2013 - $ 1.0 billion and $ 0.5 billion, respectively).

At June 30, 2014, the Corporation’s banking subsidiaries had short-term and long-term credit facilities authorized with the Federal Home Loan Bank system (the “FHLB”) aggregating to $3.3 billion (December 31, 2013 - $3.0 billion). Refer to Note 18 to the consolidated financial statements for borrowings outstanding under these credit facilities. At June 30, 2014, the credit facilities authorized with the FHLB were collateralized by $ 3.4 billion in loans held-in-portfolio (December 31, 2013 - $ 4.5 billion). Also, at June 30, 2014, the Corporation’s banking subsidiaries had a borrowing capacity at the Federal Reserve (“Fed”) discount window of $2.6 billion, which remained unused as of such date ( December 31, 2013 - $3.4 billion). The amount available under these credit facilities with the Fed is dependent upon the balance of loans and securities pledged as collateral. At June 30, 2014, the credit facilities with the Fed discount window were collateralized by $ 4.8 billion in loans held-in-portfolio (December 31, 2013 - $ 4.5 billion). These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statements of financial condition.

In addition, at June 30, 2014, trade receivables from brokers and counterparties amounting to $76 million were pledged to secure repurchase agreements (December 31, 2013 - $69 million).

 

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Note 7 – Investment securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at June 30, 2014 and December 31, 2013.

 

     At June 30, 2014  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair
value
     Weighted
average
yield
 

U.S. Treasury securities

              

After 1 to 5 years

   $ 26,085      $ 1,644      $ —        $ 27,729        3.87 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     26,085        1,644        —          27,729        3.87  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

Within 1 year

     6,998        7        —          7,005        0.14  

After 1 to 5 years

     1,948,833        2,424        9,053        1,942,204        1.20  

After 5 to 10 years

     252,520        581        7,198        245,903        1.63  

After 10 years

     23,000        —          882        22,118        3.15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     2,231,351        3,012        17,133        2,217,230        1.27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

After 1 to 5 years

     5,384        19        22        5,381        2.86  

After 5 to 10 years

     23,352        7        1,398        21,961        5.46  

After 10 years

     48,812        422        7,405        41,829        5.85  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     77,548        448        8,825        69,171        5.52  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 1 to 5 years

     4,876        124        —          5,000        2.56  

After 5 to 10 years

     27,924        1,219        2        29,141        2.82  

After 10 years

     2,305,054        17,819        53,542        2,269,331        2.06  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     2,337,854        19,162        53,544        2,303,472        2.07  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—private label

              

After 10 years

     130        —          —          130        3.90  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—private label

     130        —          —          130        3.90  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     1        —          —          1        3.66  

After 1 to 5 years

     26,420        1,458        —          27,878        4.56  

After 5 to 10 years

     200,182        8,743        486        208,439        3.47  

After 10 years

     735,125        50,779        2,174        783,730        4.08  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     961,728        60,980        2,660        1,020,048        3.97  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     3,177        1,284        118        4,343        6.39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     9,458        —          15        9,443        1.68  

After 10 years

     2,341        85        —          2,426        3.63  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     11,799        85        15        11,869        2.06  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 5,649,672      $ 86,615      $ 82,295      $ 5,653,992        2.14 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     At December 31, 2013  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair
value
     Weighted
average
yield
 

U.S. Treasury securities

              

After 1 to 5 years

   $ 26,474      $ 2,008      $ —        $ 28,482        3.85 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     26,474        2,008        —          28,482        3.85  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

Within 1 year

     25,021        39        —          25,060        1.85  

After 1 to 5 years

     1,087,453        1,678        12,715        1,076,416        1.26  

After 5 to 10 years

     528,611        100        21,742        506,969        1.52  

After 10 years

     23,000        —          2,240        20,760        3.12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     1,664,085        1,817        36,697        1,629,205        1.38  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

After 1 to 5 years

     6,228        45        85        6,188        4.64  

After 5 to 10 years

     23,147        —          1,978        21,169        6.33  

After 10 years

     48,803        29        9,812        39,020        5.84  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     78,178        74        11,875        66,377        5.89  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 1 to 5 years

     5,131        101        —          5,232        1.79  

After 5 to 10 years

     31,613        921        —          32,534        2.98  

After 10 years

     2,438,021        18,532        76,023        2,380,530        2.05  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     2,474,765        19,554        76,023        2,418,296        2.06  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—private label

              

After 10 years

     509        4        —          513        3.78  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—private label

     509        4        —          513        3.78  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     419        24        —          443        3.14  

After 1 to 5 years

     15,921        833        —          16,754        4.50  

After 5 to 10 years

     62,373        3,058        1,214        64,217        4.12  

After 10 years

     1,007,733        50,807        4,313        1,054,227        3.93  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     1,086,446        54,722        5,527        1,135,641        3.95  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     3,178        1,109        171        4,116        4.06  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     9,638        —          141        9,497        1.68  

After 10 years

     2,604        69        —          2,673        3.61  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     12,242        69        141        12,170        2.09  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 5,345,877      $ 79,357      $ 130,434      $ 5,294,800        2.30 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

There were no sales of investment securities available-for-sale during the six months ended June 30, 2014 or June 30, 2013.

 

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Table of Contents

The following tables present the Corporation’s fair value and gross unrealized losses 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 June 30, 2014 and December 31, 2013.

