UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For the Quarterly Period ended June 30, 2008
Commission File: 001-15849
SANTANDER BANCORP
(Exact name of Corporation as specified in its charter)
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Commonwealth of Puerto Rico
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66-0573723
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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207 Ponce de León Avenue, Hato Rey, Puerto Rico
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00917
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(787) 777-4100
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. Yes
þ
No
o
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 the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).Yes
o
No
þ
Indicate the number of shares outstanding of each of the Registrants classes of common stock as of
the last practicable date.
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Title of each class
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Outstanding as of June 30, 2008
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Common Stock, $2.50 par value
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46,639,104
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SANTANDER BANCORP
CONTENTS
Forward-Looking Statements
. When used in this Form 10-Q or future filings by Santander BanCorp
(the Corporation) with the Securities and Exchange Commission, in the Corporations press
releases or other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the word or phrases would be, will allow, intends
to, will likely result, are expected to, will continue, is anticipated, estimate,
project, believe, or similar expressions are intended to identify forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
The future results of the Corporation could be affected by subsequent events and could differ
materially from those expressed in forward-looking statements. If future events and actual
performance differ from the Corporations assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements.
The Corporation wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise readers that
various factors, including regional and national conditions, substantial changes in levels of
market interest rates, credit and other risks of lending and investment activities, competitive and
regulatory factors and legislative changes, could affect the Corporations financial performance
and could cause the Corporations actual results for future periods to differ materially from those
anticipated or projected. The Corporation does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or unanticipated events
or circumstances after the date of such statements.
PART I ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF JUNE 30, 2008 AND DECEMBER 31, 2007
(Dollars in thousands, except share data)
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June 30,
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December 31,
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2008
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2007
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ASSETS
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Cash and Cash Equivalents:
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Cash and due from banks
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$
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148,441
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$
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118,096
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Interest-bearing deposits
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3,228
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1,167
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Federal funds sold and securities purchased under agreements to resell
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168,597
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82,434
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Total cash and cash equivalents
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320,266
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201,697
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Interest-Bearing Deposits
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7,866
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5,439
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Trading Securities,
at fair value:
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Securities pledged that can be repledged
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8,879
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15,965
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Other trading securities
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60,506
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52,535
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Total trading securities
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69,385
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68,500
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Investment Securities Available for Sale,
at fair value:
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Securities pledged that can be repledged
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624,458
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667,361
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Other investment securities available for sale
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502,951
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600,837
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Total investment securities available for sale
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1,127,409
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1,268,198
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Other Investment Securities,
at amortized cost
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56,907
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64,559
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Loans Held for Sale,
net
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136,745
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141,902
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Loans,
net
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6,488,259
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6,769,478
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Accrued Interest Receivable
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53,631
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80,029
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Premises and Equipment,
net
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30,553
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29,523
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Goodwill
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121,482
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121,482
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Intangible Assets
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29,949
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30,203
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Other Assets
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396,239
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379,203
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$
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8,838,691
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$
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9,160,213
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LIABILITIES AND STOCKHOLDERS EQUITY
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Deposits:
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Non interest-bearing
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$
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754,371
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$
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755,457
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Interest-bearing, including $285.5 million at fair value in 2008
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5,223,885
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4,405,246
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Total deposits
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5,978,256
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5,160,703
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Federal Funds Purchased and other borrowings
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53,790
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707,110
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Securities Sold Under Agreements to Repurchase
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583,875
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635,597
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Commercial Paper Issued
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49,779
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284,482
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Federal Home Loan Bank Advances
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1,080,000
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1,245,000
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Term Notes, net
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19,665
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19,371
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Subordinated Capital Notes,
including $116.0 million at fair value in 2008
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240,067
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247,170
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Accrued Interest Payable
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46,810
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77,356
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Other Liabilities
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225,363
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246,888
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Total liabilities
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8,277,605
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8,623,677
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Contingencies and Commitments (Notes 10, 12, 13, 14 and 16)
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STOCKHOLDERS EQUITY:
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Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued and
outstanding
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Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued;
46,639,104 shares outstanding
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126,626
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126,626
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Capital paid in excess of par value
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316,065
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308,373
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Treasury stock at cost, 4,011,260 shares
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(67,552
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)
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(67,552
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)
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Accumulated other comprehensive loss, net of tax
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(25,747
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)
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(24,478
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)
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Retained earnings:
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Reserve fund
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139,250
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139,250
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Undivided profits
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72,444
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54,317
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Total stockholders equity
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561,086
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536,536
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$
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8,838,691
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$
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9,160,213
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The accompanying notes are an integral part of these condensed consolidated financial statements
1
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands, except per share data)
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For the six months ended
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For the three months ended
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June 30,
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June 30,
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Interest Income:
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Loans
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$
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281,807
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$
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298,189
