10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended June 30, 2016

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, 103,738,891 shares outstanding as of August 3, 2016.

 

 

 


Table of Contents

POPULAR, INC.

INDEX

 

     Page  

Part I – Financial Information

  

Item 1. Financial Statements

  

Unaudited Consolidated Statements of Financial Condition at June 30, 2016 and December 31, 2015

     5   

Unaudited Consolidated Statements of Operations for the quarters and six months ended June 30, 2016 and 2015

     6   

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended June 30, 2016 and 2015

     7   

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2016 and 2015

     8   

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015

     9   

Notes to Unaudited Consolidated Financial Statements

     10   

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

     135   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     196   

Item 4. Controls and Procedures

     196   

Part II – Other Information

  

Item 1. Legal Proceedings

     197   

Item 1A. Risk Factors

     197   

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

     197   

Item 3. Defaults Upon Senior Securities

     198   

Item 4. Mine Safety Disclosures

     198   

Item 5. Other information

     198   

Item 6. Exhibits

     199   

Signatures

     200   

 

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Forward-Looking Information

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

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

Various factors, some of which are beyond Popular’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

    the rate of growth in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve;

 

    changes in interest rates, as well as the magnitude of such changes;

 

    the fiscal and monetary policies of the federal government and its agencies;

 

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

 

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

 

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

 

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

 

    the impact of the Commonwealth of Puerto Rico’s fiscal crisis, and the measures taken and to be taken by the Puerto Rico Government, on the economy and our business, and the ability of the Government to manage this crisis in an orderly manner;

 

    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 and (b) risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC transaction.

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;

 

    risks associated with maintaining customer relationships from our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver;

 

    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;

 

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    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, 2015 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 Form 10-Q are based upon information available to Popular as of the date of this Form 10-Q, 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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POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

(In thousands, except share information)

   June 30,
2016
    December 31,
2015
 

Assets:

    

Cash and due from banks

   $ 365,308      $ 363,674   
  

 

 

   

 

 

 

Money market investments:

    

Securities purchased under agreements to resell

     86,328        96,338   

Time deposits with other banks

     2,699,172        2,083,754   
  

 

 

   

 

 

 

Total money market investments

     2,785,500        2,180,092   
  

 

 

   

 

 

 

Trading account securities, at fair value:

    

Pledged securities with creditors’ right to repledge

     11,088        19,506   

Other trading securities

     61,442        52,153   

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

    

Pledged securities with creditors’ right to repledge

     863,594        739,045   

Other investment securities available-for-sale

     6,379,082        5,323,947   

Investment securities held-to-maturity, at amortized cost (fair value 2016 - $81,469; 2015 - $82,889)

     99,525        100,903   

Other investment securities, at lower of cost or realizable value (realizable value 2016 - $171,569; 2015 - $175,291)

     168,563        172,248   

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

     122,338        137,000   
  

 

 

   

 

 

 

Loans held-in-portfolio:

    

Loans not covered under loss-sharing agreements with the FDIC

     22,655,877        22,453,813   

Loans covered under loss-sharing agreements with the FDIC

     607,170        646,115   

Less – Unearned income

     115,216        107,698   

Allowance for loan losses

     548,720        537,111   
  

 

 

   

 

 

 

Total loans held-in-portfolio, net

     22,599,111        22,455,119   
  

 

 

   

 

 

 

FDIC loss-share asset

     214,029        310,221   

Premises and equipment, net

     535,865        502,611   

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

     177,025        155,231   

Other real estate covered under loss-sharing agreements with the FDIC

     37,984        36,685   

Accrued income receivable

     120,979        124,234   

Mortgage servicing assets, at fair value

     203,577        211,405   

Other assets

     2,179,060        2,193,162   

Goodwill

     631,095        626,388   

Other intangible assets

     50,983        58,109   
  

 

 

   

 

 

 

Total assets

   $ 37,606,148      $ 35,761,733   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Non-interest bearing

   $ 6,531,108      $ 6,401,515   

Interest bearing

     22,206,748        20,808,208   
  

 

 

   

 

 

 

Total deposits

     28,737,856        27,209,723   
  

 

 

   

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

     821,604        762,145   

Other short-term borrowings

     31,200        1,200   

Notes payable

     1,575,948        1,662,508   

Other liabilities

     1,077,894        1,019,018   

Liabilities from discontinued operations (Refer to Note 4)

     1,815        1,815   
  

 

 

   

 

 

 

Total liabilities

     32,246,317        30,656,409   
  

 

 

   

 

 

 

Commitments and contingencies (Refer to Note 23)

    

Stockholders’ equity:

    

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

     50,160        50,160   

Common stock, $0.01 par value; 170,000,000 shares authorized;

    

103,952,715 shares issued (2015 - 103,816,185) and 103,703,041 shares outstanding (2015 - 103,618,976)

     1,039        1,038   

Surplus

     4,232,835        4,229,156   

Retained earnings

     1,228,979        1,087,957   

Treasury stock - at cost, 249,674 shares (2015 - 197,209)

     (7,570     (6,101

Accumulated other comprehensive loss, net of tax

     (145,612     (256,886
  

 

 

   

 

 

 

Total stockholders’ equity

     5,359,831        5,105,324   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 37,606,148      $ 35,761,733   
  

 

 

   

 

 

 

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

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Quarters ended June 30,     Six months ended June 30,  

(In thousands, except per share information)

   2016     2015     2016     2015  

Interest income:

        

Loans

   $ 369,721      $ 374,133      $ 732,918      $ 729,764   

Money market investments

     3,889        1,845        6,752        3,291   

Investment securities

     36,725        31,297        72,996        61,598   

Trading account securities

     1,875        3,026        3,564        5,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     412,210        410,301        816,230        800,375   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     30,599        26,258        60,473        52,122   

Short-term borrowings

     2,058        1,863        3,919        3,597   

Long-term debt

     19,002        19,627        38,875        38,908   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     51,659        47,748        103,267        94,627   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     360,551        362,553        712,963        705,748   

Provision for loan losses - non-covered loans

     39,668        60,468        87,608        90,179   

Provision (reversal) for loan losses - covered loans

     804        15,766        (2,301     26,090   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     320,079        286,319        627,656        589,479   
  

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     40,296        40,138        80,158        79,155   

Other service fees (Refer to Note 29)

     56,945        59,421        110,327        113,047   

Mortgage banking activities (Refer to Note 12)

     16,227        21,325        26,778        34,177   

Net gain on sale of investment securities

     1,583        5        1,583        5   

Other-than-temporary impairment losses on investment securities

     (209     (14,445     (209     (14,445

Trading account profit (loss)

     1,117        (3,108     955        (2,694

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

     —          681        (304     602   

Adjustments (expense) to indemnity reserves on loans sold

     (5,746     419        (9,844     (4,107

FDIC loss-share (expense) income (Refer to Note 30)

     (12,576     19,075        (15,722     23,214   

Other operating income

     12,866        17,248        28,411        27,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     110,503        140,759        222,133        255,994   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Personnel costs

     116,708        120,977        243,799        237,435   

Net occupancy expenses

     21,714        23,286        42,144        44,995   

Equipment expenses

     15,261        15,925        29,809        29,336   

Other taxes

     10,170        11,113        20,365        19,687   

Professional fees

     80,625        78,449        156,084        153,977   

Communications

     6,012        6,153        12,332        12,329   

Business promotion

     13,705        13,776        24,815        24,589   

FDIC deposit insurance

     5,362        8,542        12,732        14,940   

Other real estate owned (OREO) expenses

     12,980        44,816        22,121        67,885   

Other operating expenses

     23,515        31,082        40,680        48,430   

Amortization of intangibles

     3,097        2,881        6,211        4,985   

Restructuring costs (Refer to Note 4)

     —          6,174        —          16,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     309,149        363,174        611,092        675,515   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax

     121,433        63,904        238,697        169,958   

Income tax expense (benefit)

     32,446        (533,533     64,711        (500,964
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     88,987        597,437        173,986        670,922   

Income from discontinued operations, net of tax (Refer to Note 4)