 

     At June 30, 2014  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
 

Obligations of U.S. Government sponsored entities

   $ 594,695      $ 8,886      $ 462,222      $ 8,247      $ 1,056,917      $ 17,133  

Obligations of Puerto Rico, States and political subdivisions

     20,733        2,584        24,596        6,241        45,329        8,825  

Collateralized mortgage obligations—federal agencies

     713,604        24,114        758,570        29,430        1,472,174        53,544  

Mortgage-backed securities

     15,875        446        46,384        2,214        62,259        2,660  

Equity securities

     —          —          1,707        118        1,707        118  

Other

     —          —          9,443        15        9,443        15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale in an unrealized loss position

   $ 1,344,907      $ 36,030      $ 1,302,922      $ 46,265      $ 2,647,829      $ 82,295  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2013  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
 

Obligations of U.S. Government sponsored entities

   $ 1,326,866      $ 32,457      $ 69,257      $ 4,240      $ 1,396,123      $ 36,697  

Obligations of Puerto Rico, States and political subdivisions

     54,256        11,685        8,330        190        62,586        11,875  

Collateralized mortgage obligations—federal agencies

     1,567,654        70,378        96,676        5,645        1,664,330        76,023  

Mortgage-backed securities

     105,455        4,762        7,225        765        112,680        5,527  

Equity securities

     1,657        171        —          —          1,657        171  

Other

     —          —          9,497        141        9,497        141  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale in an unrealized loss position

   $ 3,055,888      $ 119,453      $ 190,985      $ 10,981      $ 3,246,873      $ 130,434  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2014, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $82 million, driven by US Agency Collateralized Mortgage Obligations, obligations from the U.S. Government sponsored entities, and obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all US Agencies’ securities, management considers the US Agency guarantee.

In February 2014, the three principal nationally recognized rating agencies (Moody’s Investor Services, Standard and Poor’s and Fitch Ratings) downgraded the general-obligation bonds of the Commonwealth and other obligations of Puerto Rico instrumentalities to non-investment grade categories, citing concerns about financial flexibility and a reduced capacity to borrow in the financial markets. On June 2014, the Puerto Rico general obligations were further downgraded by the rating agencies, after the Commonwealth enacted a law that allowed the Puerto Rico public corporations to restructure their debt. The portfolio of obligations of the Puerto Rico Government is comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality reviews on these issuers.

 

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Table of Contents

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.

At June 30, 2014, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analyses performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. At June 30, 2014, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it is not more likely than not that the Corporation will have to sell the investment securities prior to recovery of their amortized cost basis.

The following table states the name of issuers, and the aggregate amortized cost and fair 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 backed by the full faith and credit of the U.S. Government. 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.

 

     June 30, 2014      December 31, 2013  

(In thousands)

   Amortized cost      Fair value      Amortized cost      Fair value  

FNMA

   $ 2,013,092      $ 1,988,874      $ 2,318,171      $ 2,266,610  

FHLB

     1,144,118        1,139,269        336,933        326,220  

Freddie Mac

     1,361,507        1,356,819        1,434,346        1,418,216  

 

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Table of Contents

Note 8 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at June 30, 2014 and December 31, 2013.

 

     At June 30, 2014  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair
value
     Weighted
average
yield
 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 12,685      $ —        $ 2      $ 12,683        2.10 

After 1 to 5 years

     12,595        1        383        12,213        5.93  

After 5 to 10 years

     20,925        —          5,209        15,716        6.08  

After 10 years

     66,471        1,368        6,545        61,294        2.28  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     112,676        1,369        12,139        101,906        3.37  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 5 to 10 years

     104        —          8        96        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     104        —          8        96        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

Within 1 year

     1,250        —          —          1,250        1.39  

After 1 to 5 years

     250        —          1        249        1.38  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     1,500        —          1        1,499        1.39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 114,280      $ 1,369      $ 12,148      $ 103,501        3.35 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2013  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair
value
     Weighted
average
yield
 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 12,570      $ —        $ 12      $ 12,558        2.06 

After 1 to 5 years

     12,060        —          984        11,076        5.91  

After 5 to 10 years

     20,015        —          5,251        14,764        6.06  

After 10 years

     69,236        257        13,179        56,314        2.43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     113,881        257        19,426        94,712        3.40  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 10 years

     115        7        —          122        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     115        7        —          122        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

Within 1 year

     26,000        —          645        25,355        3.41  

After 1 to 5 years

     500        —          1        499        1.33  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     26,500        —          646        25,854        3.37  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 140,496      $ 264      $ 20,072      $ 120,688        3.40 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

24


Table of Contents

The following tables present the Corporation’s fair value and gross unrealized losses 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 June 30, 2014 and December 31, 2013.

 

     At June 30, 2014  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
 

Obligations of Puerto Rico, States and political subdivisions

   $ 48,601      $ 5,012      $ 22,948      $ 7,127      $ 71,549      $ 12,139  

Collateralized mortgage obligations—federal agencies

     96        8        —          —          96        8  

Other

     249        1        —          —          249        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity in an unrealized loss position

   $ 48,946      $ 5,021      $ 22,948      $ 7,127      $ 71,894      $ 12,148  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2013  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
 

Obligations of Puerto Rico, States and political subdivisions

   $ 60,028      $ 12,180      $ 13,044      $ 7,246      $ 73,072      $ 19,426  

Other

     24,604        646        —           —           24,604        646  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity in an unrealized loss position

   $ 84,632      $ 12,826      $ 13,044      $ 7,246      $ 97,676      $ 20,072  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As indicated in Note 7 to these consolidated financial statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at June 30, 2014 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $62 million of securities issued by three municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $41 million in securities for which the underlying source of payment is not the central government, but in which it provides a guarantee in the event of default. In February 2014, the three principal nationally recognized rating agencies (Moody’s Investor Services, Standard and Poor’s and Fitch Ratings) downgraded the general-obligation bonds of the Commonwealth and other obligations of Puerto Rico instrumentalities to non-investment grade categories, citing concerns about financial flexibility and a reduced capacity to borrow in the financial markets. On June 2014, the Puerto Rico general obligations were further downgraded by the rating agencies, after the Commonwealth enacted a law that allowed the Puerto Rico public corporations to restructure their debt. The Corporation performs periodic credit quality reviews on these issuers. The Corporation does not have the intent to sell securities held-to-maturity and it is not more likely than not that the Corporation will have to sell these investment securities prior to recovery of their amortized cost basis.