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$
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138,137
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$
|
149,834
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Investment securities
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|
27,316
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|
|
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33,649
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|
|
|
13,196
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|
|
|
16,742
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Interest-bearing deposits
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|
|
576
|
|
|
|
2,260
|
|
|
|
126
|
|
|
|
1,110
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Federal funds sold and securities purchased under agreements to resell
|
|
|
2,765
|
|
|
|
1,222
|
|
|
|
1,977
|
|
|
|
556
|
|
|
|
|
|
|
|
|
|
|
|
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Total interest income
|
|
|
312,464
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|
|
|
335,320
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|
|
|
153,436
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|
168,242
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|
|
|
|
|
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|
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Interest Expense:
|
|
|
|
|
|
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|
|
|
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|
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|
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Deposits
|
|
|
80,168
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|
|
|
92,828
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|
|
|
40,963
|
|
|
|
46,864
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|
Securities sold under agreements to repurchase and other borrowings
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|
49,807
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|
|
|
77,007
|
|
|
|
18,249
|
|
|
|
39,229
|
|
Subordinated capital notes
|
|
|
6,844
|
|
|
|
7,886
|
|
|
|
3,179
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|
|
|
3,952
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|
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|
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Total interest expense
|
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|
136,819
|
|
|
|
177,721
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|
|
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62,391
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|
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90,045
|
|
|
|
|
|
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|
|
|
|
|
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|
|
Net interest income
|
|
|
175,645
|
|
|
|
157,599
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|
|
|
91,045
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|
|
|
78,197
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|
Provision for Loan Losses
|
|
|
78,090
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|
|
|
52,874
|
|
|
|
38,515
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|
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30,850
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|
|
|
|
|
|
|
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|
|
|
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Net interest income after provision for loan losses
|
|
|
97,555
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|
|
|
104,725
|
|
|
|
52,530
|
|
|
|
47,347
|
|
|
|
|
|
|
|
|
|
|
|
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Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Bank service charges, fees and other
|
|
|
23,525
|
|
|
|
24,452
|
|
|
|
11,101
|
|
|
|
12,134
|
|
Broker-dealer, asset management and insurance fees
|
|
|
41,973
|
|
|
|
32,369
|
|
|
|
19,986
|
|
|
|
16,081
|
|
Gain on sale of securities
|
|
|
2,874
|
|
|
|
238
|
|
|
|
|
|
|
|
49
|
|
Gain on sale of loans
|
|
|
2,267
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|
|
|
4,338
|
|
|
|
829
|
|
|
|
1,990
|
|
Other income (loss)
|
|
|
12,716
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|
|
|
4,568
|
|
|
|
(920
|
)
|
|
|
1,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
83,355
|
|
|
|
65,965
|
|
|
|
30,996
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|
|
|
31,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
61,512
|
|
|
|
65,902
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|
|
|
31,525
|
|
|
|
34,073
|
|
Occupancy costs
|
|
|
13,222
|
|
|
|
11,488
|
|
|
|
6,806
|
|
|
|
5,914
|
|
Equipment expenses
|
|
|
2,252
|
|
|
|
2,241
|
|
|
|
1,059
|
|
|
|
1,076
|
|
EDP servicing, amortization and technical assistance
|
|
|
21,061
|
|
|
|
18,074
|
|
|
|
10,883
|
|
|
|
8,640
|
|
Communication expenses
|
|
|
5,181
|
|
|
|
5,451
|
|
|
|
2,646
|
|
|
|
2,766
|
|
Business promotion
|
|
|
3,786
|
|
|
|
8,000
|
|
|
|
1,821
|
|
|
|
4,548
|
|
Other taxes
|
|
|
6,756
|
|
|
|
4,948
|
|
|
|
3,349
|
|
|
|
1,843
|
|
Other operating expenses
|
|
|
33,919
|
|
|
|
29,697
|
|
|
|
18,156
|
|
|
|
14,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
147,689
|
|
|
|
145,801
|
|
|
|
76,245
|
|
|
|
73,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income tax
|
|
|
33,221
|
|
|
|
24,889
|
|
|
|
7,281
|
|
|
|
5,505
|
|
Provision for Income Tax
|
|
|
8,983
|
|
|
|
9,064
|
|
|
|
765
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
|
$
|
24,238
|
|
|
$
|
15,825
|
|
|
$
|
6,516
|
|
|
$
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings per Common Share
|
|
$
|
0.52
|
|
|
$
|
0.34
|
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
2
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND YEAR ENDED DECEMBER 31, 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
Year ended
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
126,626
|
|
|
$
|
126,626
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
126,626
|
|
|
|
126,626
|
|
|
|
|
|
|
|
|
Capital Paid in Excess of Par Value:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
308,373
|
|
|
|
304,171
|
|
Capital contribution
|
|
|
7,692
|
|
|
|
4,202
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
316,065
|
|
|
|
308,373
|
|
|
|
|
|
|
|
|
Treasury Stock at cost:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, net of tax:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(24,478
|
)
|
|
|
(44,213
|
)
|
Unrealized net (loss) gain on investment securities available
for sale, net of tax
|
|
|
(1,745
|
)
|
|
|
18,227
|
|
Unrealized net gain (loss) on cash flow hedges, net of tax
|
|
|
476
|
|
|
|
(1,023
|
)
|
Change in retirement plans funded status, net of tax
|
|
|
|
|
|
|
2,531
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
(25,747
|
)
|
|
|
(24,478
|
)
|
|
|
|
|
|
|
|
Reserve Fund:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
139,250
|
|
|
|
137,511
|
|
Transfer from undivided profits
|
|
|
|
|
|
|
1,739
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
139,250
|
|
|
|
139,250
|
|
|
|
|
|
|
|
|
Undivided Profits:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
54,317
|
|
|
|
122,677
|
|
Net income (loss)
|
|
|
24,238
|
|
|
|
(36,245
|
)
|
Transfer to reserve fund
|
|
|
|
|
|
|
(1,739
|
)
|
Deferred tax benefit amortization
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Common stock cash dividends
|
|
|
(9,328
|
)
|
|
|
(29,849
|
)
|
Cumulative effect of the adoption of SFAS 159 (See notes 1,
12 and 18)
|
|
|
3,219
|
|
|
|
|
|
Cumulative effect of the adoption of FIN No. 48 (See note 11)
|
|
|
|
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
72,444
|
|
|
|
54,317
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
561,086
|
|
|
$
|
536,536
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
3
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
For the three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,238
|
|
|
$
|
15,825
|
|
|
|
6,516
|
|
|
$
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on investment securities available for sale, net of tax
|
|
|
(2,149
|
)
|
|
|
(8,280
|
)
|
|
|
(12,124
|
)
|
|
|
(11,395
|
)
|
Reclassification adjustment for gains (losses) included in net income, net of tax
maturity category, net of amortization
|
|
|
404
|
|
|
|
|
|
|
|
735
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net loss on investment securities available for sale, net of tax
|
|
|
(1,745
|
)
|
|
|
(8,280
|
)
|
|
|
(11,389
|
)
|
|
|
(11,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gain on cash flow hedges, net of tax
|
|
|
476
|
|
|
|
531
|
|
|
|
1,593
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss, net of tax
|
|
|
(1,269
|
)
|
|
|
(7,749
|
)
|
|
|
(9,796
|
)
|
|
|
(10,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
22,969
|
|
|
$
|
8,076
|
|
|
|
(3,280
|
)
|
|
$
|
(6,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
4
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,238
|
|
|
$
|
15,825
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,797
|
|
|
|
8,324
|
|
Deferred tax benefit
|
|
|
(6,330
|
)
|
|
|
(9,097
|
)
|
Provision for loan losses
|
|
|
78,090
|
|
|
|
52,874
|
|
Gain on sale of securities
|
|
|
(2,874
|
)
|
|
|
(238
|
)
|
Gain on sale of loans
|
|
|
(2,267
|
)
|
|
|
(4,338
|
)
|
Gain on sale of mortgage-servicing rights
|
|
|
|
|
|
|
(168
|
)
|
(Gain) loss on derivatives
|
|
|
(1,304
|
)
|
|
|
758
|
|
Trading gains
|
|
|
(1,994
|
)
|
|
|
(1,241
|
)
|
Valuation loss on loans held for sale
|
|
|
4,017
|
|
|
|
|
|
Net discount accretion on securities
|
|
|
(2,398
|
)
|
|
|
(2,534
|
)
|
Net premium (discount) amortization (accretion) on loans
|
|
|
146
|
|
|
|
(1,416
|
)
|
Share-based compensation
|
|
|
7,691
|
|
|
|
7,982
|
|
Purchases and originations of loans held for sale
|
|
|
(214,936
|
)
|
|
|
(332,806
|
)
|
Proceeds from sales of loans
|
|
|
162,134
|
|
|
|
171,532
|
|
Repayments of loans held for sale
|
|
|
11,320
|
|
|
|
14,612
|
|
Proceeds from sales of trading securities
|
|
|
5,633,201
|
|
|
|
1,199,498
|
|
Purchases of trading securities
|
|
|
(5,599,000
|
)
|
|
|
(1,201,459
|
)
|
Decrease in accrued interest receivable
|
|
|
26,398
|
|
|
|
22,909
|
|
(Increase) decrease in other assets
|
|
|
(28,583
|
)
|
|
|
832
|
|
Decrease in accrued interest payable
|
|
|
(30,546
|
)
|
|
|
(18,366
|
)
|
Decrease in other liabilities
|
|
|
(3,356
|
)
|
|
|
(11,079
|
)
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
37,206
|
|
|
|
(103,421
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
61,444
|
|
|
|
(87,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
(Decrease) increase in interest-bearing deposits
|
|
|
(2,427
|
)
|
|
|
1,455
|
|
Proceeds from sales of investment securities available for sale
|
|
|
128,158
|
|
|
|
20,301
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
7,797,759
|
|
|
|
16,919,244
|
|
Purchases of investment securities available for sale
|
|
|
(7,825,616
|
)
|
|
|
(16,910,514
|
)
|
Purchases of other investments
|
|
|
7,652
|
|
|
|
551
|
|
Repayment of securities and securities called
|
|
|
44,041
|
|
|
|
51,156
|
|
Payments on derivative transactions
|
|
|
(1,497
|
)
|
|
|
|
|
Net decrease in loans
|
|
|
214,952
|
|
|
|
53,578
|
|
Proceeds from sales of mortgage-servicing rights
|
|
|
|
|
|
|
168
|
|
Purchases of premises and equipment
|
|
|
(4,618
|
)
|
|
|
(1,117
|
)
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
358,404
|
|
|
|
134,822
|
|
|
|
|
|
|
|
|
(Continued)
The accompanying notes are an integral part of these condensed consolidated financial statements
5
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
|
815,281
|
|
|
|
(30,459
|
)
|
Net decrease in federal funds purchased and other borrowings
|
|
|
(818,320
|
)
|
|
|
(46,900
|
)
|
Net decrease in securities sold under agreements to repurchase
|
|
|
(51,722
|
)
|
|
|
(61,738
|
)
|
Net (decrease) increase in commercial paper issued
|
|
|
(234,703
|
)
|
|
|
173,113
|
|
Net increase in term notes
|
|
|
294
|
|
|
|
620
|
|
Net increase in subordinated capital notes
|
|
|
17
|
|
|
|
26
|
|
Dividends paid
|
|
|
(12,126
|
)
|
|
|
(14,924
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(301,279
|
)
|
|
|
19,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
118,569
|
|
|
|
66,964
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
201,697
|
|
|
|
199,264
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
320,266
|
|
|
$
|
266,228
|
|
|
|
|
|
|
|
|
Concluded
The accompanying notes are an integral part of these condensed consolidated financial statements
6
SANTANDER BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
1. Summary of Significant Accounting Policies:
The accounting and reporting policies of Santander BanCorp (the Corporation), a 91% owned
subsidiary of Banco Santander, S.A. (Santander Spain) conform with accounting principles
generally accepted in the United States of America (hereinafter referred to as generally accepted
accounting principles or GAAP) and with general practices within the financial services
industry. The unaudited condensed consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules
and regulations. The results of the operations and cash flows for the six month periods ended June
30, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year.
These statements should be read in conjunction with the consolidated financial statements
included in the Corporations Form 10-K for the year ended December 31, 2007. The accounting
policies used in preparing these condensed consolidated financial statements are substantially the
same as those described in Note 1 to the 2007 consolidated financial statements in the
Corporations Form 10-K.