     —          15        —          1,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 88,987      $ 597,452      $ 173,986      $ 672,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 88,056      $ 596,521      $ 172,124      $ 670,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per Common Share – Basic

        

Net income from continuing operations

   $ 0.85      $ 5.80      $ 1.67      $ 6.51   

Net income from discontinued operations

     —          —          —          0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per Common Share – Basic

   $ 0.85      $ 5.80      $ 1.67      $ 6.52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per Common Share – Diluted

        

Net income from continuing operations

   $ 0.85      $ 5.79      $ 1.67      $ 6.49   

Net income from discontinued operations

     —          —          —          0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per Common Share – Diluted

   $ 0.85      $ 5.79      $ 1.67      $ 6.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends Declared per Common Share

   $ 0.15      $ —        $ 0.30      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

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

(In thousands)

   2016     2015     2016     2015  

Net income

   $ 88,987      $ 597,452      $ 173,986      $ 672,278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before tax:

        

Foreign currency translation adjustment

     (1,435     (1,092     (2,140     (1,673

Amortization of net losses of pension and postretirement benefit plans

     5,487        5,025        10,973        10,050   

Amortization of prior service cost of pension and postretirement benefit plans

     (950     (950     (1,900     (1,900

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

     38,092        (41,191     114,328        (5,849

Other-than-temporary impairment included in net income

     209        14,445        209        14,445   

Reclassification adjustment for gains included in net income

     —          (5     —          (5

Unrealized net (losses) gains on cash flow hedges

     (1,539     1,004        (3,539     (1,530

Reclassification adjustment for net losses included in net income

     1,271        951        2,816        2,309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before tax

     41,135        (21,813     120,747        15,847   

Income tax expense

     (4,997     (2,818     (9,473     (5,006
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) , net of tax

     36,138        (24,631     111,274        10,841   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 125,125      $ 572,821      $ 285,260      $ 683,119   
  

 

 

   

 

 

   

 

 

   

 

 

 
Tax effect allocated to each component of other comprehensive income (loss):   
     Quarters ended     Six months ended,  
     June 30,     June 30,  

(In thousands)

   2016     2015     2016     2015  

Amortization of net losses of pension and postretirement benefit plans

   $ (2,140   $ (1,960   $ (4,280   $ (3,920

Amortization of prior service cost of pension and postretirement benefit plans

     370        371        740        742   

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

     (3,289     2,019        (6,174     962   

Other-than-temporary impairment included in net income

     (42     (2,486     (42     (2,486

Reclassification adjustment for gains included in net income

     —          1        —          1   

Unrealized net (losses) gains on cash flow hedges

     600        (392     1,381        597   

Reclassification adjustment for net losses included in net income

     (496     (371     (1,098     (902
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ (4,997   $ (2,818   $ (9,473   $ (5,006
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                                     Accumulated        
                                     other        
     Common      Preferred            Retained     Treasury     comprehensive        

(In thousands)

   stock      stock      Surplus     earnings     stock     loss     Total  

Balance at December 31, 2014

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

Net income

             672,278            672,278   

Issuance of stock

     1            2,536              2,537   

Tax windfall benefit on vesting of restricted stock

           171              171   

Dividends declared:

                

Preferred stock

             (1,861         (1,861

Common stock purchases

               (1,741       (1,741

Common stock reissuance

               46          46   

Other comprehensive income, net of tax

                 10,841        10,841   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ 1,037       $ 50,160       $ 4,199,165      $ 924,134      $ (5,812   $ (219,031   $ 4,949,653   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ 1,038       $ 50,160       $ 4,229,156      $ 1,087,957      $ (6,101   $ (256,886   $ 5,105,324   

Net income

             173,986            173,986   

Issuance of stock

     1            3,708              3,709   

Tax shortfall expense on vesting of restricted stock

           (29           (29

Dividends declared:

                

Common stock

             (31,102         (31,102

Preferred stock

             (1,862         (1,862

Common stock purchases

               (1,476       (1,476

Common stock reissuance

               7          7   

Other comprehensive income, net of tax

                 111,274        111,274   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ 1,039       $ 50,160       $ 4,232,835      $ 1,228,979      $ (7,570   $ (145,612   $ 5,359,831   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                     June 30,     June 30,  

Disclosure of changes in number of shares:

                                   2016     2015  

Preferred Stock:

                

Balance at beginning and end of period

                 2,006,391        2,006,391   
              

 

 

   

 

 

 

Common Stock – Issued:

                

Balance at beginning of period

                 103,816,185        103,614,553   

Issuance of stock

                 136,530        76,206   
              

 

 

   

 

 

 

Balance at end of the period

                 103,952,715        103,690,759   

Treasury stock

                 (249,674     (187,745
              

 

 

   

 

 

 

Common Stock – Outstanding

                 103,703,041        103,503,014   
              

 

 

   

 

 

 

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

 

8


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six months ended June 30,  

(In thousands)

   2016     2015  

Cash flows from operating activities:

    

Net income

   $ 173,986      $ 672,278   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     85,307        116,269   

Amortization of intangibles

     6,211        4,985   

Depreciation and amortization of premises and equipment

     23,141        23,949   

Net accretion of discounts and amortization of premiums and deferred fees

     (24,724     (42,167

Other-than-temporary impairment on investment securities

     209        14,445   

Fair value adjustments on mortgage servicing rights

     12,817        6,846   

FDIC loss share expense (income)

     15,722        (23,214

Adjustments (expense) to indemnity reserves on loans sold

     9,844        4,107   

Earnings from investments under the equity method

     (13,681     (9,806

Deferred income tax expense (benefit)

     49,316        (511,128

Loss (gain) on:

    

Disposition of premises and equipment and other productive assets

     2,424        (1,429

Sale and valuation adjustments of investment securities

     (1,583     (5

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

     (15,577     (15,034

Sale of foreclosed assets, including write-downs

     9,571        54,711   

Acquisitions of loans held-for-sale

     (148,725     (249,059

Proceeds from sale of loans held-for-sale

     43,110        51,062   

Net originations on loans held-for-sale

     (247,287     (379,264

Net decrease (increase) in:

    

Trading securities

     393,178        481,271   

Accrued income receivable

     3,255        (656

Other assets

     (21,351     33,552   

Net (decrease) increase in:

    

Interest payable

     (1,208     475   

Pension and other postretirement benefits obligation

     2,300        1,641   

Other liabilities

     6,310        (41,438
  

 

 

   

 

 

 

Total adjustments

     188,579        (479,887
  

 

 

   

 

 

 

Net cash provided by operating activities

     362,565        192,391   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net increase in money market investments

     (605,407     (1,432,552

Purchases of investment securities:

    

Available-for-sale

     (1,682,199     (985,427

Held-to-maturity

     —          (250

Other

     (70,302     (12,805

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

    

Available-for-sale

     632,284        867,168   

Held-to-maturity

     2,209        2,389   

Other

     47,859        31,592   

Proceeds from sale of investment securities:

    

Available-for-sale

     —          70,005   

Other

     27,710        8,399   

Net (disbursements) repayments on loans

     (61,199     374,224   

Proceeds from sale of loans

     95,940        27,780   

Acquisition of loan portfolios

     (308,949     (140,671

Net payments from FDIC under loss sharing agreements

     88,588        164,423   

Net cash received and acquired from business combination

     —          738,296   

Acquisition of servicing advances

     —          (3,897

Cash paid related to business acquisition

     —          (17,250

Return of capital from equity method investments

     324        —     

Mortgage servicing rights purchased

     —          (2,400

Acquisition of premises and equipment

     (60,744     (30,817

Proceeds from sale of:

    

Premises and equipment and other productive assets

     2,839        7,901   

Foreclosed assets

     28,895        98,287   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,862,152     (235,605
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in:

    

Deposits

     1,530,091        745,787   

Federal funds purchased and assets sold under agreements to repurchase

     59,460        (150,413

Other short-term borrowings

     30,000        (48,215

Payments of notes payable

     (216,501     (430,003

Proceeds from issuance of notes payable

     128,883        103,231   

Proceeds from issuance of common stock

     3,710        2,536   

Dividends paid

     (32,953     (1,861

Net payments for repurchase of common stock

     (1,469     (1,695
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,501,221        219,367   
  

 

 

   

 

 

 

Net increase in cash and due from banks

     1,634        176,153   

Cash and due from banks at beginning of period

     363,674        381,095   
  

 

 

   

 

 

 

Cash and due from banks at the end of the period

   $ 365,308      $ 557,248   
  

 

 

   

 

 

 

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

During the six months ended June 30, 2016 there have not been any cash flows associated with discontinued operations. The Consolidated Statement of Cash Flows for the six months ended June 30, 2015 includes the cash flows from operating, investing and financing activities associated with discontinued operations.

