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 March 31, 2015

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, 103,499,210 shares outstanding as of May 5, 2015.

 

 

 


Table of Contents

POPULAR, INC.

INDEX

 

     Page  
Part I – Financial Information   

Item 1. Financial Statements

  

Unaudited Consolidated Statements of Financial Condition at March 31, 2015 and December 31, 2014

     4   

Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2015 and 2014

     5   

Unaudited Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2015 and 2014

     6   

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March  31, 2015 and 2014

     7   

Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2015 and 2014

     8   

Notes to Unaudited Consolidated Financial Statements

     9   

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

     129   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     186   

Item 4. Controls and Procedures

     186   
Part II – Other Information   

Item 1. Legal Proceedings

     186   

Item 1A. Risk Factors

     186   

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

     189   

Item 6. Exhibits

     189   

Signatures

     191   

 

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Table of Contents

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 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;

 

    possible legislative, tax or regulatory changes; and

 

    risks related to the Doral Transaction, including (a) our ability to maintain customer relationships, including managing any potential customer confusion caused by the alliance structure, (b) risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC transaction and (c) difficulties in converting or integrating the Doral branches or difficulties in providing transition support to alliance co-bidders.

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 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; 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; 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, 2014 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.

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)

 

     March 31,     December 31,  

(In thousands, except share information)

   2015     2014  

Assets:

    

Cash and due from banks

   $ 495,776     $ 381,095  
  

 

 

   

 

 

 

Money market investments:

Securities purchased under agreements to resell

  139,422     151,134  

Time deposits with other banks

  2,167,793     1,671,252  
  

 

 

   

 

 

 

Total money market investments

  2,307,215     1,822,386  
  

 

 

   

 

 

 

Trading account securities, at fair value:

Pledged securities with creditors’ right to repledge

  62,923     80,945  

Other trading securities

  71,371     57,582  

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

Pledged securities with creditors’ right to repledge

  1,016,574     1,020,529  

Other investment securities available-for-sale

  4,532,129     4,294,630  

Investment securities held-to-maturity, at amortized cost (fair value 2015 - $89,304; 2014 - $94,199)

  101,595     103,170  

Other investment securities, at lower of cost or realizable value (realizable value 2015 - $164,387; 2014 - $165,024)

  163,038     161,906  

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

  160,602     106,104  
  

 

 

   

 

 

 

Loans held-in-portfolio:

Loans not covered under loss sharing agreements with the FDIC

  21,110,147     19,498,286  

Loans covered under loss sharing agreements with the FDIC

  2,456,552     2,542,662  

Less – Unearned income

  97,217     93,835  

Allowance for loan losses

  588,697     601,792  
  

 

 

   

 

 

 

Total loans held-in-portfolio, net

  22,880,785     21,345,321  
  

 

 

   

 

 

 

FDIC loss share asset

  409,844     542,454  

Premises and equipment, net

  492,291     494,581  

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

  128,170     135,500  

Other real estate covered under loss sharing agreements with the FDIC

  113,557     130,266  

Accrued income receivable

  129,639     121,818  

Mortgage servicing assets, at fair value

  149,024     148,694  

Other assets

  1,842,934     1,646,443  

Goodwill

  508,310     465,676  

Other intangible assets

  59,063     37,595  
  

 

 

   

 

 

 

Total assets

$ 35,624,840   $ 33,096,695  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

Liabilities:

Deposits:

Non-interest bearing

$ 6,285,202   $ 5,783,748  

Interest bearing

  20,988,487     19,023,787  
  

 

 

   

 

 

 

Total deposits

  27,273,689     24,807,535  
  

 

 

   

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

  1,132,643     1,271,657  

Other short-term borrowings

  1,200     21,200  

Notes payable

  1,757,313     1,711,828  

Other liabilities

  1,080,945     1,012,029  

Liabilities from discontinued operations (Refer to Note 5)

  1,930     5,064  
  

 

 

   

 

 

 

Total liabilities

  31,247,720     28,829,313  
  

 

 

   

 

 

 

Commitments and contingencies (Refer to Note 26)

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; 103,657,174 shares issued (2014 – 103,614,553) and 103,486,927 shares outstanding (2014 – 103,476,847)

  1,037     1,036  

Surplus

  4,197,932     4,196,458  

Retained earnings

  327,613     253,717  

Treasury stock – at cost, 170,247 shares (2014 – 137,706)

  (5,222   (4,117

Accumulated other comprehensive loss, net of tax

  (194,400   (229,872
  

 

 

   

 

 

 

Total stockholders’ equity

  4,377,120     4,267,382  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 35,624,840   $ 33,096,695  
  

 

 

   

 

 

 

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

 

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Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Quarters ended March 31,  

(In thousands, except per share information)

   2015     2014  

Interest income:

    

Loans

   $ 355,631     $ 377,602  

Money market investments

     1,446       973  

Investment securities

     30,301       35,127  

Trading account securities

     2,696       5,257  
  

 

 

   

 

 

 

Total interest income

  390,074     418,959  
  

 

 

   

 

 

 

Interest expense:

Deposits

  25,864     26,858  

Short-term borrowings

  1,734     9,040  

Long-term debt

  19,281     31,890  
  

 

 

   

 

 

 

Total interest expense

  46,879     67,788  
  

 

 

   

 

 

 

Net interest income

  343,195     351,171  

Provision for loan losses - non-covered loans

  29,711     54,122  

Provision for loan losses - covered loans

  10,324     25,714  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

  303,160     271,335  
  

 

 

   

 

 

 

Service charges on deposit accounts

  39,017     39,359  

Other service fees (Refer to Note 32)

  53,626     52,818  

Mortgage banking activities (Refer to Note 14)

  12,852     3,678  

Trading account profit

  414     1,977  

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

  (79   4,393  

Adjustments (expense) to indemnity reserves on loans sold

  (4,526   (10,347

FDIC loss share income (expense) (Refer to Note 33)

  4,139     (24,206

Other operating income

  9,792     28,360  
  

 

 

   

 

 

 

Total non-interest income

  115,235     96,032  
  

 

 

   

 

 

 

Operating expenses:

Personnel costs

  116,458     104,301  

Net occupancy expenses

  21,709     21,360  

Equipment expenses

  13,411     11,412  

Other taxes

  8,574     13,663  

Professional fees

  75,528     66,999  

Communications

  6,176     6,685  

Business promotion

  10,813     11,386  

FDIC deposit insurance

  6,398     10,978  

Other real estate owned (OREO) expenses

  23,069     6,440  

Other operating expenses

  17,349     22,349  

Amortization of intangibles

  2,104     2,026  

Restructuring costs

  10,753     —    
  

 

 

   

 

 

 

Total operating expenses

  312,342     277,599  
  

 

 

   

 

 

 

Income from continuing operations before income tax

  106,053     89,768  

Income tax expense

  32,568     23,264  
  

 

 

   

 

 

 

Income from continuing operations

  73,485     66,504  

Income from discontinued operations, net of tax

  1,341     19,905  
  

 

 

   

 

 

 

Net Income

$ 74,826   $ 86,409  
  

 

 

   

 

 

 

Net Income Applicable to Common Stock

$ 73,896   $ 85,478  
  

 

 

   

 

 

 

Net Income per Common Share – Basic

Net income from continuing operations

  0.71      0.64  

Net income from discontinued operations

  0.01     0.19  
  

 

 

   

 

 

 

Net Income per Common Share – Basic

$ 0.72   $ 0.83  
  

 

 

   

 

 

 

Net Income per Common Share – Diluted

Net income from continuing operations

  0.71     0.64  

Net income from discontinued operations

  0.01     0.19  
  

 

 

   

 

 

 

Net Income per Common Share – Diluted

$ 0.72   $ 0.83  
  

 

 

   

 

 

 

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

 

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Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Quarters ended March 31,  

(In thousands)

   2015     2014  

Net income

   $ 74,826     $ 86,409  
  

 

 

   

 

 

 

Other comprehensive income before tax:

Foreign currency translation adjustment

  (581   (2,115

Reclassification adjustment for losses included in net income

  —       7,718  

Amortization of net losses on pension and postretirement benefit plans

  5,025     2,126  

Amortization of prior service cost of pension and postretirement benefit plans

  (950   (950

Unrealized holding gains on investments arising during the period

  35,342     27,582  

Unrealized net losses on cash flow hedges

  (2,535   (1,725

Reclassification adjustment for net losses included in net income

  1,358     1,824  
  

 

 

   

 

 

 

Other comprehensive income before tax

  37,659     34,460  

Income tax expense

  (2,187   (1,990
  

 

 

   

 

 

 

Total other comprehensive income, net of tax

  35,472     32,470  
  

 

 

   

 

 

 

Comprehensive income, net of tax

$ 110,298   $ 118,879  
  

 

 

   

 

 

 
Tax effect allocated to each component of other comprehensive income:    Quarters ended March 31,  

(In thousands)

   2015     2014  

Amortization of net losses on pension and postretirement benefit plans

     (1,960     (829

Amortization of prior service cost of pension and postretirement benefit plans

     371       371  

Unrealized holding gains on investments arising during the period

     (1,057     (1,493

Unrealized net losses on cash flow hedges

     989       672  

Reclassification adjustment for net losses included in net income

     (530     (711
  

 

 

   

 

 

 

Income tax expense

$ (2,187 $ (1,990
  

 

 

   

 

 

 

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

 

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Table of Contents

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, 2013

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

Net income

              86,409           86,409  

Issuance of stock

     1           1,665              1,666  

Dividends declared:

                 

Preferred stock

              (931         (931

Common stock purchases

                (17       (17

Other comprehensive income, net of tax

                  32,470       32,470  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

$ 1,035   $ 50,160   $ 4,171,817   $ 679,908   $ (898 $ (156,275 $ 4,745,747  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