Following is a summary of the Corporations most significant policies:
Nature of Operations and Use of Estimates
Santander BanCorp is a financial holding company offering a full range of financial services
(including mortgage banking) through its wholly owned banking subsidiary Banco Santander Puerto
Rico and subsidiary (the Bank). The Corporation also engages in broker-dealer, asset management,
consumer finance, international banking, insurance agency services and insurance products through
its subsidiaries, Santander Securities Corporation, Santander Asset Management Corporation,
Santander Financial Services, Inc. (Island Finance), Santander International Bank and Santander
Insurance Agency and Island Insurance Corporation (currently inactive), respectively.
Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations,
supervision, and examination of the Federal Reserve Board.
In preparing the condensed consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses, impairment of goodwill and
other intangibles, income taxes, and the valuation of foreclosed real estate, deferred tax assets
and financial instruments.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Corporation, the
Bank and the Banks wholly owned subsidiary, Santander International Bank; Santander Securities
Corporation and its wholly owned subsidiary, Santander Asset Management Corporation; Santander
Financial Services, Inc., Santander Insurance Agency and Island Insurance Corporation. All
significant intercompany balances and transactions have been eliminated in consolidation. Effective
January 1, 2008, Santander Mortgage Corporation ( a wholly owned subsidiary of the Bank) was merged
into the Bank and ceased to operate as a separate legal entity.
Securities Purchased/Sold under Agreements to Resell/Repurchase
Repurchase and resell agreements are treated as collateralized financing transactions and are
carried at the amounts at which the assets will be subsequently reacquired or resold.
The counterparties to securities purchased under resell agreements maintain effective control
over such securities and accordingly, those securities are not reflected in the Corporations
condensed consolidated balance sheets. The Corporation
7
monitors the market value of the underlying securities as compared to the related receivable,
including accrued interest, and requests additional collateral where deemed appropriate.
The Corporation maintains effective control over assets sold under agreements to repurchase;
accordingly, such securities continue to be carried on the condensed consolidated balance sheets.
Investment Securitie
s
Investment securities are classified in four categories and accounted for as follows:
|
|
|
Debt securities that the Corporation has the intent and ability to hold to maturity are
classified as securities held to maturity and reported at cost adjusted for premium
amortization and discount accretion. The Corporation may not sell or transfer
held-to-maturity securities without calling into question its intent to hold other
securities to maturity, unless a nonrecurring or unusual event that could not have been
reasonably anticipated has occurred.
|
|
|
|
|
Debt and equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported at fair
value with unrealized gains and losses included in the condensed consolidated statements of
income as part of the other income. Financial instruments including, to a limited extent,
derivatives, such as option contracts, are used by the Corporation in dealing and other
trading activities and are carried at fair value. Interest revenue and expense arising from
trading instruments are included in the condensed consolidated statements of income as part
of net interest income.
|
|
|
|
|
Debt and equity securities not classified as either securities held to maturity or
trading securities, and which have a readily available fair value, are classified as
securities available for sale and reported at fair value, with unrealized gains and losses
reported, net of tax, in accumulated other comprehensive income (loss). The specific
identification method is used to determine realized gains and losses on sales of securities
available for sale, which are included in gain (loss) on sale of investment securities in
the condensed consolidated statements of income.
|
|
|
|
|
Investments in debt, equity or other securities, that do not have readily determinable
fair values, are classified as other investment securities in the condensed consolidated
balance sheets. These securities are stated at cost. Stock that is owned by the
Corporation to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB)
stock, is included in this category.
|
The amortization of premiums is deducted and the accretion of discounts is added to net
interest income based on a method which approximates the interest method, over the outstanding life
of the related securities. The cost of securities sold is determined by specific identification.
For securities available for sale, held to maturity and other investment securities, the
Corporation reports separately in the condensed consolidated statements of income, net realized
gains or losses on sales of investment securities and unrealized loss valuation adjustments
considered other than temporary, if any.
Derivative Financial Instruments
The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows.
All of the Corporations derivative instruments are recognized as assets and liabilities at
fair value. If certain conditions are met, the derivative may qualify for hedge accounting
treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized firm commitment
(fair value hedge); (b) a hedge of the exposure to variability of cash flows of a recognized
asset, liability or forecasted transaction (cash flow hedge) or (c) a hedge of foreign currency
exposure (foreign currency hedge).
Prior to the adoption of Statement of Financial Accounting Standard (SFAS ) No. 159,
, Fair
Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB
Statements No. 115
, in the case of a qualifying fair value hedge, changes in the value of the
derivative instruments that have been highly effective were recognized in current period condensed
consolidated statements of income along with the change in value of the designated hedged item
attributable to the risk being hedged. If the hedge relationship was terminated, hedge accounting
was discontinued and any balance related to the derivative was recognized in current operations,
and the fair value adjustment to the hedged item continued to be reported as part of the basis of
the item and was amortized to earnings as a yield adjustment. The Corporation hedges certain
callable brokered certificates of deposits and subordinated capital notes by using interest rate
swaps. Prior to the adoption of SFAS 159 as of January 1, 2008, these swaps were designated for the
hedge accounting treatment under SFAS 133,
Accounting for Derivatives Instruments and Hedging
Activities
as amended and interpreted (SFAS 133). These financial instruments were
8
accounted for as fair value hedges, with changes in the fair value of both the derivative and the
hedged item included in other income and the interest included in net interest income in the
condensed consolidated statements of income. In connection with the adoption of SFAS 159 the
Corporation carries certain callable brokered certificates of deposits and subordinated capital
notes at fair value with changes in fair value included in other income in the condensed
consolidated statements of income. The cost of funding on the Corporations borrowings, as well as
derivatives, continue to be included in interest expense and income, as applicable, in the
condensed consolidated statements of income. See Note 12 of the condensed consolidated financial
statements for more information.
In the case of a qualifying cash flow hedge, changes in the value of the derivative
instruments that have been highly effective are recognized in other comprehensive income, until
such time as those earnings are affected by the variability of the cash flows of the underlying
hedged item. If the hedge relationship is terminated, the net derivative gain or loss related to
the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive
income (loss) and would be reclassified into earnings when the cash flows that were hedged occur,
or when the forecasted transaction affects earnings or is no longer expected to occur. In either a
fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in
the value of the derivative instruments do not perfectly offset changes in the value of the hedged
items. If the derivative is not designated as a hedging instrument, the changes in fair value of
the derivative are recorded in condensed consolidated statements of income.
Certain contracts contain embedded derivatives. When the embedded derivative possesses
economic characteristics that are not clearly and closely related to the economic characteristics
of the host contract, it is bifurcated, carried at fair value, and designated as a trading or
non-hedging derivative instrument.
Loans Held for Sale
Loans held for sale are recorded at the lower of cost or market computed on the aggregate
portfolio basis. The amount, by which cost exceeds market value, if any, is accounted for as a
valuation allowance with changes included in the determination of net income for the period in
which the change occurs. The amount of loan origination cost and fees are deferred at origination
of the loans and recognized as part of the gain and loss on sale of the loans in the condensed
consolidated statement of income as part of other income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the
allowance for loan losses, unearned finance charges and any deferred fees or costs on originated
loans.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and amortized using methods that approximate the
interest method over the term of the loans as an adjustment to interest yield. Discounts and
premiums on purchased loans are amortized to results of operations over the expected lives of the
loans using a method that approximates the interest method.
The accrual of interest on commercial loans, construction loans, lease financing and
closed-end consumer loans is discontinued when, in managements opinion, the borrower may be unable
to meet payments as they become due, but in no event is it recognized after 90 days in arrears on
payments of principal or interest. Interest on mortgage loans is not recognized after four months
in arrears on payments of principal or interest. Income is generally recognized on open-end
(revolving credit) consumer loans until the loans are charged off. When interest accrual is
discontinued, unpaid interest is reversed on all closed-end portfolios. Interest income is
subsequently recognized only to the extent that it is received. The non accrual status is
discontinued when loans are made current by the borrower.
The Corporation leases vehicles and equipment to individual and corporate customers. The
finance method of accounting is used to recognize revenue on lease contracts that meet the criteria
specified in Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases,
as amended. Aggregate rentals due over the term of the leases less unearned income are included in
lease receivable, which is part of Loans, net in the condensed consolidated balance sheets.
Unearned income is amortized to results of operations over the lease term so as to yield a constant
rate of return on the principal amounts outstanding. Lease origination fees and costs are deferred
and amortized over the average life of the portfolio as an adjustment to yield.
9
Off-Balance Sheet Instruments
In the ordinary course of business, the Corporation enters into off-balance sheet instruments
consisting of commitments to extend credit, stand by letters of credit and financial guarantees.
Such financial instruments are recorded in the condensed consolidated financial statements when
they are funded or when related fees are incurred or received. The Corporation periodically
evaluates the credit risks inherent in these commitments, and establishes loss allowances for such
risks if and when these are deemed necessary.