 

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Notes to Consolidated Financial

Statements (Unaudited)

 

Note 1 -

 

Nature of operations

     11   

Note 2 -

 

Basis of presentation and summary of significant accounting policies

     12   

Note 3 -

 

New accounting pronouncements

     13   

Note 4 -

 

Discontinued operations and restructuring plan

     16   

Note 5 -

 

Business combination

     17   

Note 6 -

 

Restrictions on cash and due from banks and certain securities

     19   

Note 7 -

 

Investment securities available-for-sale

     20   

Note 8 -

 

Investment securities held-to-maturity

     24   

Note 9 -

 

Loans

     26   

Note 10 -

 

Allowance for loan losses

     36   

Note 11 -

 

FDIC loss share asset and true-up payment obligation

     60   

Note 12 -

 

Mortgage banking activities

     62   

Note 13 -

 

Transfers of financial assets and mortgage servicing assets

     63   

Note 14 -

 

Other real estate owned

     67   

Note 15 -

 

Other assets

     68   

Note 16 -

 

Goodwill and other intangible assets

     69   

Note 17 -

 

Deposits

     71   

Note 18 -

 

Borrowings

     72   

Note 19 -

 

Offsetting of financial assets and liabilities

     74   

Note 20 -

 

Stockholders’ equity

     76   

Note 21 -

 

Other comprehensive loss

     77   

Note 22 -

 

Guarantees

     79   

Note 23 -

 

Commitments and contingencies

     81   

Note 24 -

 

Non-consolidated variable interest entities

     88   

Note 25 -

 

Related party transactions

     92   

Note 26 -

 

Fair value measurement

     96   

Note 27 -

 

Fair value of financial instruments

     103   

Note 28 -

 

Net income per common share

     110   

Note 29 -

 

Other service fees

     111   

Note 30 -

 

FDIC loss share (expense) income

     112   

Note 31 -

 

Pension and postretirement benefits

     113   

Note 32 -

 

Stock-based compensation

     114   

Note 33 -

 

Income taxes

     117   

Note 34 -

 

Supplemental disclosure on the consolidated statements of cash flows

     120   

Note 35 -

 

Segment reporting

     121   

Note 36 -

 

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

     126   

 

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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, mortgage, 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”). BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and South Florida under the name of Popular Community Bank. Refer to Note 4 for discussion of the sales of the California, Illinois and Central Florida regional operations during 2014. Note 35 to the consolidated financial statements presents information about the Corporation’s business segments.

On February 27, 2015, BPPR, in an alliance with other bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former 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 transfer of certain assets and deposits. BPPR entered into transition service agreements with each of the alliance co-bidders. Refer to Note 5 for further details on the Doral Bank Transaction.

 

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Table of Contents

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, 2015 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 2015 consolidated financial statements and notes to the financial statements to conform with the 2016 presentation.

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, 2015, included in the Corporation’s 2015 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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Table of Contents

Note 3 – New accounting pronouncements

Recently Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The FASB issued ASU 2016-13 in June 2016, which replaces the incurred loss model with a current expected credit loss (“CECL”) model. The CECL model applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet exposures. Under current U.S. GAAP, an entity reflects credit losses on financial assets measured on an amortized cost basis only when losses are probable or have been incurred, generally considering only past events and current conditions in making these determinations. ASU 2016-13 prospectively replaces this approach with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. ASU 2016-13 also revises the approach to recognizing credit losses for available-for-sale securities by replacing the direct write-down approach with the allowance approach and limiting the allowance to the amount at which the security’s fair value is less than the amortized cost. In addition, ASU 2016-13 provides that the initial allowance for credit losses on purchased credit impaired financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense.

ASU 2016-13 also expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted as of January 1, 2019.

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

FASB Accounting Standards Update (“ASU”) 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

The FASB issued ASU 2016-12 in May 2016. The amendments in this update, among other things, clarify the objective of the collectability criterion, provide guidance on noncash and variable consideration, provide a practical expedient for contract modifications at transition, and clarify the meaning of a completed contract for purposes of transition.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

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

FASB Accounting Standards Update (“ASU”) 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

The FASB issued ASU 2016-10 in April 2016 which clarifies two aspects of Topic 606, in particular, the identification of performance obligations. Among other things, an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. In addition, in determining whether promises to transfer goods or services are separately identifiable, an entity should determine whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

 

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

FASB Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

The FASB issued ASU 2016-09 in March 2016 which simplifies multiple aspects of the accounting for share-based payment transactions, including the recognition of excess tax benefits and deficiencies as an income tax benefit or expense in the income statement and classification in the statement of cash flows as an operating activity, allowing entities to elect as an accounting policy to account for forfeitures when they occur, permitting entities to withhold up to the maximum individual statutory rate without classifying the awards as a liability, and requiring that the cash paid to satisfy the statutory income tax withholding obligation be classified as a financing activity.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

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, cash flows or presentation and disclosures.

FASB Accounting Standards Update (“ASU”) 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

The FASB issued ASU 2016-08 in March 2016, which amends the implementation guidance in ASU 2014-09 by clarifying, among other things, that an entity should determine the nature of the goods or services provided to the customer and whether it controls each specified good or service before it is transferred to the customer, that an entity can be a principal for some goods or services and an agent for others with the same contract, and that an entity is a principal if it controls the goods or services before transferring them to the customer.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

The Corporation is currently evaluating the impact that the adoption of this guidance will have on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update (“ASU”) 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

The FASB issued ASU 2016-07 in March 2016, which eliminates the requirement to retroactively adopt the equity method of accounting. Therefore, as of the date the investment becomes qualified for equity method accounting, an entity should add the cost of acquiring the additional interest in the investee to the current basis of its previously held interest. For available-for-sale securities, an entity should recognize through earnings the unrealized holding gains/losses in accumulated other comprehensive income/loss as of that date.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

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 (“ASU”) 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

The FASB issued ASU 2016-06 in March 2016, which clarifies that in assessing whether an embedded contingent put or call option is not clearly and closely related to the debt instrument, which is part of the assessment made to determine whether an embedded

 

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Table of Contents

derivative must be bifurcated from the host contract, an entity is required to perform only the four step decision sequence. The four-step decision sequence requires an entity to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount and (4) the put or call option is contingently exercisable. It does not have to separately assess whether the event that triggers its ability to exercise the contingent option itself is indexed only to interest rates and credit risk.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

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 (“ASU”) 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

The FASB issued ASU 2016-05 in March 2016, which clarifies that a novation, or a change in the counterparty to the derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship, and therefore discontinuance of the application of hedge accounting, provided that all other hedge accounting criteria continue to be met.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

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.

For recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the consolidated financial statements included in the 2015 Form 10-K.

 

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Table of Contents

Note 4 – Discontinued operations and restructuring plan

During the year ended December 31, 2014, the Corporation completed the sale of its California, Illinois and Central Florida regional operations and relocated certain back office operations to Puerto Rico and New York.

As defined in ASC 805-10-55, the regional operations sold constituted a business, and 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 of June 30, 2016 and December 31, 2015, there were no assets held within the discontinued operations and liabilities within discontinued operations amounted to approximately $1.8 million, mainly comprised of the indemnity reserve related to the California regional sale.

There were no activities from the discontinued operations during the six month period ended June 30, 2016. Net income from the discontinued operations amounted to $1.4 million for the six months ended June 30, 2015.