$ 1,036   $ 50,160   $ 4,196,458   $ 253,717   $ (4,117 $ (229,872 $ 4,267,382  

Net income

  74,826     74,826  

Issuance of stock

  1     1,405     1,406  

Tax windfall benefit on vesting of restricted stock

  69     69  

Common stock purchases

  —    

Dividends declared:

Preferred stock

  (930   (930

Common stock purchases

  (1,123   (1,123

Common stock reissuance

  18     18  

Other comprehensive income, net of tax

  35,472     35,472  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

$ 1,037   $ 50,160   $ 4,197,932   $ 327,613   $ (5,222 $ (194,400 $ 4,377,120  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

Disclosure of changes in number of shares:

   March 31, 2015     March 31, 2014  

Preferred Stock:

    

Balance at beginning and end of period

     2,006,391       2,006,391  
  

 

 

   

 

 

 

Common Stock – Issued:

Balance at beginning of period

  103,614,553     103,435,967  

Issuance of stock

  42,621     58,463  
  

 

 

   

 

 

 

Balance at end of the period

  103,657,174     103,494,430  

Treasury stock

  (170,247   (38,895
  

 

 

   

 

 

 

Common Stock – Outstanding

  103,486,927     103,455,535  
  

 

 

   

 

 

 

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

 

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Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Quarter ended March 31,  

(In thousands)

   2015     2014  

Cash flows from operating activities:

    

Net income

   $ 74,826      $ 86,409  
  

 

 

   

 

 

 

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

Provision for loan losses

  40,035      73,072  

Amortization of intangibles

  2,104      2,504  

Depreciation and amortization of premises and equipment

  11,919      11,965  

Net accretion of discounts and amortization of premiums and deferred fees

  (19,100   (39,571

Fair value adjustments on mortgage servicing rights

  4,929      8,096  

FDIC loss share (income) expense

  (4,139   24,206  

Adjustments (expense) to indemnity reserves on loans sold

  4,526      10,347  

Earnings from investments under the equity method

  (2,301   (16,930

Deferred income tax expense

  23,380      13,898  

(Gain) loss on:

Disposition of premises and equipment

  (978   (1,671

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

  (7,222   (18,953

Sale of foreclosed assets, including write-downs

  14,851      (1,199

Acquisitions of loans held-for-sale

  (121,929   (76,125

Proceeds from sale of loans held-for-sale

  27,547      45,115  

Net originations on loans held-for-sale

  (179,604   (179,057

Net (increase) decrease in:

Trading securities

  177,942      218,997  

Accrued income receivable

  (13   5,641  

Other assets

  (28,027   (1,463

Net increase (decrease) in:

Interest payable

  (10,216   (2,680

Pension and other postretirement benefits obligation

  1,019      (1,562

Other liabilities

  (19,377   (1,193
  

 

 

   

 

 

 

Total adjustments

  (84,654   73,437  
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

  (9,828   159,846  
  

 

 

   

 

 

 

Cash flows from investing activities:

Net increase in money market investments

  (484,829   (763,980

Purchases of investment securities:

Available-for-sale

  (411,189   (436,233

Held-to-maturity

  (250   —    

Other

  (2,520   (34,768

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

Available-for-sale

  385,672      194,949  

Held-to-maturity

  2,231      1,888  

Other

  30,785      49,964  

Proceeds from sale of investment securities:

Other

  1,388      —    

Net repayments on loans

  154,794      205,660  

Proceeds from sale of loans

  19,127      42,238  

Acquisition of loan portfolios

  (49,510   (201,385

Net payments from FDIC under loss sharing agreements

  132,265      81,327  

Net cash received and acquired from business combination

  711,051      —    

Mortgage servicing rights purchased

  (2,400   —    

Acquisition of premises and equipment

  (10,231   (11,017

Proceeds from sale of:

Premises and equipment

  3,093      6,385  

Foreclosed assets

  40,161      38,830  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

  519,638      (826,142
  

 

 

   

 

 

 

Cash flows from financing activities:

Net increase (decrease) in:

Deposits

  265,906      559,972  

Federal funds purchased and assets sold under agreements to repurchase

  (139,013   548,921  

Other short-term borrowings

  (148,215   (400,000

Payments of notes payable

  (419,487   (110,514

Proceeds from issuance of notes payable

  46,000      31,905  

Proceeds from issuance of common stock

  1,405      1,666  

Dividends paid

  (620   (931

Net payments for repurchase of common stock

  (1,105   (17
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

  (395,129   631,002  
  

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

  114,681      (35,294

Cash and due from banks at beginning of period

  381,095      423,211  
  

 

 

   

 

 

 

Cash and due from banks at the end of the period

$ 495,776    $ 387,917  
  

 

 

   

 

 

 

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

The Consolidated Statements of Cash Flows for the quarters ended March 31, 2015 and 2014 include the cash flows from operating, investing and financing activities associated with discontinued operations.

 

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Table of Contents

Notes to Consolidated Financial

Statements (Unaudited)

 

Note 1 -

Nature of operations

  10   
Note 2 -

Basis of presentation and summary of significant accounting policies

  11   
Note 3 -

New accounting pronouncements

  12   
Note 4 -

Business combination

  18   
Note 5 -

Discontinued operations

  21   
Note 6 -

Restructuring plan

  22   
Note 7 -

Restrictions on cash and due from banks and certain securities

  23   
Note 8 -

Pledged assets

  24   
Note 9 -

Investment securities available-for-sale

  25   
Note 10 -

Investment securities held-to-maturity

  29   
Note 11 -

Loans

  31   
Note 12 -

Allowance for loan losses

  41   
Note 13 -

FDIC loss share asset and true-up payment obligation

  60   
Note 14 -

Mortgage banking activities

  62   
Note 15 -

Transfers of financial assets and mortgage servicing assets

  63   
Note 16 -

Other real estate owned

  66   
Note 17 -

Other assets

  67   
Note 18 -

Goodwill and other intangible assets

  68   
Note 19 -

Deposits

  70   
Note 20 -

Borrowings

  71   
Note 21 -

Offsetting of financial assets and liabilities

  73   
Note 22 -

Trust preferred securities

  75   
Note 23 -

Stockholders’ equity

  76   
Note 24 -

Other comprehensive loss

  77   
Note 25 -

Guarantees

  79   
Note 26 -

Commitments and contingencies

  82   
Note 27 -

Non-consolidated variable interest entities

  88   
Note 28 -

Related party transactions with affiliated company / joint venture

  92   
Note 29 -

Fair value measurement

  95   
Note 30 -

Fair value of financial instruments

  100   
Note 31 -

Net income per common share

  107   
Note 32 -

Other service fees

  108   
Note 33 -

FDIC loss share income (expense)

  109   
Note 34 -

Pension and postretirement benefits

  110   
Note 35 -

Stock-based compensation

  111   
Note 36 -

Income taxes

  113   
Note 37 -

Supplemental disclosure on the consolidated statements of cash flows

  116   
Note 38 -

Segment reporting

  117   
Note 39 -

Subsequent events

  121   
Note 40 -

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

  122   

 

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Note 1 – 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. 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, New Jersey and South 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 (“PCB”). Refer to Note 5 for discussion of the sales of the California, Illinois and Central Florida regional operations during 2014. Note 38 to the consolidated financial statements presents information about the Corporation’s business segments.

On February 27, 2015, BPPR, in an alliance with co-bidders, including PCB, acquired certain assets and all deposits (other than certain brokered deposits) of Doral Bank (“Doral”) from the Federal Deposit Insurance Corporation (FDIC), as receiver (the “Doral Bank transaction”). Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transferred assets and deposits. The other co-bidders which formed part of the alliance led by BPPR were First Bank Puerto Rico, Centennial Bank, and a vehicle formed by J.C. Flowers III L.P. BPPR has entered into transition service agreements with each of the alliance co-bidders. Refer to Note 4 for further details on the Doral Bank transaction.

 

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Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

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, 2014 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 2014 consolidated financial statements and notes to the financial statements to conform with the 2015 presentation. As discussed in Note 5, 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, 2014, included in the Corporation’s 2014 Annual Report (the “2014 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.

Business Combination

The Corporation determined that the acquisition of certain assets and assumption of certain liabilities in connection with the Doral Bank Transaction constitutes a business combination as defined by the Financial Accounting Standards Board (“FASB”) Codification (“ASC”) Topic 805 “Business Combinations”. The assets and liabilities, both tangible and intangible, were initially recorded at their estimated fair values. Fair values were determined based on the requirements of FASB Codification Topic 820 “Fair Value Measurements”. These fair value estimates are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair value becomes available. Acquisition-related costs are expensed as incurred. Refer to Note 4, Business Combination, for additional information of assets acquired and liabilities assumed in connection with this transaction.

Loans acquired as part of the Doral Bank Transaction

Loans acquired in a business acquisition are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

Approximately $162 million of residential mortgage loans acquired as part of the Doral Bank Transaction were considered impaired. Accordingly, the Corporation applied the guidance of ASC Subtopic 310-30. Under this guidance, the loans acquired from the FDIC were aggregated into pools based on similar characteristics, including factors such as loan type, interest rate type, accruing status, and amortization type. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value in the loans, or the “accretable yield,” is recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future cash flows of the pool is reasonably estimable. The non-accretable difference represents the difference between contractually required principal and interest and the cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses.