The Corporation recognized as liabilities the fair value of the obligations undertaken in
issuing the guarantees under the standby letters of credit issued or modified after December 31,
2002, net of the related amortization at inception. The fair value approximates the unamortized
fees received from the customers for issuing the standby letters of credit. The fees are deferred
and recognized on a straight-line basis over the commitment period. Standby letters of credit
outstanding at June 30, 2008 had terms ranging from one month to five years.
Fees received for providing loan commitments and letters of credit that result in loans are
typically deferred and amortized to interest income over the life of the related loan, beginning
with the initial borrowing. Fees on commitments and letters of credit are amortized to other
income as banking fees and commissions over the commitment period when funding is not expected.
Allowance for Loan Losses
The allowance for loan losses is a current estimate of the losses inherent in the present
portfolio based on managements ongoing quarterly evaluations of the loan portfolio. Estimates of
losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the estimation process,
managements estimate of credit losses in the loan portfolio and the related allowance may change
in the near term.
The Corporation follows a systematic methodology to establish and evaluate the adequacy of the
allowance for loan losses. This methodology consists of several key elements.
Larger commercial, construction loans and certain mortgage loans that exhibit potential or
observed credit weaknesses are subject to individual review. Where appropriate, allowances are
allocated to individual loans based on managements estimate of the borrowers ability to repay the
loan given the availability of collateral, other sources of cash flow and legal options available
to the Corporation.
Included in the review of individual loans are those that are impaired as defined by GAAP. Any
allowances for loans deemed impaired are measured based on the present value of expected future
cash flows discounted at the loans effective interest rate or on the fair value of the underlying
collateral if the loan is collateral dependent. Commercial business, commercial real estate,
construction and mortgage loans exceeding a predetermined monetary threshold are individually
evaluated for impairment. Other loans are evaluated in homogeneous groups and collectively
evaluated for impairment. Loans that are recorded at fair value or at the lower of cost or fair
value are not evaluated for impairment. Impaired loans for which the discounted cash flows,
collateral value or fair value exceeds its carrying value do not require an allowance. The
Corporation evaluates the collectibility of both principal and interest when assessing the need for
loss accrual.
Historical loss rates are applied to other commercial loans not subject to individual review.
The loss rates are derived from historical loss trends.
Homogeneous loans, such as consumer installment, credit card, residential mortgage and
consumer finance are not individually risk graded. Allowances are established for each pool of
loans based on the expected net charge-offs for one year. Loss rates are based on the average net
charge-off history by loan category, market loss trends and other relevant economic factors.
An unallocated allowance is maintained to recognize the imprecision in estimating and
measuring loss when evaluating allowances for individual loans or pools of loans.
Historical loss rates for commercial and consumer loans may also be adjusted for significant
factors that, in managements judgment, reflect the impact of any current condition on loss
recognition. Factors which management considers in
10
the analysis include the effect of the national and local economies, trends in the nature and
volume of loans (delinquencies, charge-offs, non-accrual and problem loans), changes in the
internal lending policies and credit standards, collection practices, and examination results from
bank regulatory agencies and the Corporations internal credit examiners.
Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted
as necessary based on changing borrower and/or collateral conditions and actual collection and
charge-off experience.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Transfers of financial assets are accounted for as sales, when control over the transferred
assets is deemed to be surrendered: (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase them before their
maturity. The Corporation recognizes the financial assets and servicing assets it controls and the
liabilities it has incurred. At the same time, it ceases to recognize financial assets when control
has been surrendered and liabilities when they are extinguished.
Goodwill and Intangible Assets
The Corporation accounts for goodwill in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. The reporting units are tested for impairment annually to determine whether
their carrying value exceeds their fair market value. Should this be the case, the value of
goodwill or indefinite-lived intangibles may be impaired and written down. Goodwill and other
indefinite lived intangible assets are also tested for impairment on an interim basis if an event
occurs or circumstances change between annual tests that would more likely than not reduce the fair
value of the reporting unit below its carrying amount. If there is a determination that the fair
value of the goodwill or other identifiable intangible asset is less than the carrying value, an
impairment loss is recognized in an amount equal to the difference. Impairment losses, if any, are
reflected in operating expenses in the condensed consolidated statement of income.
In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets, the Corporation reviews finite-lived intangible assets for impairment whenever an event
occurs or circumstances change which indicate that the carrying amount of such assets may not be
fully recoverable. Determination of recoverability is based on the estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition. Measurement of an
impairment loss is based on the fair value of the asset compared to its carrying value. If the fair
value of the asset is determined to be less that the carrying value, an impairment loss is incurred
in the amount equal to the difference. Impairment losses, if any, are reflected in operation
expenses in the condensed consolidated statements of income.
The Corporation uses judgment in assessing goodwill and intangible assets for impairment.
Estimates of fair value are based on projections of revenues, operating costs and cash flows of
each reporting unit considering historical and anticipated future results, general economic and
market conditions as well as the impact of planned business or operational strategies. The
valuations employ a combination of present value techniques to measure fair value and consider
market factors. Generally, the Corporation engages third party specialists to assist with its
valuations. Additionally, judgment is used in determining the useful lives of finite-lived
intangible assets. Changes in judgments and projections could result in a significantly different
estimate of the fair value of the reporting units and could result in an impairment of goodwill.
The Corporation has not adopted SFAS 157 for fair value measurement of goodwill and intangible
assets pursuant FASB Staff Position (FSP) FAS 157-2
Effective Date of FASB Statement No. 157
issued in February 2008.
As a result of the purchase price allocations from prior acquisitions and the Corporations
decentralized structure, goodwill is included in multiple reporting units. Due to certain factors
such as the highly competitive environment, cyclical nature of the business in some of the
reporting units, general economic and market conditions as well as planned business or operational
strategies, among others, the profitability of the Corporations individual reporting units may
periodically suffer from downturns in these factors. These factors may have a relatively more
pronounced impact on the individual reporting units as compared to the Corporation as a whole and
might adversely affect the fair value of the reporting units. If material adverse conditions occur
that impact the Corporations reporting units, the Corporations reporting units, and the related
goodwill would need to be written down to an amount considered recoverable.
Mortgage-servicing Rights
The Corporations mortgage-servicing rights (MSRs) are stated at the lower of carrying value
or fair value at each balance sheet date. On a quarterly basis the Corporation evaluates its MSRs
for impairment and charges any such impairment to current period earnings. In order to evaluate
its MSRs the Corporation stratifies the related mortgage loans on the basis of their
11
risk characteristics which have been determined to be: type of loan (government-guaranteed,
conventional, conforming and non-conforming), interest rates and maturities. Impairment of MSRs is
determined by estimating the fair value of each stratum and comparing it to its carrying value. No
impairment loss was recognized for the six months ended June 30, 2008 and 2007.
MSRs are also subject to periodic amortization. The amortization of MSRs is based on the
amount and timing of estimated cash flows to be recovered with respect to the MSRs over their
expected lives. Amortization may be accelerated or decelerated to the extent that changes in
interest rates or prepayment rates warrant.
Mortgage Banking
Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments
and related accounting reports to investors, collecting escrow deposits for the payment of
mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due.
No asset or liability is recorded by the Corporation for mortgages serviced, except for
mortgage-servicing rights arising from the sale of mortgages, advances to investors and escrow
advances.
The Corporation recognizes as a separate asset the right to service mortgage loans for others
whenever those servicing rights are acquired. The Corporation acquires MSRs by purchasing or
originating loans and selling or securitizing those loans (with the servicing rights retained) and
allocates the total cost of the mortgage loans sold to the MSRs (included in intangible assets in
the accompanying condensed consolidated balance sheets) and the loans based on their relative fair
values. Further, mortgage-servicing rights are assessed for impairment based on the fair value of
those rights. MSRs are amortized over the estimated life of the related servicing income.
Mortgage loan-servicing fees, which are based on a percentage of the principal balances of the
mortgages serviced, are credited to income as mortgage payments are collected.
Mortgage loans serviced for others are not included in the accompanying condensed consolidated
balance sheets. At June 30, 2008 and December 31, 2007, the unpaid principal balances of mortgage
loans serviced for others amounted to approximately $1,157,000,000 and $1,056,000,000,
respectively. In connection with these mortgage-servicing activities, the Corporation administered
escrow and other custodial funds which amounted to approximately $3,563,000 and $3,254,000 at June
30, 2008 and December 31, 2007, respectively.
Trust Services
In connection with its trust activities, the Corporation administers and is custodian of
assets amounting to approximately $225,000,000 and $1,113,000,000 at June 30, 2008 and at December
31, 2007, respectively. Due to the nature of trust activities, these assets are not included in
the Corporations condensed consolidated balance sheets. Since December 31, 2006, when the
Corporation sold to an unaffiliated third party the servicing rights for certain trust accounts,
the Corporations Trust Division is focusing its efforts on transfer and paying agent and
Individual Retirement Account (IRA) services.