Also, in connection with the sale, the Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) which has been completed by December 31, 2015, for which the Corporation incurred restructuring charges of $45.1 million. During the six month period ended June 30, 2015, the Corporation incurred $16.9 million in restructuring costs, mostly comprised of $12.2 million in personnel costs.

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

 

     Six months ended June 30,  

(In thousands)

   2016      2015  

Beginning balance

   $ 620       $ 13,536   

Charges expensed during the period

     —           8,312   

Payments made during the period

     (367      (18,759
  

 

 

    

 

 

 

Ending balance

   $ 253       $ 3,089   
  

 

 

    

 

 

 

 

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Table of Contents

Note 5 – Business combination

On February 27, 2015, BPPR, in an alliance with co-bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank from the 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 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 transfer of certain assets and deposits. BPPR entered into transition service agreements with each of the alliance co-bidders. 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 February 27, 2015.

 

(In thousands)

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

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

     1,679,792         (165,925      —           1,513,867   

Accrued income receivable

     7,808         —           —           7,808   

Receivable from the FDIC

     —           —           480,137         480,137   

Core deposit intangible

     23,572         (10,762      —           12,810   

Other assets

     67,676         7,569         —           75,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,321,972       $ (169,118    $ 480,137       $ 2,632,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deposits

   $ 2,193,404       $ 9,987       $ —         $ 2,203,391   

Advances from the Federal Home Loan Bank

     542,000         5,187         —           547,187   

Other liabilities

     50,728         (511      —           50,217   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,786,132       $ 14,663       $ —         $ 2,800,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

Excess of liabilities assumed over assets acquired

   $ 464,160            

Aggregate fair value adjustments

      $ (183,781      
     

 

 

    

 

 

    

Additional consideration

         $ 480,137      
        

 

 

    

 

 

 

Goodwill on acquisition

            $ 167,804   
           

 

 

 

 

[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.

In accordance with ASC Topic 805, the fair values assigned to the assets acquired and liabilities assumed are subject to refinement up to one year after the closing date of the acquisition as new information relative to closing date fair values become available, and thus the recognized goodwill may increase or decrease. During the second and third quarters of 2015, retrospective adjustments were made to the estimated fair values of certain assets acquired and liabilities assumed as part of the Doral Bank Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The retrospective adjustments resulted in a decrease of $2.1 million to the initial fair value estimate of the mortgage servicing rights, a decrease in other liabilities assumed of $0.5 million and, an increase of $2.6 million in the receivable from the FDIC related to the acquisition cost of deposits, all of which were adjusted against goodwill.

During the fourth quarter of 2015 the Corporation early adopted ASU 2015-16 “Business Combination”. Accordingly, adjustments to the initial fair value estimates identified during the measurement period were recognized in the reporting period in which the adjustment amounts were determined. Pursuant to ASU 2015-16, adjustments were made effective in the fourth quarter of 2015 to the estimated fair values of assets and liabilities assumed with the Doral Bank Transaction to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements.

 

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Table of Contents

During the quarter ended March 31, 2016, the Corporation recorded adjustments to its initial fair value estimates in connection with the Doral Bank Transaction. As a result, the discount on the loans increased by $4.7 million with a corresponding increase to goodwill.

The following table presents the principal changes in fair value and the revised amounts recorded during the measurement period.

 

(In thousands)

   February 27, 2015
As recasted[a]
     February 27, 2015
As previously
reported[b]
     Change  

Assets:

        

Loans

   $ 1,513,867       $ 1,665,756       $ (151,889

Goodwill

     167,804         41,633         126,171   

Core deposit intangible

     12,810         23,572         (10,762

Receivable from the FDIC

     480,137         441,721         38,416   

Other assets

     626,177         626,177         —     
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,800,795       $ 2,798,859       $ 1,936   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Deposits

   $ 2,203,391       $ 2,201,455       $ 1,936   

Advances from the Federal Home Loan Bank

     547,187         547,187         —     

Other liabilities

     50,217         50,217         —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,800,795       $ 2,798,859       $ 1,936   
  

 

 

    

 

 

    

 

 

 

 

[a] Amounts reported include retrospective adjustments during the measurement period, in accordance with U.S. GAAP, related to the Doral Bank Transaction.
[b] Amounts are presented as previously reported as of September 30, 2015.

The impact in the results of operations for the quarter and the six months ended June 30, 2015 as a result of the recasting was an increase in net income of approximately $2.7 million and $3.4 million, respectively, as detailed in the following table:

 

     Quarter ended June 30, 2015     Six months ended June 30, 2015  

(In thousands)

   As recasted      As reported      Difference     As recasted      As reported      Difference  

Net Interest Income

   $ 29,629       $ 27,164       $ 2,465      $ 39,935       $ 36,932       $ 3,003   

Non-Interest Income

     7,210         7,210         —          11,472         11,472         —     

Operating Expenses

     26,506         26,775         (269     40,903         41,262         (359
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income Before Taxes

   $ 10,333       $ 7,599       $ 2,734      $ 10,504       $ 7,142       $ 3,362   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 6 - 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 June 30, 2016 (December 31, 2015 - $ 1.1 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At June 30, 2016, the Corporation held $23 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, 2015 - $44 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

 

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Table of Contents

Note 7 – Investment securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at June 30, 2016 and December 31, 2015.

 

     At June 30, 2016  

(In thousands)

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

U.S. Treasury securities

              

Within 1 year

   $ 45,014       $ 90       $ —         $ 45,104         0.72

After 1 to 5 years

     1,557,118         12,141         —           1,569,259         1.05   

After 5 to 10 years

     9,942         471         —           10,413         1.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     1,612,074         12,702         —           1,624,776         1.05   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

Within 1 year

     50,045         150         —           50,195         0.90   

After 1 to 5 years

     716,459         7,026         90         723,395         1.36   

After 5 to 10 years

     250         1         —           251         5.64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     766,754         7,177         90         773,841         1.33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

After 1 to 5 years

     7,150         17         —           7,167         4.27   

After 5 to 10 years

     5,915         1         1,562         4,354         4.02   

After 10 years

     18,614         1         4,501         14,114         6.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     31,679         19         6,063         25,635         5.82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

              

Within 1 year

     159         —           —           159         0.97   

After 1 to 5 years

     19,667         972         —           20,639         2.86   

After 5 to 10 years

     36,988         771         —           37,759         2.86   

After 10 years

     1,369,388         17,599         6,823         1,380,164         1.98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

     1,426,202         19,342         6,823         1,438,721         2.01   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     18         —           —           18         4.72   

After 1 to 5 years

     19,790         872         9         20,653         4.50   

After 5 to 10 years

     268,493         7,414         184         275,723         2.41   

After 10 years

     3,002,023         69,496         670         3,070,849         2.63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     3,290,324         77,782         863         3,367,243         2.63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     1,351         1,169         —           2,520         7.86   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     8,725         35         —           8,760         1.73   

After 5 to 10 years

     1,136         44         —           1,180         3.62   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     9,861         79         —           9,940         1.95   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale[1]

   $ 7,138,245       $ 118,270       $ 13,839       $ 7,242,676         2.02
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $3.6 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $2.9 billion serve as collateral for public funds.