 

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Table of Contents

Note 9 – Loans

Covered loans acquired in the Westernbank FDIC-assisted transaction, except for lines of credit with revolving privileges, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The covered loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC-assisted transaction are accounted for under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be accreted into interest income. Loans accounted for under ASC Subtopic 310-20 are placed in non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued.

The risks on loans acquired in the FDIC-assisted transaction are significantly different from the risks on loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Accordingly, the Corporation presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to the FDIC loss sharing agreements as “non-covered loans”. The FDIC loss sharing agreements expires at the end of the quarter ending June 30, 2015 for commercial (including construction) and consumer loans, and at the end of the quarter ending June 30, 2020 for to single-family residential mortgage loans, as explained in Note 11.

For a summary of the accounting policy related to loans, interest recognition and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 to the consolidated financial statements included in 2013 Annual Report.

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, at June 30, 2014 and December 31, 2013.

 

(In thousands)

   June 30, 2014      December 31, 2013  

Commercial multi-family

   $ 475,826      $ 1,175,937  

Commercial real estate non-owner occupied

     2,501,036        2,970,505  

Commercial real estate owner occupied

     1,758,535        2,166,545  

Commercial and industrial

     3,420,150        3,724,197  

Construction

     179,059        206,084  

Mortgage

     6,664,448        6,681,476  

Leasing

     546,868        543,761  

Legacy[2]

     162,941        211,135  

Consumer:

     

Credit cards

     1,171,182        1,185,272  

Home equity lines of credit

     388,667        478,211  

Personal

     1,406,920        1,349,119  

Auto

     745,579        699,980  

Other

     214,013        219,644  
  

 

 

    

 

 

 

Total loans held-in-portfolio[1]

   $ 19,635,224      $ 21,611,866  
  

 

 

    

 

 

 

 

[1] Non-covered loans held-in-portfolio at June 30, 2014 are net of $91 million in unearned income and exclude $97 million in loans held-for-sale (December 31, 2013 - $92 million in unearned income and $110 million in loans held-for-sale).
[2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

 

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Table of Contents

The following table presents the composition of covered loans at June 30, 2014 and December 31, 2013.

 

(In thousands)

   June 30, 2014      December 31, 2013  

Commercial real estate

   $ 1,638,634      $ 1,710,229  

Commercial and industrial

     107,333        102,575  

Construction

     82,763        190,127  

Mortgage

     867,075        934,373  

Consumer

     40,297        47,123  
  

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 2,736,102      $ 2,984,427  
  

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) at June 30, 2014 and December 31, 2013 by main categories.

 

(In thousands)

   June 30, 2014 [1]      December 31, 2013  

Commercial

   $ 2,895      $ 603  

Construction

     949        —    

Mortgage

     93,166        109,823  
  

 

 

    

 

 

 

Total loans held-for-sale

   $ 97,010      $ 110,426  
  

 

 

    

 

 

 

 

[1] Loans held-for-sale from discontinued operations are presented as part of “Assets from Discontinued Operations” in the Consolidated Statement of Condition. Refer to Note 3 to the consolidated financial statements for further information on the discontinued operations.

During the quarter and six months ended June 30, 2014, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $169 million and $331 million, respectively (June 30, 2013 - $0.4 billion and $1.5 billion, respectively). Also, the Corporation recorded purchases of $92 million in consumer loans during the six months ended June 30, 2014 (June 30, 2013 - $42 million). In addition, during the six months ended June 30, 2014, the Corporation recorded purchases of commercial loans amounting to $21 million (during the quarter and six months ended June 30, 2013 - $3 million).

The Corporation performed whole-loan sales involving approximately $27 million and $70 million of residential mortgage loans during the quarter and six months ended June 30, 2014, respectively (June 30, 2013 - $503 million and $553 million, respectively). These sales included $435 million from the bulk sale of non-performing mortgage loans, completed during the quarter ended June 30, 2013. Also, the Corporation securitized approximately $ 184 million and $ 350 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2014, respectively (June 30, 2013 - $ 282 million and $ 568 million, respectively). Furthermore, the Corporation securitized approximately $ 60 million and $ 123 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2014, respectively (June 30, 2013 - $ 124 million and $ 252 million, respectively). Also, the Corporation did not securitize mortgage loans into Federal Home Loan Mortgage Corporation (“FHLMC”) mortgage-backed securities during the quarter and six months ended June 30, 2014 (during the quarter and six months ended June 30, 2013 - $ 27 million). The Corporation sold commercial and construction loans with a book value of approximately $30 million and $61 million during the quarter and six months ended June 30, 2014, respectively (June 30, 2013 - $6 million and $407 million, respectively). These sales included $401 million from the bulk sale of non-performing commercial and construction loans during the quarter ended March 31, 2013.

 

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Table of Contents

Non-covered loans

The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at June 30, 2014 and December 31, 2013. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from another financial institution that, although delinquent, the Corporation has received timely payment from the seller / servicer, and, in some instances, have partial guarantees under recourse agreements. However, residential conventional loans purchased from another financial institution, which are in the process of foreclosure, are classified as non-performing mortgage loans.

 

At June 30, 2014

 
     Puerto Rico      U.S. mainland [4]      Popular, Inc.  