Broker-dealer and Asset Management Commissions
Commissions of the Corporations broker-dealer operations are composed of brokerage commission
income and expenses recorded on a trade date basis and proprietary securities transactions recorded
on a trade date basis. Investment banking revenues include gains, losses and fees net of syndicate
expenses, arising from securities offerings in which the Corporation acts as an underwriter or
agent. Investment banking management fees are recorded on offering date, sales concessions on trade
date, and underwriting fees at the time the underwriting is completed and the income is reasonably
determinable. Revenues from portfolio and other management and advisory fees include fees and
advisory charges resulting from the asset management of certain funds and are recognized over the
period when services are rendered.
Insurance Commissions
The Corporations insurance agency operation earns commissions on the sale of insurance
policies issued by unaffiliated insurance companies. Commission revenue is reported net of the
provision for commission returns on insurance policy cancellations, which is based on managements
estimate of future insurance policy cancellations as a result of historical turnover rates by types
of credit facilities subject to insurance.
12
Income Taxes
The Corporation uses the asset and liability balance sheet method for the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have
been recognized in the Corporations financial statements or tax returns. Deferred income tax
assets and liabilities are determined for differences between financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in the future. The
computation is based on enacted tax laws and rates applicable to periods in which the temporary
differences are expected to be recovered or settled. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.
The Corporation accounts for uncertain tax positions in accordance with FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Accordingly, the Corporation
reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any,
related to unrecognized tax benefits in income tax expense.
Earnings Per Common Share
Basic and diluted earnings per common share are computed by dividing net income available to
common stockholders, by the weighted average number of common shares outstanding during the period.
The Corporations average number of common shares outstanding, used in the computation of earnings
per common share was 46,639,104 for each of the quarters ended June 30, 2008 and 2007. Basic and
diluted earnings per common share are the same since no stock options or other potentially dilutive
common shares were outstanding during the periods ended June 30, 2008 and 2007.
Recent Accounting Pronouncements that Affect the Corporation
The adoption of these accounting pronouncements had the following impact on the Corporations
condensed consolidated statements of income and financial condition:
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Staff Accounting Bulletin No. 109 (SAB 109) Written Loan Commitments Recorded at Fair
Value through Earnings.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No.
109 (SAB 109), which requires that the fair value of a written loan commitment that is
marked to market through earnings should include the future cash flows related to the
loans servicing rights. However, the fair value measurement of a written loan commitment
still must exclude the expected net cash flows related to internally developed intangible
assets (such as customer relationship intangible assets). SAB 109 applies to two types of
loan commitments: (1) written mortgage loan commitments for loans that will be
held-for-sale when funded that are marked to market as derivatives under FAS 133
(derivative loan commitments); and (2) other written loan commitments that are accounted
for at fair value through earnings under Statement 159s fair-value election. SAB 109
supersedes SAB 105, which applied only to derivative loan commitments and allowed the
expected future cash flows related to the associated servicing of the loan to be recognized
only after the servicing asset had been contractually separated from the underlying loan by
sale or securitization of the loan with servicing retained. SAB 109 will be applied
prospectively to derivative loan commitments issued or modified in fiscal quarters
beginning after December 15, 2007. The adoption of this statement did not have material
impact on the Corporations condensed consolidated financial statements and disclosures.
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SFAS No. 157, Fair Value Measurements.
In September 2006, the FASB issued SFAS No.
157, Fair Value Measurements, which establishes a framework for measuring fair value
under GAAP and enhances disclosures about fair value measurements. The Corporation adopted
SFAS 157, as of January 1, 2008 for financial assets and liabilities. Fair value is defined
under SFAS 157 as the price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date.
In February 2008, the FASB issued a FASB Staff Position (FSP FAS 157-2) that partially
delayed the effective date of SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. FSP FAS 157-2 states that a measurement
is recurring if it happens at least annually and defines nonfinancial assets and
nonfinancial liabilities as all assets and liabilities other than those meeting the
definition of a financial asset or financial liability in SFAS No. 159. As such, the
Corporation did not adopt SFAS 157 for nonfinancial assets and liabilities eligible for
deferral under FSP FAS 157-2, and is evaluating the impact, that this adoption may have on
its condensed consolidated financial statements and disclosures. See Note 18 for
additional information.
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SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities-
including an amendment of FASB Statements No. 115.
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets
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and Financial Liabilities. In conjunction with the adoption of SFAS 157, the Corporation
adopted SFAS 159, as of January 1, 2008. SFAS 159 provides an option for most financial
assets and liabilities to be reported at fair value on an instrument-by-instrument basis with
changes in fair value reported in earnings. The election is made at the initial adoption, at
the acquisition of a financial asset, financial liability or a firm commitment and it may not
be revoked. Under the SFAS 159 transition provisions, the Corporation has elected to report
certain callable brokered certificates of deposits and subordinated notes at fair value with
future changes in value reported in earnings. SFAS 159 provides an opportunity to mitigate
volatility in reported earnings as well as reducing the burden associated with complex hedge
accounting requirements. As a result of this adoption and election under the fair value
option, the Corporation reported an after-tax increase to beginning of year retained earnings
of $3.2 million.
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FSP FIN No. 39-1 Amendment of FASB Interpretation No. 39
In April 2007, the FASB
issued Staff Position FSP FIN No. 39-1, which defines right of setoff and specifies what
conditions must be met for a derivative contract to qualify for this right of setoff. It
also addresses the applicability of a right of setoff to derivative instruments and
clarifies the circumstances in which it is appropriate to offset amounts recognized for
those instruments in the statement of financial position. In addition, this FSP permits the
offsetting of fair value amounts recognized for multiple derivative instruments executed
with the same counterparty under a master netting arrangement and fair value amounts
recognized for the right to reclaim cash collateral (a receivable) or the obligation to
return cash collateral (a payable) arising from the same master netting arrangement as the
derivative instruments. This interpretation is effective for fiscal years beginning after
November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 in
2008 did not have a material impact on the Corporations condensed consolidated financial
statements and disclosures.
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The Corporation is evaluating the impact that the following recently issued accounting
pronouncements may have on its consolidated financial condition and results of operations.
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SFAS No. 161 Disclosure about Derivative Instruments and Hedging Activities, an
amendment of FASB Statements No. 133.
In March 2008, the FASB issued SFAS No. 161, which
requires the enhancement of the current disclosure framework in Statement 133. The
Statement requires that objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting designation. This disclosure better conveys the purpose
of derivative use in terms of the risks that the entity is intending to manage. Disclosing
the fair values of derivative instruments and their gains and losses in a tabular format
should provide a more complete picture of the location in an entitys financial statements
of both the derivative positions existing at period end and the effect of using derivatives
during the reporting period. Disclosing information about credit-risk-related contingent
features should provide information on the potential effect on an entitys liquidity from
using derivatives. Finally, this Statement requires cross-referencing within the footnotes,
which should help users of financial statements locate important information about
derivative instruments. This Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative disclosures for
earlier periods at initial adoption. The Corporation is evaluating the effects, if any,
that the adoption of this statement will have on its consolidated financial statements.
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Staff Position (FSP) FAS 142-3, Determination of Useful Life of Intangible Assets(FSP
FAS 142-3).
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,
Determination of Useful Life of Intangible Assets. This FASB Staff Position (FSP) amends
the factors that should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets
. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and the period
of expected cash flows used to measure the fair value of the asset under FASB Statement No.
141 (revised 2007),
Business Combinations,
and other U.S. generally accepted accounting
principles (GAAP). An intangible asset may be acquired individually or with a group of
other assets. This FSP applies regardless of the nature of the transaction that resulted in
the recognition of the intangible asset, that is, whether acquired in a business
combination or otherwise. In developing assumptions about renewal or extension used to
determine the useful life of a recognized intangible asset, an entity shall consider its
own historical experience in renewing or extending similar arrangements; however, these
assumptions should be adjusted for the entity-specific factors in paragraph 11 of Statement
142. In the absence of that experience, an entity shall consider the assumptions that
market participants would use about renewal or extension (consistent with the highest and
best use of the asset by market participants), adjusted for the entity-specific factors in
paragraph 11 of Statement 142. The Corporation is evaluating the potential impact of
adopting this FSP.
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SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles.
In May 2008,
the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
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accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The current
GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants
(AICPA) Statement on Auditing Standards No. 69,
The Meaning of
Present Fairly in Conformity
With Generally Accepted Accounting Principles, has been criticized because (1) it is directed
to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of
Financial Accounting Concepts, which are subject to the same level of due process as FASB
Statements of Financial Accounting Standards, below industry practices that are widely
recognized as generally accepted but that are not subject to due process. The Board believes
that the GAAP hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial statements
that are presented in conformity with GAAP. Accordingly, the Board concluded that the GAAP
hierarchy should reside in the accounting literature established by the FASB and is issuing
this Statement to achieve that result. This Statement is effective 60 days following the
SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411,
The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles.