 

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Note 3 – New accounting pronouncements

FASB Accounting Standards Update 2015-07, Fair Value Measurement – (Topic 820): Disclosures for Investment in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”)

The FASB issued ASU 2015-07 in May 2015, which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Currently, investments valued using the practical expedient are categorized within the fair value hierarchy on the basis of whether the investment is redeemable with the investee at net asset value on the measurement date, never redeemable with the investee at net asset value, or redeemable with the investee at a future date. For investments that are redeemable with the investee at a future date, a reporting entity must take into account the length of time until those investments become redeemable to determine the classification within the fair value hierarchy. There is diversity in practice related to how certain investment measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy.

The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.

The amendments of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements.

The adoption of this guidance impacts presentation disclosures only and will not have an impact on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2015-05, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”)

The FASB issued ASU 2015-05 in April 2015, which provides guidance about a customer’s accounting for fees paid in a cloud computing arrangement. The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not change the accounting for service contracts. All software licenses within the scope of ASC Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted. An entity can adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively.

The Corporation is currently evaluating the impact that the adoption of this accounting pronouncement will have on its consolidated financial statements.

FASB Accounting Standards Update 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (“ASU 2015-04”)

The FASB issued ASU 2015-04 in April 2015, which simplifies the measurement of benefit plan assets and obligations. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this ASU provides a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan.

For an entity that has a significant event in an interim period that calls for a remeasurement of defined benefit plan assets and obligation, the amendments in this ASU also provide a practical expedient that permits the entity to remeasure define plan assets and obligations using the month-end that is closest to the date of the significant event.

An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments of this ASU. Employee benefit plans are not within the scope of these amendments.

 

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The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted. The amendments in this ASU should be applied prospectively.

The Corporation does not expect that the adoption of this accounting pronouncement will have a significant impact on its financial statements.

FASB Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”)

The FASB issued ASU 2015-03 in April 2015, which simplifies the presentation of debt issuance costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. Having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. The recognition and measurement guidance for debt issuance costs are not affected by the amendments of this Update.

The amendments of this Update are effective for financial statements issued for fiscal years beginning after December 31, 2015, and interim periods within fiscal years beginning after December 31, 2016. Early adoption is permitted for financial statements that have not been previously issued.

An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle.

The Corporation’s current policy is to record debt issuance costs as a deferred asset, and accordingly, it will need to reclassify this balance upon adoption. However, this balance sheet reclassification is not expected to have a material impact in the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2015-02, Consolidation (Topic 810): Amendment to the Consolidation Analysis (“ASU 2015-02”)

The FASB issued ASU 2015-02 in February 2015, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments:

 

  1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities

 

  2) Eliminate the presumption that a general partner should consolidate a limited partnership

 

  3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships

 

  4) Provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustment should be reflected as of the beginning of the fiscal year of that includes that interim period.

The amendments may be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity may also apply the amendments of this ASU retrospectively.

The Corporation is currently evaluating the impact that the adoption of this accounting pronouncement will have on its consolidated financial statements.

FASB Accounting Standards Update 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”)

The FASB issued ASU 2015-01 in January 2015, which eliminates from GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports the classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity is also required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.

 

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Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary. This will alleviate uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately.

The presentation and disclosure guidance for items that are unusual in nature and occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. The amendments may be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided is applied from the beginning of the fiscal year of adoption.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition, results of operations or presentation and disclosures.

FASB Accounting Standards Update 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is more Akin to Debt or to Equity (“ASU 2014-16”)

The FASB issued ASU 2014-16 in November 2014, which intends to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. An entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. In evaluating the stated and implied substantive terms and features, the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. Although an individual term or feature may weigh more heavily in the evaluation on the basis of facts and circumstances, an entity should use judgment based on an evaluation of all relevant terms and features.

The amendment in this ASU does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. An entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria.

The amendments in the ASU are effective for annual periods, and interim periods within those annual periods, beginning in the first quarter of 2016. Early adoption is permitted. The effects of initially adopting the amendments of this ASU should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods.

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

FASB Accounting Standards Update 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability as a Going Concern (“ASU 2014-15”)

The FASB issued ASU 2014-15 in August 2014, which provides guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide the related footnote disclosures. These amendments should reduce diversity in the timing and content of footnote disclosures.

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

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The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application 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, results of operations or presentation and disclosures.

FASB Accounting Standards Update 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (“ASU 2014-14”)

The FASB issued ASU 2014-14 in August 2014, which intends to resolve the diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to receivables. This ASU address the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs.

The amendments of the ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:

 

  1- The loan has a government guarantee that is not separable from the loan before foreclosure.

 

  2- At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim.

 

  3- At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor.

The amendments in the ASU are effective for annual periods, and interim periods within those annual periods, beginning in the first quarter of 2015. The amendments of this ASU can be applied using either a prospective transition method or a modified retrospective transition method. For prospective transition, an entity should apply the amendments in this Update to foreclosures that occur after the date of adoption. For modified retrospective transition, an entity should apply the amendments in this Update by means of a cumulative-effect adjustment as of the beginning of the annual period of adoption. Prior periods should not be adjusted. However, a reporting entity must apply the same method of transition as elected under ASU 2014-04.

The Corporation adopted this guidance in the first quarter of 2015 and it did not have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financial Entity (“ASU 2014-13”)

The FASB issued ASU 2014-13 in August 2014, which intends to clarify that when a reporting entity that consolidates a collateralized financing entity may elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in this Update or Topic 820 on fair value measurement. When the measurement alternative is not elected, the amendments of this Update clarify that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured using the requirements of Topic 820 and any differences in the fair value of the financial assets and the fair value of the financial liabilities of that entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income.

When a reporting entity elects the measurement alternative included in this Update for a collateralized financing entity, the reporting entity should measure both the financial assets and the financial liabilities of that entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities.

The amendments in the ASU are effective in the first quarter of 2016. Early adoption is permitted as of the beginning of an annual period. The amendments of this ASU can be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. A reporting entity also may apply the amendments retrospectively to all relevant prior periods beginning with the annual period in which the amendments of ASU 2009-17 were initially adopted.

 

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

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 adoption 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 adopted this guidance on the first quarter of 2015 and did not have a material effect on its consolidated statements of financial condition or results of operations. Refer to note 20, Borrowings, for additional disclosures provided upon the adoption of this accounting pronouncement.

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.

 

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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 were originally effective in the first quarter of 2017, however, on April 1, 2015, the FASB voted to propose a deferral of the effective date of this new revenue standard by one year until January 1, 2018, but to permit entities to adopt the standard as of the original effective date.

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 2014-08, 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.

The Corporation adopted the provisions of this guidance in the first quarter of 2015 and its adoption did not have a material effect on its consolidated statement of financial condition or result of operations.

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 adopted this guidance on the first quarter of 2015 and the adoption of this ASU did not have a material effect on its consolidated statements of financial condition or results of operations.

 

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Note 4 Business combination

On February 27, 2015, the Corporation’s Puerto Rico banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), in an alliance with co-bidders, including the Corporation’s U.S. mainland banking subsidiary, Banco Popular North America, doing business as Popular Community Bank (“PCB”), had acquired certain assets and all deposits (other than certain brokered deposits) of Doral Bank from the Federal Deposit Insurance Corporation (FDIC) as receiver.

Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits to be acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transferred assets and deposits. The other co-bidders that formed part of the alliance led by BPPR are FirstBank Puerto Rico, Centennial Bank, and a vehicle formed by J.C. Flowers III LP. BPPR has entered into transition service agreements with each of the alliance co-bidders.

After taking into account the transfers to the unaffiliated alliance co-bidders, BPPR and PCB together assumed approximately $2.2 billion in deposits and acquired approximately $1.7 billion in commercial and residential loans.

BPPR assumed approximately $574 million in deposits associated with eight Puerto Rico branches of Doral Bank and approximately $425 million from its online deposit platform, and approximately $827 million in Puerto Rico residential and commercial loans.

PCB assumed approximately $1.2 billion in deposits in three New York branches of Doral Bank, and acquired approximately $891 million in commercial loans primarily in the New York metropolitan area.

On February 27, 2015, the FDIC, as receiver for Doral Bank, accepted BPPR’s bid for the purchase of the mortgage servicing rights on three pools of residential mortgage loans of approximately $5.0 billion in unpaid principal balance, for a purchase price currently estimated at $48.6 million. The transfers of the mortgage servicing rights are subject to a number of specified closing conditions, including the consent of each of Ginnie Mae, Fannie Mae and Freddie Mac in a form acceptable to BPPR, and other customary closing conditions.

There is no loss-sharing arrangement with the FDIC on the acquired assets.

The following table presents the fair values of major classes of identifiable assets acquired and liabilities assumed by the Corporation as of the February 27, 2015 acquisition date.

 

(In thousands)

   Book value prior to
purchase accounting
adjustments
     Fair value
adjustments
     Additional
consideration[1]
     As recorded by
Popular, Inc. on
February 27, 2015
 

Assets:

           

Cash and due from banks

   $ 339,633      $ —        $ —        $ 339,633  

Investment in available-for-sale securities

     172,706        —          —          172,706  

Investments in FHLB stock

     30,785        —          —          30,785  

Loans

     1,718,208        (52,452      —          1,665,756  

Accrued income receivable

     7,808        —          —          7,808  

Receivable from the FDIC

     —          —          439,112        439,112  

Core deposit intangible

     23,572        —          —          23,572  

Other assets

     67,676        9,688        —          77,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 2,360,388   $ (42,764 $ 439,112   $ 2,756,736  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

Deposits

$ 2,193,404   $ 8,051   $ —     $ 2,201,455  

Advances from the Federal Home Loan Bank

  542,000     5,187     —       547,187  

Other liabilities

  50,728     —       —       50,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 2,786,132   $ 13,238   $ —     $ 2,799,370  
  

 

 

    

 

 

    

 

 

    

 

 

 

Excess of liabilities assumed over assets acquired

$ 425,744  

Aggregate fair value adjustments

$ (56,002
  

 

 

    

 

 

    

 

 

    

 

 

 

Additional consideration

$ 439,112  
  

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill on acquisition

$ 42,634  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] The additional consideration represents the cash to be received from the FDIC for the difference between the net liabilities assumed and the net premium paid on the transaction.