(In thousands)

   Non-accrual
loans
     Accruing
loans past-due
90 days or more
     Non-accrual
loans
     Accruing
loans past-due
90 days or more
     Non-accrual
loans
     Accruing
loans past-due
90 days or more
 

Commercial multi-family

   $ 2,851      $ —        $ 4,105      $ —        $ 6,956      $ —    

Commercial real estate non-owner occupied

     56,406        —          11,857        —          68,263        —    

Commercial real estate owner occupied

     108,286        —          4,199        —          112,485        —    

Commercial and industrial

     86,009        417        4,420        —          90,429        417  

Construction

     21,456        —          —          —          21,456        —    

Mortgage[2][3]

     262,356        399,300        23,964        —          286,320        399,300  

Leasing

     2,873        —          —          —          2,873        —    

Legacy

     —          —          8,323        —          8,323        —    

Consumer:

                 

Credit cards

     —          19,595        378        —          378        19,595  

Home equity lines of credit

     —          467        7,221        —          7,221        467  

Personal

     17,968        —          1,459        —          19,427        —    

Auto

     11,703        —          —          —          11,703        —    

Other

     3,898        454        3        —          3,901        454  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 573,806      $ 420,233      $ 65,929      $ —        $ 639,735      $ 420,233  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] For purposes of this table non-performing loans exclude $ 4 million in non-performing loans held-for-sale.
[2] Non-covered loans by $55 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
[3] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $124 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of June 30, 2014. Furthermore, the Corporation has approximately $60 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.
[4] Excludes $9.5 million in non-performing loans from discontinued operations.

 

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Table of Contents

At December 31, 2013

 
     Puerto Rico      U.S. mainland      Popular, Inc.  

(In thousands)

   Non-accrual
loans
     Accruing
loans past-due
90 days or more
     Non-accrual
loans
     Accruing
loans past-due
90 days or more
     Non-accrual
loans
     Accruing
loans past-due
90 days or more
 

Commercial multi-family

   $ 4,944      $ —        $ 20,894      $ —        $ 25,838      $ —    

Commercial real estate non-owner occupied

     41,959        —          42,413        —          84,372        —    

Commercial real estate owner occupied

     83,441        —          23,507        —          106,948        —    

Commercial and industrial

     55,753        556        6,142        —          61,895        556  

Construction

     18,108        —          5,663        —          23,771        —    

Mortgage[2][3]

     206,389        395,645        26,292        —          232,681        395,645  

Leasing

     3,495        —          —          —          3,495        —    

Legacy

     —          —          15,050        —          15,050        —    

Consumer:

                 

Credit cards

     —          20,313        486        —          486        20,313  

Home equity lines of credit

     —          147        8,632        —          8,632        147  

Personal

     17,054        54        1,591        —          18,645        54  

Auto

     10,562        —          2        —          10,564        —    

Other

     5,550        585        21        —          5,571        585  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 447,255      $ 417,300      $ 150,693      $ —        $ 597,948      $ 417,300  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] For purposes of this table non-performing loans exclude $ 1 million in non-performing loans held-for-sale.
[2] Non-covered loans by $43 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
[3] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $115 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2013. Furthermore, the Corporation has approximately $50 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.

The following tables present loans by past due status at June 30, 2014 and December 31, 2013 for non-covered loans held-in-portfolio (net of unearned income).

 

June 30, 2014

 

Puerto Rico

 
     Past due             Non-covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Puerto Rico  

Commercial multi-family

   $ —        $ 189      $ 2,851      $ 3,040      $ 58,466      $ 61,506  

Commercial real estate non-owner occupied

     2,836        2,453        56,406        61,695        1,888,187        1,949,882  

Commercial real estate owner occupied

     9,351        4,015        108,286        121,652        1,423,932        1,545,584  

Commercial and industrial

     18,564        3,905        86,426        108,895        2,633,113        2,742,008  

Construction

     —          583        21,456        22,039        113,644        135,683  

Mortgage

     293,037        157,245        716,632        1,166,914        4,291,658        5,458,572  

Leasing

     7,083        1,857        2,873        11,813        535,055        546,868  

Consumer:

                 

Credit cards

     12,977        8,533        19,595        41,105        1,114,780        1,155,885  

Home equity lines of credit

     —          —          467        467        13,814        14,281  

Personal

     14,465        7,132        17,968        39,565        1,247,340        1,286,905  

Auto

     35,057        8,837        11,703        55,597        689,712        745,309  

Other

     1,462        522        4,352        6,336        207,133        213,469  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 394,832      $ 195,271      $ 1,049,015      $ 1,639,118      $ 14,216,834      $ 15,855,952  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

June 30, 2014

 

U.S. mainland

 
     Past due                
     30-59      60-89      90 days      Total             Loans HIP  

(In thousands)

   days      days      or more      past due      Current      U.S. mainland  

Commercial multi-family

   $ —        $ —        $ 4,105      $ 4,105      $ 410,215      $ 414,320  

Commercial real estate non-owner occupied

     —          —          11,857        11,857        539,297        551,154  

Commercial real estate owner occupied

     1,553        8,500        4,199        14,252        198,699        212,951  

Commercial and industrial

     2,411        4,022        4,420        10,853        667,289        678,142  

Construction

     —          —          —          —          43,376        43,376  

Mortgage

     1,892        7,241        23,964        33,097        1,172,779        1,205,876  

Legacy

     1,871        2,770        8,323        12,964        149,977        162,941  

Consumer:

                 

Credit cards

     295        176        378        849        14,448        15,297  

Home equity lines of credit

     2,052        2,077        7,221        11,350        363,036        374,386  

Personal

     790        1,034        1,459        3,283        116,732        120,015  

Auto

     6        —          —          6        264        270  

Other

     20        —          3        23        521        544  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,890      $ 25,820      $ 65,929      $ 102,639      $ 3,676,633      $ 3,779,272  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2014

 

Popular, Inc.

 
     Past due             Non-covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Popular, Inc.  