The Corporation will be evaluating the effects, if any, that the adoption of this statement
may have on its consolidated financial statements.
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15
2. Investment Securities Available for Sale:
The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of
investment securities available for sale by contractual maturity are as follows:
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June 30, 2008
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Gross
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Gross
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Weighted
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Amortized
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Unrealized
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Unrealized
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Fair
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Average
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Cost
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Gains
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Losses
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Value
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Yield
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(Dollars in thousands)
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Treasury and agencies of the United States Government:
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Within one year
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$
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342,647
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$
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$
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33
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$
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342,614
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2.02
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%
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After one year to five years
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227,930
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2,450
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230,380
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3.89
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%
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570,577
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2,450
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33
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572,994
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2.77
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%
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Commonwealth of Puerto Rico and its subdivisions:
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Within one year
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245
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1
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244
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3.50
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%
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After one year to five years
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25,945
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497
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25,448
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4.20
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%
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After five years to ten years
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15,237
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|
39
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182
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15,094
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5.21
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%
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Over ten years
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16,111
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|
114
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81
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16,144
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5.67
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%
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57,538
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153
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761
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56,930
|
|
|
|
4.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five years to ten years
|
|
|
179,293
|
|
|
|
|
|
|
|
6,302
|
|
|
|
172,991
|
|
|
|
4.37
|
%
|
Over ten years
|
|
|
332,233
|
|
|
|
|
|
|
|
7,789
|
|
|
|
324,444
|
|
|
|
5.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511,526
|
|
|
|
|
|
|
|
14,091
|
|
|
|
497,435
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year to five years
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,139,691
|
|
|
$
|
2,603
|
|
|
$
|
14,885
|
|
|
$
|
1,127,409
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Weighted
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Treasury and agencies of the United States Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
317,974
|
|
|
$
|
137
|
|
|
$
|
233
|
|
|
$
|
317,878
|
|
|
|
3.63
|
%
|
After one year to five years
|
|
|
354,281
|
|
|
|
1,703
|
|
|
|
184
|
|
|
|
355,800
|
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
672,255
|
|
|
|
1,840
|
|
|
|
417
|
|
|
|
673,678
|
|
|
|
3.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
1,370
|
|
|
|
|
|
|
|
3
|
|
|
|
1,367
|
|
|
|
3.99
|
%
|
After one year to five years
|
|
|
20,245
|
|
|
|
|
|
|
|
470
|
|
|
|
19,775
|
|
|
|
4.44
|
%
|
After five years to ten years
|
|
|
15,186
|
|
|
|
84
|
|
|
|
159
|
|
|
|
15,111
|
|
|
|
5.21
|
%
|
Over ten years
|
|
|
13,091
|
|
|
|
62
|
|
|
|
118
|
|
|
|
13,035
|
|
|
|
5.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,892
|
|
|
|
146
|
|
|
|
750
|
|
|
|
49,288
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five years to ten years
|
|
|
232,420
|
|
|
|
|
|
|
|
7,296
|
|
|
|
225,124
|
|
|
|
4.40
|
%
|
Over ten years
|
|
|
324,112
|
|
|
|
|
|
|
|
4,054
|
|
|
|
320,058
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556,532
|
|
|
|
|
|
|
|
11,350
|
|
|
|
545,182
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year to five years
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,278,729
|
|
|
$
|
1,986
|
|
|
$
|
12,517
|
|
|
$
|
1,268,198
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The duration of long-term (over one year) investment securities in the available for sale
portfolio is approximately 2.7 years at June 30, 2008, comprised of approximately 0.7 years for
treasuries and agencies of the United States Government, 4.2 years for instruments from the
Commonwealth of Puerto Rico and its subdivisions, 4.7 years for mortgage backed securities and 0.8
year for all other securities.
The number of positions, fair value and unrealized losses at June 30, 2008, of investment
securities available for sale that have been in a continuous unrealized loss position for less
than twelve months and for twelve months or more, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
Treasury and agencies
of the United States
Government
|
|
|
7
|
|
|
$
|
342,614
|
|
|
$
|
33
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
7
|
|
|
$
|
342,614
|
|
|
$
|
33
|
|
Commonwealth of Puerto
Rico and its
subdivisions
|
|
|
11
|
|
|
|
17,260
|
|
|
|
231
|
|
|
|
15
|
|
|
|
22,690
|
|
|
|
530
|
|
|
|
26
|
|
|
|
39,950
|
|
|
|
761
|
|
Mortgage-backed
securities
|
|
|
14
|
|
|
|
182,417
|
|
|
|
2,774
|
|
|
|
17
|
|
|
|
315,018
|
|
|
|
11,317
|
|
|
|
31
|
|
|
|
497,435
|
|
|
|
14,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
$
|
542,291
|
|
|
$
|
3,038
|
|
|
|
32
|
|
|
$
|
337,708
|
|
|
$
|
11,847
|
|
|
|
64
|
|
|
$
|
879,999
|
|
|
$
|
14,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation evaluates its investment securities for other-than-temporary impairment on a
quarterly basis or earlier if other factors indicative of potential impairment exist. An
impairment charge in the condensed consolidated statements of income is recognized when the
decline in the fair value of the securities below their cost basis is judged to be
other-than-temporary. The Corporation considers various factors in determining whether it should
recognize an impairment charge, including, but not limited to the length of time and extent to
which the fair value has been less than its cost basis, expectation of recoverability of its
original investment in the securities and the Corporations intent and ability to hold the
securities for a period of time sufficient to allow for any forecasted recovery of fair value up
to (or beyond) the cost of the investment.
As of June 30, 2008, management concluded that there was no other-than-temporary impairment
in its investment securities portfolio. The unrealized losses in the Corporations investments in
U.S. and P.R. Government agencies and subdivisions were caused by changes in market interest
rates. Substantially, all U.S. and P.R. Government agencies securities are rated the equivalent of
AAA and BBB-, respectively, by major rating agencies. The contractual terms of these investments
do not permit the issuer to settle the securities at a price less than the face value of the
investment. Since the Corporation has the ability and intent to hold these investments until a
recovery of fair value, which may be maturity, the Corporation does not consider these investments
to be other-than-temporarily impaired at June 30, 2008. The unrealized losses in the Corporations
investment in mortgage-backed securities were also caused by changes in market interest rates. The
Corporation purchased these investments at a discount relative to their face amount, and the
contractual cash flows of these investments are guaranteed by an agency of the U.S. government or
by other government-sponsored corporations. Accordingly, it is expected that the securities will be settled at a price not less than the amortized cost of the Corporations investment. The
decline in market value is attributable to changes in interest rates and not credit quality and
since the Corporation has the ability and intent to hold these investments until a recovery of
fair value, which may be maturity, the Corporation does not consider these investments to be
other-than-temporarily impaired at June 30, 2008.
Contractual maturities on certain securities, including mortgage-backed securities, could
differ from actual maturities since certain issuers have the right to call or prepay these
securities.
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.
17
3. Assets Pledged:
At June 30, 2008 and December 31, 2007, investment securities and loans were pledged to secure
deposits of public funds and Federal Home Loan Bank Advances. The classification and carrying
amount of pledged assets, which the secured parties are not permitted to sell or repledge as of
June 30 and December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Investment securities available for sale
|
|
$
|
283,218
|
|
|
$
|
415,278
|
|
Other investment securities
|
|
|
48,600
|
|
|
|
56,025
|
|
Loans
|
|
|
2,337,985
|
|
|
|
2,314,359
|
|
|
|
|
|
|
|
|
|
|
$
|
2,669,803
|
|
|
$
|
2,785,662
|
|
|
|
|
|
|
|
|
Pledged securities, that the creditor has the right or contract to repledge, are presented
separately on the condensed consolidated balance sheet. At June 30, 2008 and December 31, 2007,
investment securities with a carrying value of approximately $633,337,000 and $683,326,000,
respectively, were pledged to securities sold under agreements to repurchase.