 

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Other assets recorded as part of the Doral Bank Transaction include the fair value estimate of the contingent asset for the probable acquisition of approximately $57.6 million from the FDIC of mortgage servicing rights on three pools of residential mortgage loans of approximately $5.0 billion in unpaid principal balance. As discussed above, at March 31, 2015, these mortgage servicing rights were subject to a number of closing conditions. On April 23, 2015, BPPR closed the acquisition of Ginnie Mae mortgage servicing rights for a loan portfolio of approximately $2.7 billion in unpaid principal balance. BPPR is in negotiations for the transfers of the Fannie Mae and Freddie Mac mortgage servicing rights which are expected to be completed during the second quarter of 2015.

The fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Because of the short time period between the February 27, 2015 closing of the transaction and the March 31, 2015 reporting date, the Corporation continues to analyze its estimates of fair value on loans and other assets acquired as well as the deposits and other liabilities assumed. As the Corporation finalizes its analyses of these assets and liabilities, there may be adjustments to the recorded carrying values, and thus the recognized goodwill may increase or decrease.

The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed on the Doral Bank Transaction:

Loans

Fair values for loans were based on a discounted cash flow methodology. Certain loans were valued individually, while other loans were valued as pools. Aggregation into pools considered characteristics such as loan type, payment term, rate type and accruing status. Principal and interest projections considered prepayment rates and credit loss expectations. The discount rates were developed based on the relative risk of the cash flows, taking into account principally the loan type, market rates as of the valuation date, liquidity expectations, and the expected life of the loans.

Goodwill

The amount of goodwill is the residual difference in the fair value of liabilities assumed and net consideration paid to the FDIC over the fair value of the assets acquired. The goodwill created by this transaction is driven by the deployment of capital with meaningful earnings accretion and significant cost savings opportunities. In addition to strengthening the Corporation’s Puerto Rico franchise, the transaction grows the U.S. business through the addition of an attractive commercial platform. The goodwill is deductible for income tax purposes. The goodwill from the Doral Bank Transaction was assigned to the BPPR and BPNA reportable segments based on the relative fair value of the assets acquired and liabilities assumed.

Core deposit intangible

This intangible asset represents the value of the relationships that Doral Bank had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the core deposit base, interest costs, and the net maintenance cost attributable to customer deposits, and the cost of alternative funds. The core deposit intangible asset will be amortized over a period of fifteen years.

Deposits

The fair values used for the demand deposits that comprise the transaction accounts acquired, which have no stated maturity and include non-interest bearing demand deposits, savings, NOW, and money market accounts, by definition equal the amount payable on demand at the reporting date. The fair values for time deposits were estimated using a discounted cash flow calculation that applies interest rates currently offered to comparable time deposits with similar maturities, and also accounts for the non-performance risk by using internally-developed models that consider, where applicable, the remaining term and the credit premium of the institution.

 

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Deferred taxes

Deferred taxes relate to a difference between the financial statement and tax basis of the assets acquired and liabilities assumed in the transaction. Deferred taxes were reported based upon the principles in ASC Topic 740 “Income Taxes”, and were measured using the enacted statutory income tax rate to be in effect for BPPR and BPNA at the time the deferred tax is expected to reverse.

For income tax purposes, the Doral Bank Transaction was accounted for as an asset purchase and the tax bases of assets acquired were allocated based on fair values using a modified residual method. Under this method, the purchase price was allocated among the assets in order of liquidity (the most liquid first) up to its fair market value.

The operating results of the Corporation for the quarter March 31, 2015 include the operating results produced by the acquired assets and liabilities assumed for the period of February 28, 2015 to March 31, 2015. This includes approximately $14.0 million in gross revenues and approximately $14.5 million in operating expenses. The Corporation believes that given the amount of assets and liabilities assumed, the size of the operations acquired in relation to Popular’s operations and the significant amount of fair value adjustments, the historical results of Doral Bank are not meaningful to Popular’s results, and thus no pro forma information is presented.

 

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Table of Contents

Note 5 – Discontinued operations

During the year ended December 31, 2014, the Corporation completed the sale of its California, Illinois and Central Florida regional operations to three different buyers.

In connection with these transactions, the Corporation is relocating certain back office operations to Puerto Rico and New York. The Corporation incurred restructuring charges of $10.8 million during the quarter ended March 31, 2015. Additional restructuring charges amounting to approximately $12.6 million are expected to be incurred in the year 2015. Refer to Note 6, for restructuring charges incurred during the quarter ended March 31, 2015.

The regional operations sold 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 non-cash 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.

After the sale of these three regions, at March 31, 2015, there were no assets held within the discontinued operations. Liabilities within discontinued operations amounted to approximately $1.9 million, mainly comprised of the indemnity reserve related to the California regional sale.

The following table provides the components of net income from the discontinued operations for the quarters ended March 31, 2015 and 2014.

 

     Quarters ended March 31,  

(In thousands)

   2015      2014  

Net interest income

   $ —        $ 21,797  

Provision (reversal) for loan losses

     —          (6,764

Other non-interest income

     —          10,533  
  

 

 

    

 

 

 

Total non-interest income

  —       10,533  
  

 

 

    

 

 

 

Operating expenses:

Personnel costs

  —       8,852  

Net occupancy expenses

  —       4,331  

Professional fees (reversal)

  (1,341   2,793  

Goodwill impairment charge

  —       —    

Other operating expenses

  —       3,213  
  

 

 

    

 

 

 

Total operating expenses

  (1,341   19,189  
  

 

 

    

 

 

 

Net income from discontinued operations

$ 1,341   $ 19,905  
  

 

 

    

 

 

 

 

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Table of Contents

Note 6 – Restructuring plan

As discussed in Note 5, in connection with the sale of the operations of the California, Illinois and Central Florida regions, the Corporation is relocating certain back office operations, previously conducted in these regions, to 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 restructuring charges of approximately $50.1 million, of which approximately $26.7 million were incurred during 2014; $10.8 million during the first quarter of 2015 and the remaining $12.6 million are expected to be incurred during 2015. The remaining costs for 2015 are primarily related to $10.6 million in personnel related costs and $2.0 million in lease cancellations and other restructuring costs.

The following table details the expenses recorded by the Corporation that were associated with the PCB Restructuring Plan:

 

(In thousands)

   Quarter ended
March 31, 2015
 

Personnel costs

   $ 9,366  

Net occupancy expenses

     386  

Equipment expenses

     158  

Professional fees

     466  

Other operating expenses

     377  
  

 

 

 

Total restructuring costs

$ 10,753  
  

 

 

 

The following table presents the activity in the reserve for the restructuring costs associated with the PCB Restructuring Plan:

 

(In thousands)

      

Balance at January 1, 2015

   $ 13,536  

Charges expensed during the period

     6,297  

Payments made during the period

     (9,030
  

 

 

 

Balance at March 31, 2015

$ 10,803  
  

 

 

 

 

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Table of Contents

Note 7 - 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 $ 1.1 billion at March 31, 2015 (December 31, 2014 - $ 1.0 billion). Cash and due from banks, as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

At March 31, 2015, the Corporation held $42 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, 2014 - $45 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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Table of Contents

Note 8 – 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:

 

(In thousands)

   March 31,
2015
     December 31,
2014
 

Investment securities available-for-sale, at fair value

   $ 1,835,849      $ 1,700,820  

Investment securities held-to-maturity, at amortized cost

     58,660        60,515  

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

     459,577        480,441  

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

     8,908,657        8,820,204  
  

 

 

    

 

 

 

Total pledged assets

$ 11,262,743   $ 11,061,980  
  

 

 

    

 

 

 

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 March 31, 2015, the Corporation had $ 0.8 billion in investment securities available-for-sale and $ 0.7 billion in loans that served as collateral to secure public funds (December 31, 2014 - $ 0.7 billion and $ 0.7 billion, respectively).

At March 31, 2015, 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 $3.6 billion (December 31, 2014 - $3.7 billion). Refer to Note 20 to the consolidated financial statements for borrowings outstanding under these credit facilities. At March 31, 2015, the credit facilities authorized with the FHLB were collateralized by $ 4.5 billion in loans held-in-portfolio (December 31, 2014 - $ 4.5 billion). Also, at March 31, 2015, the Corporation’s banking subsidiaries had a borrowing capacity at the Federal Reserve (“Fed”) discount window of $2.1 billion, which remained unused as of such date (December 31, 2014 - $2.1 billion). The amount available under these credit facilities with the Fed is dependent upon the balance of loans and securities pledged as collateral. At March 31, 2015, the credit facilities with the Fed discount window were collateralized by $ 4.2 billion in loans held-in-portfolio (December 31, 2014 - $ 4.1 billion). These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statements of financial condition.

 

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Table of Contents

Note 9 – 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 March 31, 2015 and December 31, 2014.