 

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Table of Contents
    At December 31, 2015  

(In thousands)

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

U.S. Treasury securities

         

Within 1 year

  $ 24,861      $ 335      $ —        $ 25,196        4.31

After 1 to 5 years

    1,149,807        365        1,999        1,148,173        1.03   

After 5 to 10 years

    9,937        22        —          9,959        1.99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. Treasury securities

    1,184,605        722        1,999        1,183,328        1.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Obligations of U.S. Government sponsored entities

         

After 1 to 5 years

    919,819        1,337        4,808        916,348        1.33   

After 5 to 10 years

    250        1        —          251        5.64   

After 10 years

    23,000        42        —          23,042        3.22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total obligations of U.S. Government sponsored entities

    943,069        1,380        4,808        939,641        1.38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Obligations of Puerto Rico, States and political subdivisions

         

After 1 to 5 years

    7,227        —          199        7,028        3.94   

After 5 to 10 years

    5,925        —          2,200        3,725        4.02   

After 10 years

    18,585        —          6,979        11,606        6.99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

    31,737        —          9,378        22,359        5.74   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collateralized mortgage obligations - federal agencies

         

After 1 to 5 years

    21,446        594        37        22,003        2.81   

After 5 to 10 years

    44,585        733        —          45,318        2.85   

After 10 years

    1,518,662        8,137        33,283        1,493,516        1.99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total collateralized mortgage obligations - federal agencies

    1,584,693        9,464        33,320        1,560,837        2.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage-backed securities

         

After 1 to 5 years

    22,015        987        8        22,994        4.65   

After 5 to 10 years

    256,097        4,866        1,197        259,766        2.51   

After 10 years

    2,039,217        34,839        12,620        2,061,436        2.83   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-backed securities

    2,317,329        40,692        13,825        2,344,196        2.81   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities (without contractual maturity)

    1,350        1,053        5        2,398        7.92   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

         

After 1 to 5 years

    8,911        —          28        8,883        1.71   

After 5 to 10 years

    1,311        39        —          1,350        3.62   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other

    10,222        39        28        10,233        1.95   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities available-for-sale[1]

  $ 6,073,005      $ 53,350      $ 63,363      $ 6,062,992        2.07
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] Includes $2.4 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $1.5 billion serve as collateral for public funds.

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 quarter and six months ended June 30, 2016. During the six months ended June 30, 2015, the Corporation sold U.S. agency securities with a carrying amount of $70 million at the BPPR segment, resulting in a realized gain of $5 thousand.

 

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Table of Contents

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2016 and December 31, 2015.

 

    At June 30, 2016  
    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

  $ 24,110      $ 63      $ 1,301      $ 27      $ 25,411      $ 90   

Obligations of Puerto Rico, States and political subdivisions

    —          —          16,501        6,063        16,501        6,063   

Collateralized mortgage obligations - federal agencies

    —          —          405,082        6,823        405,082        6,823   

Mortgage-backed securities

    114,735        829        9,662        34        124,397        863   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 138,845      $ 892      $ 432,546      $ 12,947      $ 571,391      $ 13,839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    At December 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
 

U.S. Treasury securities

  $ 589,689      $ 1,999      $ —        $ —        $ 589,689      $ 1,999   

Obligations of U.S. Government sponsored entities

    390,319        2,128        181,744        2,680        572,063        4,808   

Obligations of Puerto Rico, States and political subdivisions

    884        164        19,490        9,214        20,374        9,378   

Collateralized mortgage obligations - federal agencies

    331,501        4,446        814,195        28,874        1,145,696        33,320   

Mortgage-backed securities

    1,641,663        12,992        22,362        833        1,664,025        13,825   

Equity securities

    45        5        —          —          45        5   

Other

    8,883        28        —          —          8,883        28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2,962,984      $ 21,762      $ 1,037,791      $ 41,601      $ 4,000,775      $ 63,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2016, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $14 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 U.S. Agencies’ securities, management considers the U.S. Agency guarantee. 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.

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.

During the second quarter of 2016, the Corporation recognized an other-than-temporary impairment charge of $209 thousand on an investment security available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2016 this security was rated Caa2 and CC by Moody’s and S&P, respectively. Puerto Rico’s fiscal and economic situation, together with, among other factors, the recent moratorium declared on the payment of principal and interest on obligations for certain Puerto Rico government securities, including those issued or guaranteed by the Commonwealth, led management to conclude that the unrealized losses on this security was other-than-temporary. The Corporation determined that the entire balance of the unrealized loss carried by this security was attributed to estimated credit losses. Accordingly, the other-than-temporary impairment was recognized in its entirety in the accompanying consolidated statement of operations and no amount remained recognized in the accompanying statement of other comprehensive income related to this specific security.

 

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Table of Contents

In the second quarter of 2015, the Corporation recognized an other-than-temporary impairment charge of $14.4 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2015 these securities were rated Caa2 and CCC- by Moody’s and S&P, respectively.

The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities backed by the full faith and credit of the U.S. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.

 

     June 30, 2016      December 31, 2015  

(In thousands)

   Amortized cost      Fair value      Amortized cost      Fair value  

FNMA

   $ 2,820,595       $ 2,863,151       $ 2,649,860       $ 2,633,899   

FHLB

     286,449         289,572         340,119         338,700   

Freddie Mac

     1,377,651         1,390,990         1,088,691         1,079,956   

 

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Table of Contents

Note 8 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at June 30, 2016 and December 31, 2015.

 

     At June 30, 2016  
            Gross      Gross             Weighted  
     Amortized      unrealized      unrealized      Fair      average  

(In thousands)

   cost      gains      losses      value      yield  

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 3,050       $ —         $ 227       $ 2,823         5.91

After 1 to 5 years

     14,270         —           5,757         8,513         6.00   

After 5 to 10 years

     18,930         —           7,561         11,369         6.17   

After 10 years

     61,194         3,325         7,805         56,714         1.97   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     97,444         3,325         21,350         79,419         3.50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

              

After 5 to 10 years

     81         4         —           85         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

     81         4         —           85         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     2,000         —           35         1,965         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     2,000         —           35         1,965         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity[1]

   $ 99,525       $ 3,329       $ 21,385       $ 81,469         3.47
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $97.8 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

 

     At December 31, 2015  
            Gross      Gross             Weighted  
     Amortized      unrealized      unrealized      Fair      average  

(In thousands)

   cost      gains      losses      value      yield  

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 2,920       $ —         $ 291       $ 2,629         5.90

After 1 to 5 years

     13,655         —           5,015         8,640         5.98   

After 5 to 10 years

     20,020         —           8,020         12,000         6.14   

After 10 years

     62,222         3,604         8,280         57,546         2.08   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     98,817         3,604         21,606         80,815         3.55   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

              

After 5 to 10 years

     86         5         —           91         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

     86         5         —           91         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     2,000         —           17         1,983         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     2,000         —           17         1,983         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity[1]

   $ 100,903       $ 3,609       $ 21,623       $ 82,889         3.52
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $57.2 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

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.

 

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Table of Contents

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2016 and December 31, 2015.

 

     At June 30, 2016  
     Less than 12 months      12 months or more      Total  
            Gross             Gross             Gross  
     Fair      unrealized      Fair      unrealized      Fair      unrealized  

(In thousands)

   value      losses      value      losses      value      losses  

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ —         $ 32,650       $ 21,350       $ 32,650       $ 21,350   

Other

     720         30         995         5         1,715         35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 720       $ 30       $ 33,645       $ 21,355       $ 34,365       $ 21,385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2015  
     Less than 12 months      12 months or more      Total  
            Gross             Gross             Gross  
     Fair      unrealized      Fair      unrealized      Fair      unrealized  

(In thousands)

   value      losses      value      losses      value      losses  

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ —         $ 33,334       $ 21,606       $ 33,334       $ 21,606   

Other

     1,483         17         —           —           1,483         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 1,483       $ 17       $ 33,334       $ 21,606       $ 34,817       $ 21,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at June 30, 2016 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $55 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 $43 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.

The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security was other-than-temporarily impaired at June 30, 2016. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.

 

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Table of Contents

Note 9 – Loans

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 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 expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential mortgage loans, as explained in Note 11.

For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to Note 2 - Summary of significant accounting policies, of the 2015 Form 10-K.

During the quarter and six months ended June 30, 2016, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $118 million and $240 million, respectively; consumer loans of $58 million and $164 million, respectively; and commercial loans amounting to $51 million during the six months ended June 30, 2016. Excluding the impact of the Doral Bank Transaction, during the quarter and six months ended June 30, 2015, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $213 million and $382 million, respectively.

Excluding the bulk sale of Westernbank loans with a carrying value of approximately $100 million, the Corporation sold commercial and construction loans with a carrying value of approximately $1 million during the six months ended June 30, 2016 (during the quarter and six months ended June 30, 2015 - $8 million and $9 million). The Corporation sold approximately $19 million and $40 million of residential mortgage loans (on a whole loan basis) during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $25 million and $65 million, respectively). Also, the Corporation securitized approximately $ 170 million and $ 304 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $ 243 million and $ 400 million, respectively). Furthermore, the Corporation securitized approximately $ 43 million and $ 79 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $ 70 million and $ 117 million, respectively).