4. Loans:
The Corporations loan portfolio consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Commercial and industrial
|
|
$
|
2,410,664
|
|
|
$
|
2,530,806
|
|
Consumer
|
|
|
648,333
|
|
|
|
672,888
|
|
Consumer finance
|
|
|
1,013,262
|
|
|
|
946,209
|
|
Leasing
|
|
|
80,717
|
|
|
|
98,987
|
|
Construction
|
|
|
384,752
|
|
|
|
486,284
|
|
Mortgage
|
|
|
2,546,104
|
|
|
|
2,539,811
|
|
|
|
|
|
|
|
|
|
|
|
7,083,832
|
|
|
|
7,274,985
|
|
|
|
|
|
|
|
|
|
|
Unearned income and deferred fees/costs:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
(1,749
|
)
|
|
|
(3,459
|
)
|
Consumer finance
|
|
|
(406,935
|
)
|
|
|
(335,096
|
)
|
Allowance for loan losses
|
|
|
(186,889
|
)
|
|
|
(166,952
|
)
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
6,488,259
|
|
|
$
|
6,769,478
|
|
|
|
|
|
|
|
|
During the quarter ended June 30, 2008, the Corporation sold certain impaired
loans to an affiliate for $91.3 million in cash. These loans had a net book value of $91.3 million comprised
of an outstanding principal balance of $96.8 million and a specific valuation allowance of
$5.5 million. The type of loans by net book value was $76.8 million in construction loans and $14.5 million in commercial loans. No gain or loss was recognized
on this transaction.
18
5. Allowance for Loan Losses:
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
For the three months ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
179,150
|
|
|
$
|
115,171
|
|
Provision for loan losses
|
|
|
78,090
|
|
|
|
52,874
|
|
|
|
38,515
|
|
|
|
30,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,042
|
|
|
|
159,737
|
|
|
|
217,665
|
|
|
|
146,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
4,150
|
|
|
|
3,484
|
|
|
|
1,818
|
|
|
|
1,568
|
|
Construction
|
|
|
5,358
|
|
|
|
|
|
|
|
5,344
|
|
|
|
|
|
Mortgage
|
|
|
64
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
19,975
|
|
|
|
11,717
|
|
|
|
10,438
|
|
|
|
6,970
|
|
Consumer finance
|
|
|
29,458
|
|
|
|
16,190
|
|
|
|
13,541
|
|
|
|
9,863
|
|
Leasing
|
|
|
1,050
|
|
|
|
1,485
|
|
|
|
562
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,055
|
|
|
|
34,026
|
|
|
|
31,703
|
|
|
|
18,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
293
|
|
|
|
799
|
|
|
|
137
|
|
|
|
104
|
|
Consumer
|
|
|
579
|
|
|
|
429
|
|
|
|
234
|
|
|
|
263
|
|
Consumer finance
|
|
|
779
|
|
|
|
723
|
|
|
|
403
|
|
|
|
370
|
|
Leasing
|
|
|
251
|
|
|
|
254
|
|
|
|
153
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,902
|
|
|
|
2,205
|
|
|
|
927
|
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
58,153
|
|
|
|
31,821
|
|
|
|
30,776
|
|
|
|
18,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
186,889
|
|
|
$
|
127,916
|
|
|
$
|
186,889
|
|
|
$
|
127,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Goodwill and Other Intangible Assets:
Goodwill
The Corporation assigned goodwill to reporting units at the time of acquisition. Goodwill
was allocated to the Commercial Banking segment, the Wealth Management segment and the Consumer
Finance segment as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Commercial Banking
|
|
$
|
10,537
|
|
|
$
|
10,537
|
|
Wealth Management
|
|
|
24,254
|
|
|
|
24,254
|
|
Consumer Finance
|
|
|
86,691
|
|
|
|
86,691
|
|
|
|
|
|
|
|
|
|
|
$
|
121,482
|
|
|
$
|
121,482
|
|
|
|
|
|
|
|
|
Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco
Central Hispano Puerto Rico in 1996, the goodwill assigned to the Wealth Management segment is
related to the acquisition of Merrill Lynchs retail brokerage business in Puerto Rico by Santander
Securities Corporation in 2000 and goodwill assigned to the Consumer Finance segment is related to
the acquisition of Island Finance in 2006.
As a result of the unfavorable economic environment in Puerto Rico, Island Finances
short-term financial performance and profitability declined significantly during 2007, caused by
reduced lending activity and increases in non-performing assets and charge-offs. The Corporation,
with the assistance of an independent valuation firm, performed an interim impairment test of the
goodwill and other intangibles of Island Finance as of July 1, 2007. Statement 142 provides a
two-step impairment test. The first step of the impairment test compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment test is performed to
19
measure the amount of the impairment loss, if any. The Corporation completed the first step of the
impairment test and determined that the carrying amount of the goodwill and other intangible assets
of Island Finance exceeded their fair value, thereby requiring performance of the second step of
the impairment test to calculate the amount of the impairment. Based upon the completed impairment
test, the Corporation determined that the actual non-cash impairment charges as of July 1, 2007
were $43.3 million, which included $26.8 of goodwill and $16.5 million of other intangibles assets
(comprised of $9.2 million of customer relationships, $5.4 million of trade name and $1.9 million
of non-compete agreement). These impairment charges did not result in cash expenditures and will
not result in future cash expenditures.
Upon the completion of the interim impairment test, the Corporation performed its annual
impairment assessment as of October 1, 2007 with the assistance of the independent valuation
specialist. Based upon their test, and after consideration of the July 1, 2007 impairment charge,
the Corporation determined that no additional impairment charge was necessary as of October 1,
2007.
Other Intangible Assets
Other intangible assets at June 30, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Commercial Banking Mortgage-servicing rights
|
|
$
|
9,830
|
|
|
$
|
9,631
|
|
Wealth Management Advisory-servicing rights
|
|
|
1,419
|
|
|
|
1,572
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
18,300
|
|
|
|
18,300
|
|
Non-compete agreements
|
|
|
400
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
$
|
29,949
|
|
|
$
|
30,203
|
|
|
|
|
|
|
|
|
Mortgage-servicing rights arise from the right to serve mortgages sold and have an estimated
useful life of eight years. The advisory-servicing rights are related to the Corporations
subsidiary acquisition of the right to serve as the investment advisor for the First Puerto Rico
Tax-Exempt Fund, Inc. acquired in 2002 and for First Puerto Rico Growth and Income Fund Inc. and
First Puerto Rico Daily Liquidity Fund Inc. acquired in December 2006. This intangible asset is
being amortized over a 10-year estimated useful life. Trade name is related to the acquisition of
Island Finance and has an indefinite useful life and is therefore not being amortized but is tested
for impairment at least annually. Non-compete agreements are intangible assets related to the
acquisition of Island Finance. Non-compete agreements are being amortized over 1 year.
Amortization of the other intangibles assets for the six month period ended June 30, 2008 and
year ended December 31, 2007 were approximately $1.5 million and $3.8 million, respectively.
7. Other Assets:
The Corporations other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets, net
|
|
$
|
40,500
|
|
|
$
|
37,199
|
|
Accounts receivable
|
|
|
43,817
|
|
|
|
38,617
|
|
Repossesed assets
|
|
|
18,250
|
|
|
|
16,448
|
|
Software, net
|
|
|
6,268
|
|
|
|
8,069
|
|
Prepaid expenses
|
|
|
34,221
|
|
|
|
14,224
|
|
Customers liabilities on acceptances
|
|
|
829
|
|
|
|
783
|
|
Derivative assets
|
|
|
65,798
|
|
|
|
79,969
|
|
Confirming advances
|
|
|
182,384
|
|
|
|
179,376
|
|
Other
|
|
|
4,172
|
|
|
|
4,518
|
|
|
|
|
|
|
|
|
|
|
$
|
396,239
|
|
|
$
|
379,203
|
|
|
|
|
|
|
|
|
20
Amortization of software assets for the six month period ended June 30, 2008 and year ended
December 31, 2007 was approximately $2.7 million and $4.4 million, respectively.
8. Other Borrowings:
Following are summaries of borrowings as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
(Dollars in thousands)
|
|
Amount outstanding at period-end
|
|
$
|
53,790
|
|
|
$
|
583,875
|
|
|
$
|
49,779
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the period
|
|
$
|
360,764
|
|
|
$
|
585,837
|
|
|
$
|
378,663
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the period
|
|
$
|
751,000
|
|
|
$
|
625,006
|
|
|
$
|
625,000
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the period
|
|
|
4.84
|
%
|
|
|
4.98
|
%
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at period-end
|
|
|
2.75
|
%
|
|
|
4.85
|
%
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
(Dollars in thousands)
|
|
Amount outstanding at year-end
|
|
$
|
707,110
|
|
|
$
|
635,597
|
|
|
$
|
284,482
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the year
|
|
$
|
723,364
|
|
|
$
|
756,117
|
|
|
$
|
379,351
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the year
|
|
$
|
800,000
|
|
|
$
|
851,578
|
|
|
$
|
676,957
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the year
|
|
|
5.77
|
%
|
|
|
5.48
|
%
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at year-end
|
|
|
5.14
|
%
|
|
|
5.43
|
%
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and other borrowings, securities sold under agreements to repurchase
and commercial paper issued mature as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(In thousands)
|
|
Federal funds purchased and other borrowings:
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
52,000
|
|
|
$
|
7,110
|
|
Thirty to ninety days
|
|
|
|
|
|
|
700,000
|
|
Over ninety days
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,790
|
|
|
$
|
707,110
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
8,875
|
|
|
$
|
10,591
|
|
Over ninety days
|
|
|
575,000
|
|
|
|
625,006
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
583,875
|
|
|
$
|
635,597
|
|
|
|
|
|
|
|
|
Commercial paper issued:
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
10,000
|
|
|
$
|
284,482
|
|
Thirty to ninety days
|
|
|
39,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,779
|
|
|
$
|
284,482
|
|
|
|
|
|
|
|
|
21
As of June 30, 2008 the weighted average maturity of Federal funds purchased and other
borrowings over ninety days was 6.03 months.