Commercial multi-family

   $ —        $ 189      $ 6,956      $ 7,145      $ 468,681      $ 475,826  

Commercial real estate non-owner occupied

     2,836        2,453        68,263        73,552        2,427,484        2,501,036  

Commercial real estate owner occupied

     10,904        12,515        112,485        135,904        1,622,631        1,758,535  

Commercial and industrial

     20,975        7,927        90,846        119,748        3,300,402        3,420,150  

Construction

     —          583        21,456        22,039        157,020        179,059  

Mortgage

     294,929        164,486        740,596        1,200,011        5,464,437        6,664,448  

Leasing

     7,083        1,857        2,873        11,813        535,055        546,868  

Legacy

     1,871        2,770        8,323        12,964        149,977        162,941  

Consumer:

                 

Credit cards

     13,272        8,709        19,973        41,954        1,129,228        1,171,182  

Home equity lines of credit

     2,052        2,077        7,688        11,817        376,850        388,667  

Personal

     15,255        8,166        19,427        42,848        1,364,072        1,406,920  

Auto

     35,063        8,837        11,703        55,603        689,976        745,579  

Other

     1,482        522        4,355        6,359        207,654        214,013  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 405,722      $ 221,091      $ 1,114,944      $ 1,741,757      $ 17,893,467      $ 19,635,224  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2013

 

Puerto Rico

 
     Past due             Non-covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Puerto Rico  

Commercial multi-family

   $ 446      $ —        $ 4,944      $ 5,390      $ 77,013      $ 82,403  

Commercial real estate non-owner occupied

     13,889        349        41,959        56,197        1,808,021        1,864,218  

Commercial real estate owner occupied

     13,725        8,318        83,441        105,484        1,501,019        1,606,503  

Commercial and industrial

     9,960        4,463        56,309        70,732        2,841,734        2,912,466  

Construction

     2,329        —          18,108        20,437        140,734        161,171  

Mortgage

     316,663        154,882        645,444        1,116,989        4,283,690        5,400,679  

Leasing

     7,457        1,607        3,495        12,559        531,202        543,761  

Consumer:

                 

Credit cards

     13,797        9,991        20,313        44,101        1,125,520        1,169,621  

Home equity lines of credit

     133        53        147        333        14,845        15,178  

Personal

     12,897        6,794        17,108        36,799        1,177,085        1,213,884  

Auto

     31,340        9,361        10,562        51,263        648,228        699,491  

Other

     1,834        859        6,135        8,828        209,636        218,464  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 424,470      $ 196,677      $ 907,965      $ 1,529,112      $ 14,358,727      $ 15,887,839  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

 

U.S. mainland

 
     Past due                
     30-59      60-89      90 days      Total             Loans HIP  

(In thousands)

   days      days      or more      past due      Current      U.S. mainland  

Commercial multi-family

   $ 3,621      $ 1,675      $ 20,894      $ 26,190      $ 1,067,344      $ 1,093,534  

Commercial real estate non-owner occupied

     4,255        —          42,413        46,668        1,059,619        1,106,287  

Commercial real estate owner occupied

     657        8,452        23,507        32,616        527,426        560,042  

Commercial and industrial

     2,331        2,019        6,142        10,492        801,239        811,731  

Construction

     —          —          5,663        5,663        39,250        44,913  

Mortgage

     30,713        9,630        26,292        66,635        1,214,162        1,280,797  

Legacy

     9,079        2,098        15,050        26,227        184,908        211,135  

Consumer:

                 

Credit cards

     285        200        486        971        14,680        15,651  

Home equity lines of credit

     2,794        2,198        8,632        13,624        449,409        463,033  

Personal

     3,196        826        1,591        5,613        129,622        135,235  

Auto

     11        —          2        13        476        489  

Other

     43        50        21        114        1,066        1,180  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,985      $ 27,148      $ 150,693      $ 234,826      $ 5,489,201      $ 5,724,027  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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December 31, 2013

 

Popular, Inc.

 
     Past due             Non-covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Popular, Inc.  

Commercial multi-family

   $ 4,067      $ 1,675      $ 25,838      $ 31,580      $ 1,144,357      $ 1,175,937  

Commercial real estate non-owner occupied

     18,144        349        84,372        102,865        2,867,640        2,970,505  

Commercial real estate owner occupied

     14,382        16,770        106,948        138,100        2,028,445        2,166,545  

Commercial and industrial

     12,291        6,482        62,451        81,224        3,642,973        3,724,197  

Construction

     2,329        —          23,771        26,100        179,984        206,084  

Mortgage

     347,376        164,512        671,736        1,183,624        5,497,852        6,681,476  

Leasing

     7,457        1,607        3,495        12,559        531,202        543,761  

Legacy

     9,079        2,098        15,050        26,227        184,908        211,135  

Consumer:

                 

Credit cards

     14,082        10,191        20,799        45,072        1,140,200        1,185,272  

Home equity lines of credit

     2,927        2,251        8,779        13,957        464,254        478,211  

Personal

     16,093        7,620        18,699        42,412        1,306,707        1,349,119  

Auto

     31,351        9,361        10,564        51,276        648,704        699,980  

Other

     1,877        909        6,156        8,942        210,702        219,644  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 481,455      $ 223,825      $ 1,058,658      $ 1,763,938      $ 19,847,928      $ 21,611,866  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at June 30, 2014 and December 31, 2013 by main categories.