 

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Table of Contents

Non-covered loans

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, by past due status at June 30, 2016 and December 31, 2015, including loans previously covered by the commercial FDIC loss sharing agreements.

 

June 30, 2016

 

Puerto Rico

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

(In thousands)

  days     days     or more     past due     Current     Puerto Rico  

Commercial multi-family

  $ 359      $ 63      $ 1,004      $ 1,426      $ 174,085      $ 175,511   

Commercial real estate non-owner occupied

    98,373        6,624        57,017        162,014        2,436,617        2,598,631   

Commercial real estate owner occupied

    9,570        4,969        122,337        136,876        1,679,956        1,816,832   

Commercial and industrial

    8,286        2,348        34,944        45,578        2,580,500        2,626,078   

Construction

    —          —          4,848        4,848        98,794        103,642   

Mortgage

    292,558        159,972        802,407        1,254,937        4,765,625        6,020,562   

Leasing

    6,611        1,034        3,019        10,664        653,430        664,094   

Consumer:

           

Credit cards

    11,024        8,109        17,225        36,358        1,078,082        1,114,440   

Home equity lines of credit

    49        206        293        548        8,945        9,493   

Personal

    13,660        7,510        20,349        41,519        1,146,847        1,188,366   

Auto

    32,909        6,925        11,117        50,951        778,906        829,857   

Other

    512        255        18,158        18,925        160,601        179,526   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 473,911      $ 198,015      $ 1,092,718      $ 1,764,644      $ 15,562,388      $ 17,327,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

June 30, 2016

 

U.S. mainland

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

(In thousands)

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

Commercial multi-family

  $ —        $ —        $ 375      $ 375      $ 888,457      $ 888,832   

Commercial real estate non-owner occupied

    251        375        317        943        1,092,910        1,093,853   

Commercial real estate owner occupied

    2,072        97        746        2,915        279,637        282,552   

Commercial and industrial

    1,800        7,786        80,312        89,898        787,628        877,526   

Construction

    —          —          100        100        613,590        613,690   

Mortgage

    1,381        5,009        14,390        20,780        822,776        843,556   

Legacy

    623        176        3,839        4,638        45,071        49,709   

Consumer:

           

Credit cards

    19        83        535        637        —          637   

Home equity lines of credit

    2,684        674        3,861        7,219        272,232        279,451   

Personal

    1,299        1,098        1,351        3,748        279,788        283,536   

Auto

    —          —          —          —          15        15   

Other

    4        —          —          4        268        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 10,133      $ 15,298      $ 105,826      $ 131,257      $ 5,082,372      $ 5,213,629   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

June 30, 2016

 

Popular, Inc.

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

(In thousands)

  days     days     or more     past due     Current     Popular, Inc.[1] [2]  

Commercial multi-family

  $ 359      $ 63      $ 1,379      $ 1,801      $ 1,062,542      $ 1,064,343   

Commercial real estate non-owner occupied

    98,624        6,999        57,334        162,957        3,529,527        3,692,484   

Commercial real estate owner occupied

    11,642        5,066        123,083        139,791        1,959,593        2,099,384   

Commercial and industrial

    10,086        10,134        115,256        135,476        3,368,128        3,503,604   

Construction

    —          —          4,948        4,948        712,384        717,332   

Mortgage

    293,939        164,981        816,797        1,275,717        5,588,401        6,864,118   

Leasing

    6,611        1,034        3,019        10,664        653,430        664,094   

Legacy[3]

    623        176        3,839        4,638        45,071        49,709   

Consumer:

           

Credit cards

    11,043        8,192        17,760        36,995        1,078,082        1,115,077   

Home equity lines of credit

    2,733        880        4,154        7,767        281,177        288,944   

Personal

    14,959        8,608        21,700        45,267        1,426,635        1,471,902   

Auto

    32,909        6,925        11,117        50,951        778,921        829,872   

Other

    516        255        18,158        18,929        160,869        179,798   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 484,044      $ 213,313      $ 1,198,544      $ 1,895,901      $ 20,644,760      $ 22,540,661   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] Non-covered loans held-in-portfolio are net of $115 million in unearned income and exclude $122 million in loans held-for-sale.
[2] Includes $7.6 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.7 billion were pledged at the FHLB as collateral for borrowings, $2.4 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.
[3] 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.

 

December 31, 2015

 

Puerto Rico

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

(In thousands)

  days     days     or more     past due     Current     Puerto Rico  

Commercial multi-family

  $ 459      $ 217      $ 1,316      $ 1,992      $ 130,154      $ 132,146   

Commercial real estate non-owner occupied

    166,732        12,520        84,982        264,234        2,404,858        2,669,092   

Commercial real estate owner occupied

    14,245        5,624        138,778        158,647        1,750,597        1,909,244   

Commercial and industrial

    6,010        6,059        38,464        50,533        2,607,204        2,657,737   

Construction

    238        253        13,738        14,229        86,719        100,948   

Mortgage

    344,858        162,341        863,869        1,371,068        4,756,423        6,127,491   

Leasing

    7,844        1,630        3,009        12,483        615,167        627,650   

Consumer:

           

Credit cards

    11,078        9,414        19,098        39,590        1,088,755        1,128,345   

Home equity lines of credit

    186        292        394        872        9,816        10,688   

Personal

    13,756        7,889        22,625        44,270        1,158,565        1,202,835   

Auto

    33,554        7,500        11,640        52,694        763,256        815,950   

Other

    1,069        298        19,232        20,599        167,885        188,484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 600,029      $ 214,037      $ 1,217,145      $ 2,031,211      $ 15,539,399      $ 17,570,610   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

December 31, 2015

 

U.S. mainland

 
    Past due     Current     Loans HIP
U.S. mainland
 

(In thousands)

  30-59
days
    60-89
days
    90 days
or more
    Total
past due
     

Commercial multi-family

  $ 33      $ 253      $ —        $ 286      $ 693,647      $ 693,933   

Commercial real estate non-owner occupied

    160        —          253        413        962,610        963,023   

Commercial real estate owner occupied

    1,490        429        221        2,140        200,204        202,344   

Commercial and industrial

    13,647        1,526        75,575        90,748        780,896        871,644   

Construction

    —          —          —          —          580,158        580,158   

Mortgage

    18,957        3,424        13,538        35,919        872,671        908,590   

Legacy

    1,160        662        3,649        5,471        58,965        64,436   

Consumer:

           

Credit cards

    327        134        437        898        13,037        13,935   

Home equity lines of credit

    3,149        1,114        4,176        8,439        296,045        304,484   

Personal

    1,836        690        1,240        3,766        168,860        172,626   

Auto

    —          —          6        6        22        28   

Other

    —          10        5        15        289        304   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 40,759      $ 8,242      $ 99,100      $ 148,101      $ 4,627,404      $ 4,775,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

December 31, 2015

 

Popular, Inc.

 
    Past due     Current     Non-covered
loans HIP
Popular, Inc.[1] [2]
 

(In thousands)

  30-59
days
    60-89
days
    90 days
or more
    Total
past due
     

Commercial multi-family

  $ 492      $ 470      $ 1,316      $ 2,278      $ 823,801      $ 826,079   

Commercial real estate non-owner occupied

    166,892        12,520        85,235        264,647        3,367,468        3,632,115   

Commercial real estate owner occupied

    15,735        6,053        138,999        160,787        1,950,801        2,111,588   

Commercial and industrial

    19,657        7,585        114,039        141,281        3,388,100        3,529,381   

Construction

    238        253        13,738        14,229        666,877        681,106   

Mortgage

    363,815        165,765        877,407        1,406,987        5,629,094        7,036,081   

Leasing

    7,844        1,630        3,009        12,483        615,167        627,650   

Legacy[3]

    1,160        662        3,649        5,471        58,965        64,436   

Consumer:

           

Credit cards

    11,405        9,548        19,535        40,488        1,101,792        1,142,280   

Home equity lines of credit

    3,335        1,406        4,570        9,311        305,861        315,172   

Personal

    15,592        8,579        23,865        48,036        1,327,425        1,375,461   

Auto

    33,554        7,500        11,646        52,700        763,278        815,978   

Other

    1,069        308        19,237        20,614        168,174        188,788   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 640,788      $ 222,279      $ 1,316,245      $ 2,179,312      $ 20,166,803      $ 22,346,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] Non-covered loans held-in-portfolio are net of $108 million in unearned income and exclude $137 million in loans held-for-sale.
[2] Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.3 billion were pledged at the FHLB as collateral for borrowings, $2.5 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.
[3] 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.