 

                                                                                                        
     At March 31, 2015  

(In thousands)

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

U.S. Treasury securities

              

After 1 to 5 years

   $ 777,468      $ 6,806      $ —        $ 784,274        1.12
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

  777,468     6,806     —       784,274     1.12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

Within 1 year

  35,160     254     —       35,414     1.87  

After 1 to 5 years

  1,412,508     3,965     2,168     1,414,305     1.25  

After 5 to 10 years

  30,115     52     818     29,349     1.98  

After 10 years

  23,000     66     —       23,066     3.19  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

  1,500,783     4,337     2,986     1,502,134     1.31  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

Within 1 year

  2,758     —       1     2,757     3.83  

After 1 to 5 years

  7,036     —       189     6,847     4.10  

After 5 to 10 years

  16,662     —       3,075     13,587     6.68  

After 10 years

  48,843     2     14,672     34,173     6.22  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

  75,299     2     17,937     57,364     6.04  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

After 1 to 5 years

  18,943     889     —       19,832     2.95  

After 5 to 10 years

  52,779     1,269     —       54,048     2.72  

After 10 years

  1,782,504     14,440     21,798     1,775,146     2.01  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

  1,854,226     16,598     21,798     1,849,026     2.03  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

After 1 to 5 years

  24,869     1,318     —       26,187     4.68  

After 5 to 10 years

  140,493     7,319     3     147,809     3.51  

After 10 years

  1,120,062     49,715     1,400     1,168,377     3.37  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

  1,285,424     58,352     1,403     1,342,373     3.41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

  1,350     1,284     3     2,631     1.37  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

After 1 to 5 years

  9,187     12     —       9,199     1.69  

After 5 to 10 years

  1,658     44     —       1,702     3.62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

  10,845     56     —       10,901     1.99  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

$ 5,505,395   $ 87,435   $ 44,127   $ 5,548,703     2.08
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
                                                                                                        
     At December 31, 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

   $ 698,003      $ 2,226      $ 75      $ 700,154        1.14 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

  698,003     2,226     75     700,154     1.14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

Within 1 year

  42,140     380     —       42,520     1.61  

After 1 to 5 years

  1,603,245     1,168     9,936     1,594,477     1.26  

After 5 to 10 years

  67,373     58     2,271     65,160     1.72  

After 10 years

  23,000     —       184     22,816     3.18  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

  1,735,758     1,606     12,391     1,724,973     1.31  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

Within 1 year

  2,765     17     —       2,782     3.83  

After 1 to 5 years

  1,024     38     —       1,062     8.40  

After 5 to 10 years

  22,552     2     2,331     20,223     5.82  

After 10 years

  48,823     40     11,218     37,645     6.22  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

  75,164     97     13,549     61,712     6.04  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

After 1 to 5 years

  3,687     87     —       3,774     2.66  

After 5 to 10 years

  25,202     985     —       26,187     2.93  

After 10 years

  1,905,763     13,109     38,803     1,880,069     2.03  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

  1,934,652     14,181     38,803     1,910,030     2.04  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

After 1 to 5 years

  27,339     1,597     —       28,936     4.68  

After 5 to 10 years

  147,182     7,314     1     154,495     3.51  

After 10 years

  676,567     45,047     683     720,931     3.93  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

  851,088     53,958     684     904,362     3.88  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

  1,351     1,271     —       2,622     5.03  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

After 1 to 5 years

  9,277     10     —       9,287     1.69  

After 5 to 10 years

  1,957     62     —       2,019     3.63  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

  11,234     72     —       11,306     2.03  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

$ 5,307,250   $ 73,411   $ 65,502   $ 5,315,159     2.04 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 securities sold during the quarters ended March 31, 2015 and 2014.

 

26


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 March 31, 2015 and December 31, 2014.

 

     At March 31, 2015  
     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

     195,562        706        272,535        2,280        468,097        2,986  

Obligations of Puerto Rico, States and political subdivisions

     16,408        4,104        37,885        13,833        54,293        17,937  

Collateralized mortgage obligations - federal agencies

     137,117        988        967,570        20,810        1,104,687        21,798  

Mortgage-backed securities

     238,052        1,016        24,720        387        262,772        1,403  

Equity securities

     47        3        —          —          47        3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

$     587,186   $   6,817   $ 1,302,710   $ 37,310   $ 1,889,896   $ 44,127  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 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
 

U.S. Treasury securities

   $ 49,465      $ 75      $ —        $ —        $ 49,465      $ 75  

Obligations of U.S. Government sponsored entities

     888,325        6,866        429,835        5,525        1,318,160        12,391  

Obligations of Puerto Rico, States and political subdivisions

     14,419        3,031        41,084        10,518        55,503        13,549  

Collateralized mortgage obligations - federal agencies

     539,658        13,774        733,814        25,029        1,273,472        38,803  

Mortgage-backed securities

     457        4        25,486        680        25,943        684  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

$ 1,492,324   $ 23,750   $ 1,230,219   $ 41,752   $ 2,722,543   $ 65,502  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2015, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $44 million, driven by U.S. Agency Collateralized Mortgage Obligations and obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all US Agencies’ securities, management considers the U.S. 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. In July 2014, the Puerto Rico general obligations were further downgraded by the rating agencies, after the Commonwealth enacted a law that allowed certain Puerto Rico public corporations to restructure their debt.

On February 12, 2015, S&P further downgraded the debt rating of the Commonwealth general obligation bonds and of various public instrumentalities. S&P stated that, in their view, Puerto Rico’s current economic and financial trajectory is now more susceptible to adverse financial, economic and market conditions that could ultimately impair the Commonwealth’s ability to fund services and its debt commitments. S&P also cited implementation risk with respect to the value-added tax and expressed concern that, while higher taxes could improve the budget balance, there could be potential negative economic implications. On February 19, 2015, Moody’s also downgraded its debt ratings for the Commonwealth general obligation bonds and of various public instrumentalities, citing similar concerns as S&P. On April 27, 2015, S&P cut General Obligation ratings to CCC+ from B with negative implications. The ratings firm attributed the downgrade to a reduced possibility of the Commonwealth accessing the bond markets and heightened budget pressures exacerbated by current weak economic trends and high debt levels. The portfolio of obligations of the Puerto Rico Government is mostly 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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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 March 31, 2015, 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. However, further negative evidence impacting the liquidity and sources of repayment of the “Obligations of Puerto Rico, States and political subdivisions”, could result in a charge to earnings to recognize estimated credit losses determined to be other-than-temporary. At March 31, 2015, 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.

 

     March 31, 2015      December 31, 2014  

(In thousands)

   Amortized cost      Fair value      Amortized cost      Fair value  

FNMA

   $ 2,008,358      $ 2,015,810      $ 1,746,807      $ 1,736,987  

FHLB

     538,493        538,874        737,149        732,894  

Freddie Mac

     1,161,089        1,163,815        1,117,865        1,112,485  

 

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Table of Contents

Note 10 – 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 March 31, 2015 and December 31, 2014.

 

     At March 31, 2015  

(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

   $ 2,865      $ —        $ 106      $ 2,759        5.88 

After 1 to 5 years

     13,400        —          2,296        11,104        5.97  

After 5 to 10 years

     20,310        —          6,400        13,910        6.12  

After 10 years

     63,429        3,906        7,400        59,935        2.14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

  100,004     3,906     16,202     87,708     3.57  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

After 5 to 10 years

  91     5     —       96     5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

  91     5     —       96     5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

After 1 to 5 years

  1,500     —       —       1,500     1.16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

  1,500     —       —       1,500     1.16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

$ 101,595   $ 3,911   $ 16,202   $ 89,304     3.54 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 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

   $ 2,740      $ —        $ 8      $ 2,732        5.84 

After 1 to 5 years

     12,830        —          764        12,066        5.95  

After 5 to 10 years

     21,325        —          6,003        15,322        6.09  

After 10 years

     64,678        3,342        5,543        62,477        2.22  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

  101,573     3,342     12,318     92,597     3.60  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

After 5 to 10 years

  97     5     —       102     5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

  97     5     —       102     5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

Within 1 year

  250     —       —       250     1.33  

After 1 to 5 years

  1,250     —       —       1,250     1.10  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

  1,500     —       —       1,500     1.14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

$ 103,170   $ 3,347   $ 12,318   $ 94,199     3.57 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

The 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 March 31, 2015 and December 31, 2014.

 

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Table of Contents
     At March 31, 2015  
     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

   $ 619      $ 6      $ 42,089      $ 16,196      $ 42,708      $ 16,202  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

$ 619   $ 6   $ 42,089   $ 16,196   $ 42,708   $ 16,202  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 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

   $ 373      $ 2      $ 45,969      $ 12,316      $ 46,342      $ 12,318  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

$ 373   $ 2   $ 45,969   $ 12,316   $ 46,342   $ 12,318  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As indicated in Note 9 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 March 31, 2015 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $59 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. In July 2014, the Puerto Rico general obligations were further downgraded by the rating agencies, after the Commonwealth enacted a law that allowed certain Puerto Rico public corporations to restructure their debt.

On February 12, 2015, S&P further downgraded the debt rating of the Commonwealth general obligation bonds and of various public instrumentalities. S&P stated that, in their view, Puerto Rico’s current economic and financial trajectory is now more susceptible to adverse financial, economic and market conditions that could ultimately impair the Commonwealth’s ability to fund services and its debt commitments. S&P also cited implementation risk with respect to the value-added tax and expressed concern that, while higher taxes could improve the budget balance, there could be potential negative economic implications. On February 19, 2015, Moody’s also downgraded its debt ratings for the Commonwealth general obligation bonds and of various public instrumentalities, citing similar concerns as S&P. On April 27, 2015, S&P cut General Obligation ratings to CCC+ from B with negative implications. The ratings firm attributed the downgrade to a reduced possibility of the Commonwealth accessing the bond markets and heightened budget pressures exacerbated by current weak economic trends and high debt levels.

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 11 – 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 single-family residential mortgage loans, as explained in Note 13.

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 2014 Annual Report.