 

(In thousands)

   June 30, 2014      December 31, 2013  

Commercial

   $ 2,895      $ 603  

Construction

     949        —    

Mortgage

     582        489  
  

 

 

    

 

 

 

Total

   $ 4,426      $ 1,092  
  

 

 

    

 

 

 

The outstanding principal balance of non-covered loans accounted pursuant to ASC Subtopic 310-30, net of amounts charged off by the Corporation, amounted to $226 million at June 30, 2014 (December 31, 2013—$197 million). At June 30, 2014, none of the acquired non-covered loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the non-covered loans accounted pursuant to the ASC Subtopic 310-30, for the quarters and six months ended June 30, 2014 and 2013 were as follows:

 

Activity in the accretable discount - Non-covered loans ASC 310-30

 
     For the quarter ended     For the quarter ended  

(In thousands)

   June 30, 2014     June 30, 2013  

Beginning balance

   $ 67,285     $ 36,627  

Additions

     4,060       10,107  

Accretion

     (2,552     (2,004

Change in expected cash flows

     8,034       4,483  
  

 

 

   

 

 

 

Ending balance

   $ 76,827     $ 49,213  
  

 

 

   

 

 

 

 

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Activity in the accretable discount—Non-covered loans ASC 310-30

 
     For the six months ended     For the six months ended  

(In thousands)

   June 30, 2014     June 30, 2013  

Beginning balance

   $ 49,398     $ —    

Additions

     11,144       47,342  

Accretion

     (4,926     (2,612

Change in expected cash flows

     21,211       4,483  
  

 

 

   

 

 

 

Ending balance

   $ 76,827     $ 49,213  
  

 

 

   

 

 

 

Carrying amount of non-covered loans accounted for pursuant to ASC 310-30

 
     For the quarter ended     For the quarter ended  

(In thousands)

   June 30, 2014     June 30, 2013  

Beginning balance

   $ 190,216       133,041  

Additions

     13,139       22,899  

Accretion

     2,552       2,004  

Collections and charge-offs

     (6,866     (19,312
  

 

 

   

 

 

 

Ending balance

   $ 199,041     $ 138,632  

Allowance for loan losses ASC 310-30 non-covered loans

     (15,751     —    
  

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 183,290     $ 138,632  
  

 

 

   

 

 

 

Carrying amount of non-covered loans accounted for pursuant to ASC 310-30

 
     For the six months ended     For the six months ended  

(In thousands)

   June 30, 2014     June 30, 2013  

Beginning balance

   $ 173,659     $ —    

Additions

     33,181       156,311  

Accretion

     4,926       2,612  

Collections and charge-offs

     (12,725     (20,291
  

 

 

   

 

 

 

Ending balance

   $ 199,041     $ 138,632  

Allowance for loan losses ASC 310-30 non-covered loans

     (15,751     —    
  

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 183,290     $ 138,632  
  

 

 

   

 

 

 

Covered loans

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at June 30, 2014 and December 31, 2013.

 

     June 30, 2014      December 31, 2013  
     Non-accrual      Accruing loans past      Non-accrual      Accruing loans past  

(In thousands)

   loans      due 90 days or more      loans      due 90 days or more  

Commercial real estate

   $ 7,775      $ —        $ 8,345      $ —    

Commercial and industrial

     888        —          7,335        456  

Construction

     4,112        —          11,872        —    

Mortgage

     3,044        18        1,739        69  

Consumer

     331        —          90        112  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 16,150      $ 18      $ 29,381      $ 637  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Covered loans accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

 

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The following tables present loans by past due status at June 30, 2014 and December 31, 2013 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

 

June 30, 2014

 
     Past due                
     30-59      60-89      90 days      Total             Covered  

(In thousands)

   days      days      or more      past due      Current      loans HIP  

Commercial real estate

   $ 18,747      $ 7,829      $ 340,117      $ 366,693      $ 1,271,941      $ 1,638,634  

Commercial and industrial

     870        684        7,686        9,240        98,093        107,333  

Construction

     —          —          71,197        71,197        11,566        82,763  

Mortgage

     46,826        25,447        149,311        221,584        645,491        867,075  

Consumer

     2,139        830        3,762        6,731        33,566        40,297  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 68,582      $ 34,790      $ 572,073      $ 675,445      $ 2,060,657      $ 2,736,102  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

 
     Past due                
     30-59      60-89      90 days      Total             Covered  

(In thousands)

   days      days      or more      past due      Current      loans HIP  

Commercial real estate

   $ 42,898      $ 8,745      $ 374,301      $ 425,944      $ 1,284,285      $ 1,710,229  

Commercial and industrial

     1,584        349        16,318        18,251        84,324        102,575  

Construction

     399        —          178,007        178,406        11,721        190,127  

Mortgage

     50,222        23,384        165,030        238,636        695,737        934,373  

Consumer

     2,588        1,328        4,200        8,116        39,007        47,123  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 97,691      $ 33,806      $ 737,856      $ 869,353      $ 2,115,074      $ 2,984,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The carrying amount of the covered loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”), as detailed in the following table.

 

     June 30, 2014     December 31, 2013  
     Carrying amount     Carrying amount  

(In thousands)

   Non-credit
impaired loans
    Credit impaired
loans
    Total     Non-credit
impaired loans
    Credit impaired
loans
    Total  

Commercial real estate

   $ 1,450,099     $ 126,474     $ 1,576,573     $ 1,483,331     $ 149,341     $ 1,632,672  

Commercial and industrial

     65,372       4,496       69,868       55,192       3,069       58,261  

Construction

     37,925       40,283       78,208       71,864       104,356       176,220  

Mortgage

     804,169       49,481       853,650       862,878       59,483       922,361  

Consumer

     30,346       2,019       32,365       35,810       2,623       38,433  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount

     2,387,911       222,753       2,610,664       2,509,075       318,872       2,827,947  

Allowance for loan losses

     (50,609     (40,283     (90,892     (57,594     (36,321     (93,915
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance

   $ 2,337,302     $ 182,470     $ 2,519,772     $ 2,451,481     $ 282,551     $ 2,734,032  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The outstanding principal balance of covered loans accounted pursuant to ASC Subtopic 310-30, net of amounts charged off by the Corporation, amounted to $3.4 billion at June 30, 2014 (December 31, 2013—$3.8 billion). At June 30, 2014, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

 

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Table of Contents

Changes in the carrying amount and the accretable yield for the covered loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended June 30, 2014 and 2013, were as follows:

 