The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at June 30, 2016 and December 31, 2015. 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.

 

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Table of Contents

At June 30, 2016

 
     Puerto Rico      U.S. mainland      Popular, Inc.  

(In thousands)

   Non-accrual
loans
     Accruing loans
past-due 90
days or more [1]
     Non-accrual
loans
     Accruing loans
past-due 90
days or more [1]
     Non-accrual
loans
     Accruing loans
past-due 90
days or more [1]
 

Commercial multi-family

   $ 1,004       $ —         $ 375       $ —         $ 1,379       $ —     

Commercial real estate non-owner occupied

     25,348         —           317         —           25,665         —     

Commercial real estate owner occupied

     111,713         —           746         —           112,459         —     

Commercial and industrial

     34,519         270         1,593         —           36,112         270   

Construction

     2,423         —           100         —           2,523         —     

Mortgage[3]

     323,658         394,936         14,390         —           338,048         394,936   

Leasing

     3,019         —           —           —           3,019         —     

Legacy

     —           —           3,839         —           3,839         —     

Consumer:

                 

Credit cards

     —           17,225         535         —           535         17,225   

Home equity lines of credit

     —           293         3,861         —           3,861         293   

Personal

     20,271         13         1,351         —           21,622         13   

Auto

     11,117         —           —           —           11,117         —     

Other

     17,560         582         —           —           17,560         582   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[2]

   $ 550,632       $ 413,319       $ 27,107       $ —         $ 577,739       $ 413,319   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans of $207 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 $ 40 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 $149 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of June 30, 2016. Furthermore, the Corporation has approximately $63 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, 2015

 
     Puerto Rico      U.S. mainland      Popular, Inc.  

(In thousands)

   Non-accrual
loans
     Accruing loans
past-due 90
days or more [1]
     Non-accrual
loans
     Accruing loans
past-due 90
days or more [1]
     Non-accrual
loans
     Accruing loans
past-due 90
days or more [1]
 

Commercial multi-family

   $ 1,062       $ —         $ —         $ —         $ 1,062       $ —     

Commercial real estate non-owner occupied

     33,720         —           253         —           33,973         —     

Commercial real estate owner occupied

     106,449         —           221         —           106,670         —     

Commercial and industrial

     36,671         555         3,440         —           40,111         555   

Construction

     3,550         —           —           —           3,550         —     

Mortgage[3]

     337,933         426,094         13,538         —           351,471         426,094   

Leasing

     3,009         —           —           —           3,009         —     

Legacy

     —           —           3,649         —           3,649         —     

Consumer:

                 

Credit cards

     —           19,098         437         —           437         19,098   

Home equity lines of credit

     —           394         4,176         —           4,176         394   

Personal

     22,102         523         1,240         —           23,342         523   

Auto

     11,640         —           6         —           11,646         —     

Other

     18,698         61         5         —           18,703         61   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[2]

   $ 574,834       $ 446,725       $ 26,965       $ —         $ 601,799       $ 446,725   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans by $268 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 $ 45 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 $164 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, 2015. Furthermore, the Corporation has approximately $70 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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The following table provides a breakdown of loans held-for-sale (“LHFS”) at June 30, 2016 and December 31, 2015 by main categories.

 

(In thousands)

   June 30, 2016      December 31, 2015  

Commercial

   $ 39,544       $ 45,074   

Construction

     —           95   

Mortgage

     82,794         91,831   
  

 

 

    

 

 

 

Total loans held-for-sale

   $ 122,338       $ 137,000   
  

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at June 30, 2016 and December 31, 2015 by main categories.

 

(In thousands)

   June 30, 2016      December 31, 2015  

Commercial

   $ 39,544       $ 45,074   

Construction

     —           95   
  

 

 

    

 

 

 

Total

   $ 39,544       $ 45,169   
  

 

 

    

 

 

 

The following table presents loans acquired as part of the Doral Bank Transaction 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

   $ 1,178,543   
  

 

 

 

Gross contractual amounts receivable (principal and interest)

   $ 1,666,695   
  

 

 

 

Estimate of contractual cash flows not expected to be collected

   $ 34,646   
  

 

 

 

Covered loans

The following tables present the composition of loans by past due status at June 30, 2016 and December 31, 2015 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

 

June 30, 2016

 
     Past due      Current      Covered
loans HIP [1]
 

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
       

Mortgage

   $ 30,197       $ 15,806       $ 74,541       $ 120,544       $ 468,712       $ 589,256   

Consumer

     905         396         1,680         2,981         14,933         17,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 31,102       $ 16,202       $ 76,221       $ 123,525       $ 483,645       $ 607,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $361 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

 

December 31, 2015

 
     Past due      Current      Covered
loans HIP [1]
 

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
       

Mortgage

   $ 31,413       $ 16,593       $ 83,132       $ 131,138       $ 495,964       $ 627,102   

Consumer

     1,246         444         1,283         2,973         16,040         19,013   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 32,659       $ 17,037       $ 84,415       $ 134,111       $ 512,004       $ 646,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $386 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

 

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The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at June 30, 2016 and December 31, 2015.

 

     June 30, 2016      December 31, 2015  

(In thousands)

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

Mortgage

   $ 3,335       $ —         $ 3,790       $ —     

Consumer

     147         —           97         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 3,482       $ —         $ 3,887       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

[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 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 $10 million at June 30, 2016 (December 31, 2015 - $10 million).

Loans acquired with deteriorated credit quality accounted for under ASC 310-30

The following provides information of loans acquired with evidence of credit deterioration as of the acquisition date, accounted for under the guidance of ASC 310-30.

Loans acquired from Westernbank as part of an FDIC-assisted transaction

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

 

     June 30, 2016 [1]     December 31, 2015 [1]  
     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

   $ 1,028,516      $ 14,844      $ 1,043,360      $ 1,114,368      $ 35,393      $ 1,149,761   

Commercial and industrial

     80,040        —          80,040        84,765        519        85,284   

Construction

     4,723        1,723        6,446        8,943        6,027        14,970   

Mortgage

     621,229        27,181        648,410        667,023        33,090        700,113   

Consumer

     20,105        1,582        21,687        23,047        1,326        24,373   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount

     1,754,613        45,330        1,799,943        1,898,146        76,355        1,974,501   

Allowance for loan losses

     (57,895     (9,100     (66,995     (59,753     (3,810     (63,563
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance

   $ 1,696,718      $ 36,230      $ 1,732,948      $ 1,838,393      $ 72,545      $ 1,910,938   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remains subject to the loss sharing agreement with the FDIC amounted to approximately $597 million as of June 30, 2016 and $636 million as of December 31, 2015.