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, at March 31, 2015 and December 31, 2014.

 

(In thousands)

   March 31, 2015      December 31, 2014  

Commercial multi-family

   $ 565,736      $ 487,280  

Commercial real estate non-owner occupied

     2,800,673        2,526,146  

Commercial real estate owner occupied

     1,643,186        1,667,267  

Commercial and industrial

     3,643,966        3,453,574  

Construction

     690,728        251,820  

Mortgage

     7,189,227        6,502,886  

Leasing

     581,119        564,389  

Legacy[2]

     77,675        80,818  

Consumer:

     

Credit cards

     1,128,611        1,155,229  

Home equity lines of credit

     357,508        366,162  

Personal

     1,353,594        1,375,452  

Auto

     782,635        767,369  

Other

     198,272        206,059  
  

 

 

    

 

 

 

Total loans held-in-portfolio[1]

$ 21,012,930   $ 19,404,451  
  

 

 

    

 

 

 

 

[1] Non-covered loans held-in-portfolio at March 31, 2015 are net of $97 million in unearned income and exclude $161 million in loans held-for-sale (December 31, 2014 - $94 million in unearned income and $106 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 March 31, 2015 and December 31, 2014.

 

(In thousands)

   March 31, 2015      December 31, 2014  

Commercial real estate

   $ 1,470,575      $ 1,511,472  

Commercial and industrial

     100,572        103,309  

Construction

     57,825        70,336  

Mortgage

     795,477        822,986  

Consumer

     32,103        34,559  
  

 

 

    

 

 

 

Total covered loans held-in-portfolio

$ 2,456,552   $ 2,542,662  
  

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) at March 31, 2015 and December 31, 2014 by main categories.

 

(In thousands)

   March 31, 2015      December 31, 2014  

Commercial

   $ 8,240      $ 309  

Legacy

     —          319  

Mortgage

     152,362        100,166  

Consumer

     —          5,310  
  

 

 

    

 

 

 

Total loans held-for-sale

$ 160,602   $ 106,104  
  

 

 

    

 

 

 

During the quarter ended March 31, 2015, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $169 million (2014 - $161 million) excluding the impact of the Doral Bank Transaction. Additionally, the Corporation did not purchase consumer and commercial loans during the quarter ended March 31, 2015 (March 31, 2014 - $92 million and $21 million, respectively). The Corporation recorded purchases amounting to $164 thousand of lease financing during the quarter ended March 31, 2015 (March 31, 2014 - $0 million).

The Corporation performed whole-loan sales involving approximately $39 million of residential mortgage loans during the quarter ended March 31, 2015 (March 31, 2014 - $43 million). Also, during the quarter ended March 31, 2015, the Corporation securitized approximately $156 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities and $47 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $166 million and $63 million, respectively, during the quarter ended March 31, 2014. The Corporation sold commercial and construction loans with a book value of approximately $1 million during the quarter ended March 31, 2015 (March 31, 2014 - $30 million). In addition, the Corporation sold $5 million in consumer loans during the quarter ended March 31, 2015 (March 31, 2014 - $0 million).

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 March 31, 2015 and 2014. 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. Accruing loans past due 90 days or more also include 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. In addition, at December 31, 2014 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.

 

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Table of Contents

At March 31, 2015

 
     Puerto Rico      U.S. mainland      Popular, Inc.  

(In thousands)

   Non-accrual
loans [1]
     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

   $ 2,040      $ —        $ 249      $ —        $ 2,289      $ —    

Commercial real estate non-owner occupied

     38,888        —          —          —          38,888        —    

Commercial real estate owner occupied

     91,762        —          778        —          92,540        —    

Commercial and industrial

     131,941        466        8,780        —          140,721        466  

Construction

     13,214        —          —          —          13,214        —    

Mortgage[3]

     320,154        428,827        8,461        —          328,615        428,827  

Leasing

     2,506        —          —          —          2,506        —    

Legacy

     —          —          2,288        —          2,288        —    

Consumer:

                 

Credit cards

     —          20,570        477        —          477        20,570  

Home equity lines of credit

     —          195        4,653        —          4,653        195  

Personal

     23,843        —          1,246        —          25,089        —    

Auto

     11,108        —          —          —          11,108        —    

Other

     2,561        952        4        —          2,565        952  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[2]

$ 638,017   $ 451,010   $ 26,936   $ —     $ 664,953   $ 451,010  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans of $58 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.
[2] For purposes of this table non-performing loans exclude $ 8 million in non-performing loans held-for-sale.
[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 $134 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2015. Furthermore, the Corporation has approximately $69 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.

 

At December 31, 2014

 
     Puerto Rico      U.S. mainland      Popular, Inc.  

(In thousands)

   Non-accrual
loans [1]
     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

   $ 2,199      $ —        $ —        $ —        $ 2,199      $ —    

Commercial real estate non-owner occupied

     33,452        —          —          —          33,452        —    

Commercial real estate owner occupied

     92,648        —          805        —          93,453        —    

Commercial and industrial

     129,611        494        1,510        —          131,121        494  

Construction

     13,812        —          —          —          13,812        —    

Mortgage[3]

     295,629        426,387        9,284        —          304,913        426,387  

Leasing

     3,102        —          —          —          3,102        —    

Legacy

     —          —          1,545        —          1,545        —    

Consumer:

                 

Credit cards

     —          20,368        449        —          449        20,368  

Home equity lines of credit

     —          21        4,090        —          4,090        21  

Personal

     25,678        10        1,410        —          27,088        10  

Auto

     11,387        —          —          —          11,387        —    

Other

     3,865        682        7        —          3,872        682  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[2]

$ 611,383   $ 447,962   $ 19,100   $ —     $ 630,483   $ 447,962  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans by $59 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.
[2] For purposes of this table non-performing loans exclude $ 19 million in non-performing loans held-for-sale.
[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 $125 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, 2014. Furthermore, the Corporation has approximately $66 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.

 

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Table of Contents

The following tables present loans by past due status at March 31, 2015 and December 31, 2014 for non-covered loans held-in-portfolio (net of unearned income).

 

March 31, 2015

 

Puerto Rico

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
Puerto Rico
 

Commercial multi-family

   $ —        $ —        $ 2,040      $ 2,040      $ 87,493      $ 89,533  

Commercial real estate non-owner occupied

     44,939        2,193        39,002        86,134        2,056,220        2,142,354  

Commercial real estate owner occupied

     11,716        2,765        91,762        106,243        1,323,446        1,429,689  

Commercial and industrial

     15,412        1,651        132,407        149,470        2,590,463        2,739,933  

Construction

     608        —          13,214        13,822        84,884        98,706  

Mortgage

     334,537        167,235        807,018        1,308,790        4,862,457        6,171,247  

Leasing

     7,570        1,518        2,506        11,594        569,525        581,119  

Consumer:

                 

Credit cards

     12,504        9,359        20,570        42,433        1,072,071        1,114,504  

Home equity lines of credit

     —          —          195        195        11,968        12,163  

Personal

     13,132        6,974        24,083        44,189        1,200,892        1,245,081  

Auto

     31,933        7,325        11,108        50,366        732,182        782,548  

Other

     678        300        3,520        4,498        193,412        197,910  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 473,029   $ 199,320   $ 1,147,425   $ 1,819,774   $ 14,785,013   $ 16,604,787  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

March 31, 2015

 

U.S. mainland

 
     Past due                

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      Loans HIP
U.S. mainland
 

Commercial multi-family

   $ 204      $ —        $ 249      $ 453      $ 475,750      $ 476,203  

Commercial real estate non-owner occupied

     50        —          —          50        658,269        658,319  

Commercial real estate owner occupied

     3,599        —          778        4,377        209,120        213,497  

Commercial and industrial

     1,276        236        8,780        10,292        893,741        904,033  

Construction

     671        —          —          671        591,351        592,022  

Mortgage

     27,211        5,043        8,461        40,715        977,265        1,017,980  

Legacy

     3,713        594        2,288        6,595        71,080        77,675  

Consumer:

                 

Credit cards

     267        119        477        863        13,244        14,107  

Home equity lines of credit

     3,858        1,081        4,653        9,592        335,753        345,345  

Personal

     2,008        659        1,246        3,913        104,600        108,513  

Auto

     —          —          —          —          87        87  

Other

     —          —          4        4        358        362  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 42,857   $ 7,732   $ 26,936   $ 77,525   $ 4,330,618   $ 4,408,143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

34


Table of Contents

March 31, 2015

 

Popular, Inc.

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
Popular, Inc.
 