     Activity in the accretable yield  
     Covered loans ASC 310-30  
     For the quarters ended  
     June 30, 2014     June 30, 2013  
     Non-credit     Credit           Non-credit     Credit        

(In thousands)

   impaired loans     impaired loans     Total     impaired loans     impaired loans     Total  

Beginning balance

   $ 1,212,706     $ 5,506     $ 1,218,212     $ 1,372,375     $ (240   $ 1,372,135  

Accretion

     (77,316     (2,547     (79,863     (60,284     (2,252     (62,536

Change in expected cash flows

     135,812       6,597       142,409       53,579       16,434       70,013  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,271,202     $ 9,556     $ 1,280,758     $ 1,365,670     $ 13,942     $ 1,379,612  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Activity in the accretable discount  
     Covered loans ASC 310-30  
     For the six months ended  
     June 30, 2014     June 30, 2013  
     Non-credit     Credit           Non-credit     Credit        
     impaired     impaired           impaired     impaired        

(In thousands)

   loans     loans     Total     loans     loans     Total  

Beginning balance

   $ 1,297,725     $ 11,480     $ 1,309,205     $ 1,446,381     $ 5,288     $ 1,451,669  

Accretion

     (149,868     (9,113     (158,981     (121,461     (6,065     (127,526

Change in expected cash flows

     123,345       7,189       130,534       40,750       14,719       55,469  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,271,202     $ 9,556     $ 1,280,758     $ 1,365,670     $ 13,942     $ 1,379,612  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Carrying amount of covered loans accounted for pursuant to ASC 310-30  
     For the quarters ended  
     June 30, 2014     June 30, 2013  
     Non-credit     Credit           Non-credit     Credit        

(In thousands)

   impaired loans     impaired loans     Total     impaired loans     impaired loans     Total  

Beginning balance

   $ 2,469,453     $ 263,669     $ 2,733,122     $ 2,758,944     $ 398,719     $ 3,157,663  

Accretion

     77,316       2,547       79,863       60,284       2,252       62,536  

Collections and charge-offs

     (158,858     (43,463     (202,321     (166,157     (41,176     (207,333
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,387,911     $ 222,753     $ 2,610,664     $ 2,653,071     $ 359,795     $ 3,012,866  

Allowance for loan losses ASC 310-30 covered loans

     (50,609     (40,283     (90,892     (47,017     (44,178     (91,195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 2,337,302     $ 182,470     $ 2,519,772     $ 2,606,054     $ 315,617     $ 2,921,671  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Carrying amount of loans accounted for pursuant to ASC 310-30  
     For the six months ended  
     June 30, 2014     June 30, 2013  
     Non-credit     Credit           Non-credit     Credit        

(In thousands)

   impaired loans     impaired loans     Total     impaired loans     impaired loans     Total  

Beginning balance

   $ 2,509,075     $ 318,872     $ 2,827,947     $ 3,051,964     $ 439,795     $ 3,491,759  

Accretion

     149,868       9,113       158,981       121,461       6,065       127,526  

Collections and charge offs

     (271,032     (105,232     (376,264     (520,354     (86,065     (606,419
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,387,911     $ 222,753     $ 2,610,664     $ 2,653,071     $ 359,795     $ 3,012,866  

Allowance for loan losses ASC 310-30 covered loans

     (50,609     (40,283     (90,892     (47,017     (44,178     (91,195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 2,337,302     $ 182,470     $ 2,519,772     $ 2,606,054     $ 315,617     $ 2,921,671  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loans, if the loan is accruing interest. Covered loans accounted for under ASC Subtopic 310-20 amounted to $0.1 billion at June 30, 2014 (December 31, 2013—$0.2 billion).

 

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Note 10 – 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 this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.

The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by analogy, by evaluating decreases in expected cash flows after the acquisition date.

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination for general reserves of the allowance for loan losses includes the following principal factors:

 

    Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 3-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios. The base net loss rates are applied by loan type and by legal entity.

 

    Recent loss trend adjustment, which replaces the base loss rate with a 12-month average loss rate, when these trends are higher than the respective base loss rates. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process. As part of the annual review of the components of the ALLL models, as discussed in the following paragraphs and implemented as of June 30th 2014, the Corporation eliminated the use of caps in the recent loss trend adjustment for the consumer and mortgage portfolios, among other revisions. For the period ended December 31, 2013, the recent loss trend adjustment caps for the consumer and mortgage portfolios were triggered in only one portfolio segment within the Puerto Rico consumer portfolio. Management assessed the impact of the applicable cap through a review of qualitative factors that specifically considered the drivers of recent loss trends and changes to the portfolio composition. The related effect of the aforementioned cap was immaterial for the overall level of the Allowance for Loan and Lease Losses for the Puerto Rico Consumer portfolio.

For the period ended June 30, 2014, 28% (June 30, 2013 - 37%) of the ALLL for BPPR non-covered loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2014, and in the commercial multi-family, mortgage, and leasing portfolios for 2013.

For the period ended June 30, 2014, 23% (June 30, 2013 - 24%) of the ALLL for BPNA loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial and industrial and legacy loan portfolios for 2014 and in the commercial multi-family, commercial real estate non-owner occupied and commercial and industrial portfolios for 2013.

For the period ended December 31, 2013, 27% (2012 - 32%) of the ALLL for BPPR non-covered loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, leasing, and auto loan portfolios for 2013, and in the commercial multi-family, commercial and industrial, construction, credit cards, and personal loan portfolios for 2012.

For the period ended December 31, 2013, 29% (2012 – 8%) of the ALLL for BPNA loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial real estate non-owner occupied, commercial and industrial and legacy loan portfolios for 2013 and in the construction and legacy loan portfolios for 2012.

 

    Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses.