The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.2 billion at June 30, 2016 (December 31, 2015 - $2.4 billion). At June 30, 2016, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

 

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Table of Contents

Changes in the carrying amount and the accretable yield for the Westernbank loans accounted pursuant to the ASC Subtopic 310-30, for the quarters and six months ended June 30, 2016 and 2015, were as follows:

 

     Activity in the accretable yield  
     Westernbank loans ASC 310-30  
     For the quarters ended  
     June 30, 2016     Total     June 30, 2015     Total  

(In thousands)

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

Beginning balance

   $ 1,118,276      $ 10,532      $ 1,128,808      $ 1,254,249      $ 4,699      $ 1,258,948   

Accretion

     (45,137     (3,339     (48,476     (50,228     (3,766     (53,994

Change in expected cash flows

     (11,168     2,516        (8,652     35,755        5,215        40,970   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,061,971      $ 9,709      $ 1,071,680      $ 1,239,776      $ 6,148      $ 1,245,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Activity in the accretable yield  
     Westernbank loans ASC 310-30  
     For the six months ended  
     June 30, 2016     Total     June 30, 2015     Total  

(In thousands)

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

Beginning balance

   $ 1,105,732      $ 6,726      $ 1,112,458      $ 1,265,752      $ 5,585      $ 1,271,337   

Accretion

     (87,137     (4,872     (92,009     (104,004     (5,687     (109,691

Change in expected cash flows

     43,376        7,855        51,231        78,028        6,250        84,278   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,061,971      $ 9,709      $ 1,071,680      $ 1,239,776      $ 6,148      $ 1,245,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30  
     For the quarters ended  
     June 30, 2016 [1]     Total     June 30, 2015     Total  

(In thousands)

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

Beginning balance

   $ 1,865,940      $ 69,501      $ 1,935,441      $ 2,211,781      $ 155,315      $ 2,367,096   

Accretion

     45,137        3,339        48,476        50,228        3,766        53,994   

Collections/loan sales/charge-offs[2]

     (156,464     (27,510     (183,974     (239,516     (44,496     (284,012
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,754,613      $ 45,330      $ 1,799,943      $ 2,022,493      $ 114,585      $ 2,137,078   

Allowance for loan losses

            

ASC 310-30 Westernbank loans

     (57,895     (9,100     (66,995     (42,503     (4,546     (47,049
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 1,696,718      $ 36,230      $ 1,732,948      $ 1,979,990      $ 110,039      $ 2,090,029   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $ 597 million as of June 30, 2016.
[2] For the quarter ended June 30, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 million.

 

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Table of Contents
     Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30  
     For the six months ended  
     June 30, 2016 [1]     June 30, 2015  
     Non-credit     Credit           Non-credit     Credit        
     impaired     impaired           impaired     impaired        

(In thousands)

   loans     loans     Total     loans     loans     Total  

Beginning balance

   $ 1,898,146      $ 76,355      $ 1,974,501      $ 2,272,142      $ 172,030      $ 2,444,172   

Accretion

     87,137        4,872        92,009        104,004        5,687        109,691   

Collections/loan sales/charge-offs[2]

     (230,670     (35,897     (266,567     (353,653     (63,132     (416,785
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,754,613      $ 45,330      $ 1,799,943      $ 2,022,493      $ 114,585      $ 2,137,078   

Allowance for loan losses

            

ASC 310-30 Westernbank loans

     (57,895     (9,100     (66,995     (42,503     (4,546     (47,049
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 1,696,718      $ 36,230      $ 1,732,948      $ 1,979,990      $ 110,039      $ 2,090,029   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $597 million as of June 30, 2016.
[2] For the quarter ended June 30, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 million.

Other loans acquired with deteriorated credit quality

The outstanding principal balance of other acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $710 million at June 30, 2016 (December 31, 2015 - $710 million). At June 30, 2016, none of the other acquired 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 other acquired loans accounted pursuant to the ASC Subtopic 310-30, for the quarters and six months ended June 30, 2016 and 2015 were as follows:

 

Activity in the accretable yield - other acquired loans ASC 310-30

 
     For the quarter ended      For the quarter ended  

(In thousands)

   June 30, 2016      June 30, 2015  

Beginning balance

   $ 267,768       $ 158,424   

Additions

     4,171         5,406   

Accretion

     (8,730      (4,633

Change in expected cash flows

     9,400         2,962   
  

 

 

    

 

 

 

Ending balance

   $ 272,609       $ 162,159   
  

 

 

    

 

 

 

Activity in the accretable yield - other acquired loans ASC 310-30

 
     For the six months ended      For the six months ended  

(In thousands)

   June 30, 2016      June 30, 2015  

Beginning balance

   $ 221,128       $ 116,304   

Additions

     8,511         56,068   

Accretion

     (17,285      (7,856

Change in expected cash flows

     60,255         (2,357
  

 

 

    

 

 

 

Ending balance

   $ 272,609       $ 162,159   
  

 

 

    

 

 

 

 

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Table of Contents

Carrying amount of other acquired loans accounted for pursuant to ASC 310-30

 
     For the quarter ended      For the quarter ended  

(In thousands)

   June 30, 2016      June 30, 2015  

Beginning balance

   $ 562,723         363,097   

Additions

     8,354         17,089   

Accretion

     8,730         4,633   

Collections and charge-offs

     (17,062      (16,532
  

 

 

    

 

 

 

Ending balance

   $ 562,745       $ 368,287   

Allowance for loan losses ASC 310-30 other acquired loans

     (16,059      (16,842
  

 

 

    

 

 

 

Ending balance, net of ALLL

   $ 546,686       $ 351,445   
  

 

 

    

 

 

 

Carrying amount of other acquired loans accounted for pursuant to ASC 310-30

 
     For the six months ended      For the six months ended  

(In thousands)

   June 30, 2016      June 30, 2015  

Beginning balance

   $ 564,050       $ 212,763   

Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note 5)

     (4,707      —     

Additions

     18,405         174,180   

Accretion

     17,285         7,856   

Collections and charge-offs

     (32,288      (26,512
  

 

 

    

 

 

 

Ending balance

   $ 562,745       $ 368,287   

Allowance for loan losses ASC 310-30 other acquired loans

     (16,059      (16,842
  

 

 

    

 

 

 

Ending balance, net of ALLL

   $ 546,686       $ 351,445   
  

 

 

    

 

 

 

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

 

(In thousands)

      

Contractually-required principal and interest

   $ 560,833   

Non-accretable difference

     112,153   
  

 

 

 

Cash flows expected to be collected

     448,680   

Accretable yield

     113,977   
  

 

 

 

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

   $ 334,703   
  

 

 

 

 

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Table of Contents

Note 10 – Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.

The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30, by 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 5-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.

For the period ended June 30, 2016, 51% (June 30, 2015 - 32%) of the ALLL for non-covered BPPR segment 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 other consumer, mortgage, commercial and industrial and commercial multi-family loan portfolios for 2016, and in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2015.

For the period ended June 30, 2016, 1% (June 30, 2015 - 19%) of the ALLL for BPNA segment 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 concentrated in the consumer loan portfolio for 2016 and in the commercial and industrial loan portfolio for 2015.

 

    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.

 

36


Table of Contents

The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the quarters and six months ended June 30, 2016 and 2015.

 

For the quarter ended June 30, 2016

 

Puerto Rico - Non-covered loans

 

(In thousands)

  Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

           

Beginning balance

  $ 197,590      $ 4,237      $ 124,500      $ 11,035      $ 135,785      $ 473,147   

Provision (reversal of provision)

    3,515        (4,772     25,688        (507     14,427        38,351   

Charge-offs

    (24,489     (1,531     (13,950     (879     (26,011     (66,860

Recoveries

    18,842        4,757        486        445        6,108        30,638   

Net recoveries (write-downs)

    4,369        914        —          —          162        5,445   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 199,827      $ 3,605      $ 136,724      $ 10,094      $ 130,471      $ 480,721   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

  $ 53,350      $ 116      $ 42,106      $ 548      $ 24,167      $ 120,287   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

  $ 146,477      $ 3,489      $ 94,618      $ 9,546      $ 106,304      $ 360,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

           

Impaired non-covered loans

  $ 335,881      $ 1,036      $ 476,161      $ 2,110      $ 109,130      $ 924,318   

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

    6,881,171        102,606        5,544,401        661,984        3,212,552        16,402,714   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans held-in-portfolio

  $ 7,217,052      $ 103,642      $ 6,020,562      $ 664,094      $ 3,321,682      $ 17,327,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended June 30, 2016

 

Puerto Rico - Covered loans

 

(In thousands)

  Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

           

Beginning balance

  $ —        $ —        $ 29,822      $ —        $ 223      $ 30,045   

Provision (reversal of provision)

    —          —          828        —          (24     804   

Charge-offs

    —          —          (884     —          427        (457

Recoveries

    —          —          185        —          4        189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ —        $ —        $ 29,951      $ —&