Commercial multi-family

   $ 204      $ —        $ 2,289      $ 2,493      $ 563,243      $ 565,736  

Commercial real estate non-owner occupied

     44,989        2,193        39,002        86,184        2,714,489        2,800,673  

Commercial real estate owner occupied

     15,315        2,765        92,540        110,620        1,532,566        1,643,186  

Commercial and industrial

     16,688        1,887        141,187        159,762        3,484,204        3,643,966  

Construction

     1,279        —          13,214        14,493        676,235        690,728  

Mortgage

     361,748        172,278        815,479        1,349,505        5,839,722        7,189,227  

Leasing

     7,570        1,518        2,506        11,594        569,525        581,119  

Legacy

     3,713        594        2,288        6,595        71,080        77,675  

Consumer:

                 

Credit cards

     12,771        9,478        21,047        43,296        1,085,315        1,128,611  

Home equity lines of credit

     3,858        1,081        4,848        9,787        347,721        357,508  

Personal

     15,140        7,633        25,329        48,102        1,305,492        1,353,594  

Auto

     31,933        7,325        11,108        50,366        732,269        782,635  

Other

     678        300        3,524        4,502        193,770        198,272  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 515,886   $ 207,052   $ 1,174,361   $ 1,897,299   $ 19,115,631   $ 21,012,930  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

 

Puerto Rico

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
Puerto Rico
 

Commercial multi-family

   $ 221      $ 69      $ 2,199      $ 2,489      $ 77,588      $ 80,077  

Commercial real estate non-owner occupied

     9,828        121        33,452        43,401        1,970,178        2,013,579  

Commercial real estate owner occupied

     8,954        7,709        92,648        109,311        1,364,051        1,473,362  

Commercial and industrial

     18,498        5,269        130,105        153,872        2,653,913        2,807,785  

Construction

     2,497        —          13,812        16,309        143,075        159,384  

Mortgage

     304,319        167,219        780,678        1,252,216        4,198,285        5,450,501  

Leasing

     6,779        1,246        3,102        11,127        553,262        564,389  

Consumer:

                 

Credit cards

     13,715        9,290        20,368        43,373        1,096,791        1,140,164  

Home equity lines of credit

     137        159        21        317        13,083        13,400  

Personal

     13,479        6,646        25,688        45,813        1,216,720        1,262,533  

Auto

     34,238        8,397        11,387        54,022        713,274        767,296  

Other

     1,009        209        4,547        5,765        199,879        205,644  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 413,674   $ 206,334   $ 1,118,007   $ 1,738,015   $ 14,200,099   $ 15,938,114  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

35


Table of Contents

December 31, 2014

 

U.S. mainland

 
     Past due                

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      Loans HIP
U.S. mainland
 

Commercial multi-family

   $ 87      $ 376      $ —        $ 463      $ 406,740      $ 407,203  

Commercial real estate non-owner occupied

     1,478        —          —          1,478        511,089        512,567  

Commercial real estate owner occupied

     45        3,631        805        4,481        189,424        193,905  

Commercial and industrial

     1,133        123        1,510        2,766        643,023        645,789  

Construction

     810        —          —          810        91,626        92,436  

Mortgage

     29,582        8,646        9,284        47,512        1,004,873        1,052,385  

Legacy

     929        1,931        1,545        4,405        76,413        80,818  

Consumer:

                 

Credit cards

     314        246        449        1,009        14,056        15,065  

Home equity lines of credit

     5,036        1,025        4,090        10,151        342,611        352,762  

Personal

     2,476        893        1,410        4,779        108,140        112,919  

Auto

     —          —          —          —          73        73  

Other

     10        4        7        21        394        415  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$   41,900   $   16,875   $      19,100   $      77,875   $   3,388,462   $   3,466,337  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

 

Popular, Inc.

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
Popular, Inc.
 

Commercial multi-family

   $ 308      $ 445      $ 2,199      $ 2,952      $ 484,328      $ 487,280  

Commercial real estate non-owner occupied

     11,306        121        33,452        44,879        2,481,267        2,526,146  

Commercial real estate owner occupied

     8,999        11,340        93,453        113,792        1,553,475        1,667,267  

Commercial and industrial

     19,631        5,392        131,615        156,638        3,296,936        3,453,574  

Construction

     3,307        —          13,812        17,119        234,701        251,820  

Mortgage

     333,901        175,865        789,962        1,299,728        5,203,158        6,502,886  

Leasing

     6,779        1,246        3,102        11,127        553,262        564,389  

Legacy

     929        1,931        1,545        4,405        76,413        80,818  

Consumer:

                 

Credit cards

     14,029        9,536        20,817        44,382        1,110,847        1,155,229  

Home equity lines of credit

     5,173        1,184        4,111        10,468        355,694        366,162  

Personal

     15,955        7,539        27,098        50,592        1,324,860        1,375,452  

Auto

     34,238        8,397        11,387        54,022        713,347        767,369  

Other

     1,019        213        4,554        5,786        200,273        206,059  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 455,574   $ 223,209   $ 1,137,107   $ 1,815,890   $ 17,588,561   $ 19,404,451  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at March 31, 2015 and December 31, 2014 by main categories.

 

(In thousands)

   March 31, 2015      December 31, 2014  

Commercial

   $ 8,179      $ 309  

Mortgage

     225        14,041  

Consumer

     —          4,549  
  

 

 

    

 

 

 

Total

$ 8,404   $ 18,899  
  

 

 

    

 

 

 

 

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Table of Contents

The following table presents loans acquired as part of the Doral transaction accounted for pursuant to ASC Subtopic 310-30 at the February 27, 2015 acquisition date.

 

(In thousands)

      

Contractually-required principal and interest

   $ 233,987  

Non-accretable difference

     43,904  
  

 

 

 

Cash flows expected to be collected

  190,083  

Accretable yield

  46,150  
  

 

 

 

Fair value of loans accounted for under ASC Subtopic 310-30

$ 143,933  
  

 

 

 

The following table presents acquired loans accounted for under ASC subtopic 310-20 as of the February 27, 2015 acquisition date:

 

(In thousands)

      

Fair value of loans accounted under ASC Subtopic 310-20

   $ 1,521,524   
  

 

 

 

Gross contractual amounts receivable (principal and interest)

$ 2,014,755  
  

 

 

 

Estimate of contractual cash flows not expected to be collected

$ 39,348  
  

 

 

 

The outstanding principal balance of non-covered loans accounted pursuant to ASC Subtopic 310-30, amounted to $413 million at March 31, 2015 (December 31, 2014 - $243 million). At March 31, 2015, 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 ended March 31, 2015 and 2014 were as follows:

 

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

 
     For the quarters ended  

(In thousands)

   March 31, 2015 [1]      March 31, 2014  

Beginning balance

   $ 116,304      $ 49,398  

Additions

     50,662        7,084  

Accretion

     (3,223      (2,374

Change in expected cash flows

     (5,319      13,177  
  

 

 

    

 

 

 

Ending balance

$ 158,424   $ 67,285  
  

 

 

    

 

 

 

 

[1] Includes loans acquired in the Doral Bank transaction.

 

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

 
     For the quarters ended  

(In thousands)

   March 31, 2015 [1]      March 31, 2014  

Beginning balance

   $ 212,763      $ 173,659  

Additions

     157,091        20,042  

Accretion

     3,223        2,374  

Collections and charge-offs

     (9,980      (5,859
  

 

 

    

 

 

 

Ending balance

$ 363,097   $ 190,216  

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

  (16,092   (15,078
  

 

 

    

 

 

 

Ending balance, net of allowance for loan losses

$ 347,005   $ 175,138  
  

 

 

    

 

 

 

 

[1] Includes loans acquired in the Doral Bank transaction.

 

37


Table of Contents

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 March 31, 2015 and December 31, 2014.

 

     March 31, 2015      December 31, 2014  

(In thousands)

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

Commercial real estate

   $ 7,375      $ —        $ 8,810      $ —    

Commercial and industrial

     4,179        —          1,142        —    

Construction

     2,627        —          2,770        —    

Mortgage

     5,075        25        4,376        28  

Consumer

     398        —          735        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

$ 19,654   $ 25   $ 17,833   $ 28  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

[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.

The following tables present loans by past due status at March 31, 2015 and December 31, 2014 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

 

March 31, 2015

 
     Past due                

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      Covered
loans HIP
 

Commercial real estate

   $ 48,825      $ 3,666      $ 255,571      $ 308,062      $ 1,162,513      $ 1,470,575  

Commercial and industrial

     515        211        9,045        9,771        90,801        100,572  

Construction

     —          2,420        46,517        48,937        8,888        57,825  

Mortgage

     41,509        24,033        131,139        196,681        598,796        795,477  

Consumer

     1,720        1,058        2,039        4,817        27,286        32,103  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

$   92,569   $ 31,388   $ 444,311   $ 568,268   $ 1,888,284   $ 2,456,552  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

 
     Past due                

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      Covered
loans HIP
 

Commercial real estate

   $ 98,559      $ 12,597      $ 291,010      $ 402,166      $ 1,109,306      $ 1,511,472  

Commercial and industrial

     512        7        7,756        8,275        95,034        103,309  

Construction

     —          384        58,665        59,049        11,287        70,336  

Mortgage

     45,764        23,531        143,140        212,435        610,551        822,986  

Consumer

     1,884        747        2,532        5,163        29,396        34,559  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

$ 146,719   $ 37,266   $ 503,103   $ 687,088   $ 1,855,574   $ 2,542,662  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

38


Table of Contents
     March 31, 2015     December 31, 2014  
     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

   $ 1,367,926     $ 80,924     $ 1,448,850     $ 1,392,482     $ 90,202     $ 1,482,684  

Commercial and industrial

     54,709       1,788       56,497       57,059       2,197       59,256  

Construction

     24,252       28,574       52,826       32,836       32,409       65,245  

Mortgage

     740,653       42,795       783,448       764,148       45,829       809,977  

Consumer

     24,241       1,234       25,475       25,617       1,393       27,010  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount

  2,211,781     155,315     2,367,096     2,272,142     172,030     2,444,172  

Allowance for loan losses

  (49,750   (18,636   (68,386   (52,798   (26,048   (78,846
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance

$ 2,162,031   $ 136,679   $ 2,298,710   $ 2,219,344   $ 145,982   $ 2,365,326  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The outstanding principal balance of covered loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.9 billion at March 31, 2015 (December 31, 2014 - $3.1 billion). At March 31, 2015, 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.