 

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During the second quarter of 2014, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics and revised certain components related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These enhancements to the ALLL methodology, which are described in the paragraphs below, were implemented as of June 30, 2014 and resulted in a net decrease to the allowance for loan losses of $18.7 million for the non-covered portfolio and a net increase to the allowance for loan losses of $0.8 million for the covered portfolio.

Management made the following principal revisions to the methodology during the second quarter of 2014:

 

    Annual review and recalibration of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. During the second quarter of 2014, the environmental factor models used to account for changes in current credit and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends. Management also revised the application of environmental factors to the historical loss rates to consider last 12 month trends of the applicable credit and macroeconomic indicators applied as an incremental adjustment to account for emerging risks not necessarily considered in the historical loss rates.

The combined effect of the aforementioned recalibration and enhancements to the environmental factors adjustment resulted in a decrease to the allowance for loan losses of $17 million at June 30, 2014, of which $14.1 million related to the non-covered BPPR segment and $3.7 million related to the BPNA segment, offset in part by a $0.8 million increase in the BPPR covered segment.

 

    Increased the historical look-back period for determining the recent loss trend adjustment for consumer and mortgage loans. The Corporation increased the look-back period for assessing recent trends applicable to the determination of consumer and mortgage loan net charge-offs from 6 months to 12 months and eliminated the use of caps. Previously, the Corporation used a recent loss trend adjustment based on 6 months of net charge-offs up to a determined cap. Given the current overall consumer and mortgage credit quality improvements, management concluded that a 12-month look-back period for the recent loss trend adjustment aligns the Corporation’s allowance for loan losses methodology to current credit quality trends while limiting excessive pro-cyclicality given the longer look-back period analysis, thus, eliminating the aforementioned caps.

The combined effect of the aforementioned enhancements to the recent loss trend adjustment resulted in a decrease to the allowance for loan losses of $1 million at June 30, 2014, of which $0.9 million related to the non-covered BPPR segment and $0.1 million related to the BPNA segment.

The following tables present the changes in the allowance for loan losses for the quarters ended June 30, 2014 and 2013.

 

For the quarter ended June 30, 2014

 

Puerto Rico - Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 124,134     $ 5,079     $ 137,796     $ 10,483     $ 157,248     $ 434,740  

Provision (reversal of provision)

     69,410       (503     (7,471     (3,380     16,805       74,861  

Charge-offs

     (16,218     (42     (10,083     (1,754     (29,941     (58,038

Recoveries

     6,909       657       157       610       6,370       14,703  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 184,235     $ 5,191     $ 120,399     $ 5,959     $ 150,482     $ 466,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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For the quarter ended June 30, 2014

 

Puerto Rico - Covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 38,589     $ 15,966     $ 38,848     $ —       $ 4,370     $ 97,773  

Provision (reversal of provision)

     13,542       (3,270     2,344       1       (1,013     11,604  

Charge-offs

     (5,993     (6,427     (2,262     (2     677       (14,007

Recoveries

     555       2,727       11       1       1       3,295  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 46,693     $ 8,996     $ 38,941     $ —       $ 4,035     $ 98,665  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended June 30, 2014

 

U.S. Mainland - Continuing Operations

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 31,505     $ 196     $ 25,167     $ 11,872     $ 18,893     $ 87,633  

Provision (reversal of provision)

     (12,321     (45     (7,245     (3,734     (1,442     (24,787

Charge-offs

     (5,672     —         (914     (1,347     (3,997     (11,930

Recoveries

     4,762       —         521       2,552       1,229       9,064  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 18,274     $ 151     $ 17,529     $ 9,343     $ 14,683     $ 59,980  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended June 30, 2014

 

U.S. Mainland - Discontinued Operations

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 16,375     $ 27     $ —       $ 1,400     $ 2,400     $ 20,202  

Net write-downs related to loans transferred to discontinued operations

     (16,375     (27     —         (1,400     (2,400     (20,202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ —       $ —       $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended June 30, 2014

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 210,603     $ 21,268     $ 201,811     $ 13,272     $ 10,483     $ 182,911     $ 640,348  

Provision (reversal of provision)

     70,631       (3,818     (12,372     (3,734     (3,379     14,350       61,678  

Charge-offs

     (27,883     (6,469     (13,259     (1,347     (1,756     (33,261     (83,975

Recoveries

     12,226       3,384       689       2,552       611       7,600       27,062  

Net write-downs related to loans transferred to discontinued operations

     (16,375     (27     —         (1,400     —         (2,400     (20,202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 249,202     $ 14,338     $ 176,869     $ 9,343     $ 5,959     $ 169,200     $ 624,911  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the six months ended June 30, 2014

 

Puerto Rico - Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 128,150     $ 5,095     $ 130,330     $ 10,622     $ 152,578     $ 426,775  

Provision (reversal of provision)

     80,566       (1,897     8,511       (2,863     44,458       128,775  

Charge-offs

     (38,334     (458     (18,809     (2,721     (59,137     (119,459

Recoveries

     13,853       2,451       367       921       12,583       30,175  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 184,235     $ 5,191     $ 120,399     $ 5,959     $ 150,482     $ 466,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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<

For the six months ended June 30, 2014

 

Puerto Rico - Covered loans

 

(In thousands)

   Commercial     Construction     Mortgage         Leasing         Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 42,198     $ 19,491     $ 36,006     $ —       $ 4,397     $ 102,092  

Provision (reversal of provision)

     17,581       14,297       6,842       1       (1,403     37,318  

Charge-offs

     (13,961     (29,408     (3,918     (2     972       (46,317

Recoveries

     875       4,616       11       1       69       5,572  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 46,693     $ 8,996     $ 38,941     $ —       $ 4,035     $ 98,665  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2014

 

U.S. Mainland - Continuing Operations

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 24,930     $ 214     $ 26,599     $ 11,335     $ 19,205     $ 82,283  

Allowance transferred from discontinued operations

     7,984       —         —         —         —         7,984