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 March 31, 2015 and 2014, were as follows:

 

     Activity in the accretable yield  
     Covered loans ASC 310-30  
     For the quarters ended  
     March 31, 2015     March 31, 2014  

(In thousands)

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

Beginning balance

   $ 1,265,752     $ 5,585     $ 1,271,337     $ 1,297,725     $ 11,480     $ 1,309,205  

Accretion

     (53,776     (1,921     (55,697     (72,552     (6,566     (79,118

Change in expected cash flows

     42,273       1,035       43,308        (12,467     592       (11,875
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

$ 1,254,249   $     4,699   $ 1,258,948   $ 1,212,706   $     5,506   $ 1,218,212  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Carrying amount of covered loans accounted for pursuant to ASC 310-30  
     For the quarters ended  
     March 31, 2015 [1]     March 31, 2014  

(In thousands)

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

Beginning balance

   $ 2,272,142     $ 172,030     $ 2,444,172     $ 2,509,075     $ 318,872     $ 2,827,947  

Accretion

     53,776       1,921       55,697       72,552       6,566       79,118  

Collections and charge-offs

     (114,137     (18,636     (132,773     (112,174     (61,769     (173,943
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

$ 2,211,781   $ 155,315   $ 2,367,096   $ 2,469,453   $ 263,669   $ 2,733,122  

Allowance for loan losses ASC 310-30 covered loans

  (49,750   (18,636   (68,386   (56,953   (33,418   (90,371
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

$ 2,162,031   $ 136,679   $ 2,298,710   $ 2,412,500   $ 230,251   $ 2,642,751  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] Includes $64 million of non-covered loans accounted for pursuant to ASC 310-30.

 

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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 March 31, 2015 (December 31, 2014 - $0.1 billion).

 

40


Table of Contents

Note 12 – 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 30, 2014, the Corporation eliminated the use of caps in the recent loss trend adjustment for the consumer and mortgage portfolios, among other enhancements. 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 March 31, 2015, 59% (March 31, 2014 - 34%) 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 mortgage, leasing, credit cards, personal loans and revolving loan portfolio for 2015, and in the commercial multi-family, mortgage, personal and auto loan portfolios for 2014.

For the period ended March 31, 2015, 13% (March 31, 2014 - 23%) 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 consumer loan portfolios for 2015 and in the commercial multi-family, commercial and industrial, construction and legacy loan portfolios for 2014.

 

    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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Table of Contents

The following tables present the changes in the allowance for loan losses for the quarters ended March 31, 2015 and 2014.

 

For the quarter ended March 31, 2015

 

Puerto Rico - Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 201,589     $ 5,483     $ 120,860     $ 7,131     $ 154,072     $ 489,135  

Provision (reversal of provision)

     (1,321     (6,813     16,192       846       23,009       31,913  

Charge-offs

     (9,572     —         (10,973     (1,237     (29,699     (51,481

Recoveries

     4,770       2,925       500       468       6,046       14,709  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

$ 195,466   $ 1,595   $ 126,579   $ 7,208   $ 153,428   $ 484,276  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 2015

 

Puerto Rico - Covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing      Consumer     Total  

Allowance for credit losses:

             

Beginning balance

   $ 30,871     $ 7,202     $ 40,948     $ —        $ 3,052     $   82,073  

Provision (reversal of provision)

     1,995       6,276       2,802       —          (749     10,324  

Charge-offs

     (14,239     (9,046     (3,386     —          —          (26,671

Recoveries

     2,640       3,275       105       —          727        6,747  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

$   21,267   $ 7,707   $   40,469   $    —     $     3,030   $ 72,473  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

For the quarter ended March 31, 2015

 

U.S. Mainland

 

(In thousands)

   Commercial     Construction      Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

             

Beginning balance

   $ 9,648     $ 1,187      $ 2,462     $ 2,944     $ 14,343     $ 30,584  

Provision (reversal of provision)

     299       662        (6,127     (1,810     4,774       (2,202

Charge-offs

     (450     —          (221     (474     (2,518     (3,663

Recoveries

     929       —          67       2,302       1,251       4,549  

Net recoveries (write-down)

     —         —          6,081       —         (3,401     2,680  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

$   10,426   $  1,849   $   2,262   $  2,962   $   14,449   $   31,948  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 2015

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 242,108     $ 13,872     $ 164,270     $ 2,944     $ 7,131     $ 171,467     $ 601,792  

Provision (reversal of provision)

     973       125       12,867       (1,810     846       27,034       40,035  

Charge-offs

     (24,261     (9,046     (14,580     (474     (1,237     (32,217     (81,815

Recoveries

     8,339       6,200       672       2,302       468       8,024       26,005  

Net recoveries (write-down)

     —         —         6,081       —         —         (3,401     2,680  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

$ 227,159   $ 11,151   $ 169,310   $ 2,962   $ 7,208   $ 170,907   $ 588,697  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 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)

     11,157       (1,394     15,982       517       27,653       53,915  

Charge-offs

     (22,117     (416     (8,726     (967     (29,196     (61,422

Recoveries

     6,944       1,794       210       311       6,213       15,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

For the quarter ended March 31, 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)

     4,039       17,567       4,498       —          (390     25,714  

Charge-offs

     (7,968     (22,981     (1,656     —         295       (32,310

Recoveries

     320       1,889       —         —         68       2,277  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 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  

Provision (reversal of provision)

     578       (194     (562     (3,672     4,057       207  

Charge-offs

     (4,991     —         (1,538     (2,984     (5,076     (14,589

Recoveries

     3,004       176       668       7,193       707       11,748  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2014

 

U.S. Mainland - Discontinued Operations

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 21,902     $ 33     $ —       $ 2,369     $ 5,101     $ 29,405  

Allowance transferred to continuing operations

     (7,984     —         —         —         —         (7,984

Provision (reversal of provision)

     (2,831     (226     —         (1,812     (1,895     (6,764

Charge-offs

     (2,995     —         —          (557     (900     (4,452

Recoveries

     8,283             220       —         1,400       94       9,997  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 2014

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 217,180     $ 24,833     $ 192,935     $ 13,704     $ 10,622     $ 181,281     $ 640,555  

Provision (reversal of provision)

     12,943       15,753       19,918       (5,484     517       29,425       73,072  

Charge-offs

     (38,071     (23,397     (11,920     (3,541     (967     (34,877     (112,773

Recoveries

     18,551       4,079       878       8,593       311       7,082       39,494  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table provides the activity in the allowance for loan losses related to covered loans accounted for pursuant to ASC Subtopic 310-30.

 

     ASC 310-30 Covered loans  
     For the quarters ended  

(In thousands)

   March 31, 2015      March 31, 2014  

Balance at beginning of period

   $ 78,846      $ 93,915  

Provision for loan losses

     8,601        24,555  

Net charge-offs

     (19,061      (28,099
  

 

 

    

 

 

 

Balance at end of period

$ 68,386   $ 90,371  
  

 

 

    

 

 

 

The following tables present information at March 31, 2015 and December 31, 2014 regarding loan ending balances and the allowance for loan losses by portfolio segment and whether such loans and the allowance pertains to loans individually or collectively evaluated for impairment.

 

At March 31, 2015

 

Puerto Rico

 

(In thousands)

   Commercial      Construction      Mortgage      Leasing      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL non-covered loans

   $ 69,946      $ 158      $ 42,229      $ 687      $ 25,223      $ 138,243  

General ALLL non-covered loans

     125,520        1,437        84,350        6,521        128,205        346,033  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

  195,466     1,595     126,579     7,208     153,428     484,276  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

  1,473     —       —       —       —       1,473  

General ALLL covered loans

  19,794     7,707     40,469     —       3,030     71,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

  21,267     7,707     40,469     —       3,030     72,473  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

$ 216,733   $ 9,302   $ 167,048   $ 7,208   $ 156,458   $ 556,749  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

Impaired non-covered loans

$ 417,377   $ 9,838   $ 445,506   $ 2,924   $ 114,416   $ 990,061  

Non-covered loans held-in-portfolio excluding impaired loans

  5,984,132     88,868     5,725,741     578,195     3,237,790     15,614,726  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans held-in-portfolio

  6,401,509     98,706     6,171,247     581,119     3,352,206     16,604,787  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired covered loans

  8,394     2,336     —       —       —       10,730  

Covered loans held-in-portfolio excluding impaired loans

  1,562,753     55,489     795,477     —       32,103     2,445,822  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans held-in-portfolio

  1,571,147     57,825     795,477     —       32,103     2,456,552  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

$ 7,972,656   $ 156,531   $ 6,966,724   $ 581,119   $ 3,384,309   $ 19,061,339  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

At March 31, 2015

 

U.S. Mainland

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL

   $ —        $ —        $ 341      $ —        $ 381      $ 722  

General ALLL

     10,426        1,849        1,921        2,962        14,068        31,226  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

$ 10,426   $ 1,849   $ 2,262   $ 2,962   $ 14,449   $ 31,948  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

Impaired loans

$ —     $ —     $ 5,106   $ —     $ 2,048   $ 7,154  

Loans held-in-portfolio, excluding impaired loans

  2,252,052     592,022     1,012,874     77,675     466,366     4,400,989  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

$ 2,252,052   $ 592,022   $ 1,017,980   $   77,675   $    468,414   $   4,408,143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

At March 31, 2015

 

Popular, Inc.

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Leasing      Consumer      Total  

Allowance for credit losses:

                    

Specific ALLL non-covered loans

   $ 69,946      $ 158      $ 42,570      $ —        $ 687      $ 25,604      $ 138,965  

General ALLL non-covered loans

     135,946        3,286        86,271        2,962        6,521        142,273        377,259  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

  205,892     3,444     128,841     2,962     7,208     167,877     516,224  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

  1,473     —       —       —       —       —       1,473  

General ALLL covered loans

  19,794     7,707     40,469     —       —       3,030     71,000  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

  21,267     7,707     40,469     —       —       3,030     72,473  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

$ 227,159   $ 11,151