As of June 30, 2008, securities sold under agreements to repurchase (classified by
counterparty) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Average
|
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Maturity
|
|
|
|
Borrowings
|
|
|
Securities
|
|
|
in Months
|
|
|
|
(Dollars in thousands)
|
|
JP Morgan Chase Bank, N.A.
|
|
$
|
375,000
|
|
|
$
|
400,590
|
|
|
|
17.06
|
|
Lehman Brothers Special Financing, Inc.
|
|
|
200,000
|
|
|
|
223,868
|
|
|
|
55.50
|
|
Popular Securities, Inc.
|
|
|
8,875
|
|
|
|
8,879
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
583,875
|
|
|
$
|
633,337
|
|
|
|
29.97
|
|
|
|
|
|
|
|
|
|
|
|
The following investment securities were sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest Rate
|
|
|
Interest Rate
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Securities
|
|
|
Borrowings
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Obligations of U.S. Government agencies and corporations
|
|
$
|
223,868
|
|
|
$
|
200,000
|
|
|
$
|
223,868
|
|
|
|
4.05
|
%
|
|
|
5.88
|
%
|
Mortgage-backed securities
|
|
|
409,469
|
|
|
|
383,875
|
|
|
|
409,469
|
|
|
|
5.12
|
%
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
633,337
|
|
|
$
|
583,875
|
|
|
$
|
633,337
|
|
|
|
4.74
|
%
|
|
|
4.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest Rate
|
|
|
Interest Rate
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Securities
|
|
|
Borrowings
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Obligations of U.S. Government agencies and corporations
|
|
$
|
270,821
|
|
|
$
|
250,006
|
|
|
$
|
270,821
|
|
|
|
4.79
|
%
|
|
|
5.76
|
%
|
Mortgage-backed securities
|
|
|
412,505
|
|
|
|
385,591
|
|
|
|
412,505
|
|
|
|
5.22
|
%
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
683,326
|
|
|
$
|
635,597
|
|
|
$
|
683,326
|
|
|
|
5.05
|
%
|
|
|
5.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
9. Advances from Federal Home Loan Bank:
Advances from Federal Home Loan Bank consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Non-callable advances at 2.43% and 4.74% averages fixed rate at June 30, 2008
and December 31, 2007 , respectively, with maturities during 2008
|
|
$
|
60,000
|
|
|
$
|
420,000
|
|
Non-callable advances at 2.49% average fixed rate with maturities during 2009
|
|
|
120,000
|
|
|
|
|
|
Non-callable advances at 2.71% average fixed rate with maturities during 2010
|
|
|
300,000
|
|
|
|
|
|
Non-callable advances at 3.79% average fixed rate with maturities during 2011
|
|
|
175,000
|
|
|
|
|
|
Non-callable advances at 2.66% and 5.07% averages floating rates tied to 3-month
LIBOR
at June 30, 2008 and December 31, 2007, respectively, with maturities during 2008
|
|
|
375,000
|
|
|
|
825,000
|
|
Non-callable advances at 2.67% average floating rate tied to 3-month LIBOR
with maturities during 2009
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,080,000
|
|
|
$
|
1,245,000
|
|
|
|
|
|
|
|
|
The Corporation had $2.0 billion and $2.1 billion in mortgage loans and investment securities
pledged as collateral for Federal Home Loan Bank advances as of June 30, 2008 and December 31,
2007, respectively.
10. Subordinated Capital Notes, Term Notes and Trust Preferred Securities:
Subordinated Capital Notes
Subordinated capital notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Subordinated notes with fixed interest of 6.30% maturing June 1, 2032, at fair value in 2008
|
|
$
|
70,465
|
|
|
$
|
73,260
|
|
Subordinated notes with fixed interest of 6.10% maturing June 1, 2032, at fair value in 2008
|
|
|
45,508
|
|
|
|
50,236
|
|
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
240,973
|
|
|
|
248,496
|
|
Unamortized discount
|
|
|
(906
|
)
|
|
|
(1,326
|
)
|
|
|
|
|
|
|
|
|
|
$
|
240,067
|
|
|
$
|
247,170
|
|
|
|
|
|
|
|
|
23
Term Notes
Term notes payable outstanding consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Dollars in thousands)
|
|
Term notes maturing January 29, 2010 linked to the S&P 500 index
|
|
$
|
4,815
|
|
|
$
|
4,815
|
|
Term notes maturing May 31, 2011 with a spread of 0.25%:
|
|
|
|
|
|
|
|
|
Linked to the S&P 500
|
|
|
4,000
|
|
|
|
4,000
|
|
Linked to the Dow Jones Euro STOXX 50
|
|
|
3,000
|
|
|
|
3,000
|
|
Term notes maturing May 25, 2012 linked to the Euro STOXX 50
|
|
|
5,000
|
|
|
|
5,000
|
|
Term notes maturing May 25, 2012 linked to the NIKKEI
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
21,815
|
|
|
|
21,815
|
|
Unamortized discount
|
|
|
(2,150
|
)
|
|
|
(2,444
|
)
|
|
|
|
|
|
|
|
|
|
$
|
19,665
|
|
|
$
|
19,371
|
|
|
|
|
|
|
|
|
The term notes issued contain certain general covenants related to financial ratios, among
others. The Corporation was in compliance with such covenants at June 30, 2008 and December 31,
2007.
Trust Preferred Securities:
At December 31, 2006, the Corporation had established a trust for the purpose of issuing trust
preferred securities to the public in connection with the acquisition of Island Finance. In connection with this financing arrangement,
the Corporation completed the private placement of $125 million Preferred Securities and issued
Junior Subordinated Debentures in the aggregate principal amount of $129 million in connection with
the issuance of the Preferred Securities. The Preferred Securities are classified as subordinated
notes (included on the table for subordinated capital notes above) and the dividends are classified
as interest expense in the accompanying consolidated statements of operations.
11. Income Tax:
The Corporation adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million in the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits. A
reconciliation of beginning and ending amount of the accrual for uncertain income tax positions is
as follows:
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
(in thousands)
|
|
Balance at beginning of the year
|
|
$
|
16,507
|
|
|
$
|
12,676
|
|
Additions for tax positions of prior years
|
|
|
124
|
|
|
|
761
|
|
Additions for tax positions of current year
|
|
|
1,974
|
|
|
|
211
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
18,605
|
|
|
$
|
13,648
|
|
|
|
|
|
|
|
|
The Corporations policy is to report interest and penalties related to unrecognized tax
benefits in income tax expense. For the six months ended June 30, 2008 and 2007, the Corporation
recognized $0.5 million and $0.5 million of interest and penalties, respectively, for uncertain tax
positions. As of June 30, 2008 and 2007, the related accrued interest approximated $3.2 million and
$2.4 million, respectively. At June 30, 2008 and 2007, the Corporation had $18.6 million and $13.6
million, respectively, of unrecognized tax benefits which, if recognized, would decrease the
effective income tax rate in future periods.
The amount of unrecognized tax benefits may increase or decrease in the future for various
reasons including adding amounts for current tax year positions, expiration of open income tax
returns due to the statutes of limitation, changes in
24
managements judgment about the level of uncertainty, status of examinations, litigation and
legislative activity, and the addition or elimination of uncertain tax positions. As of June 30,
2008, the years 2003 through 2007 remain subject to examination by the Puerto Rico tax
authorities. The Corporation does not anticipate a significant change to the total amount of
unrecognized tax benefits within the next 12 months.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which the temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income, management believes it is more likely than not,
the Corporation will not realize the benefits of the deferred tax assets related principally to
Santander Financial Services, Inc. amounting to $22.1 million at June 30, 2008. Accordingly, a
deferred tax asset valuation allowance of $22.1 million was recorded at June 30, 2008.
12. Derivative Financial Instruments:
As of June 30, 2008, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
the six months
|
|
|
Gain* for the
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
six months ended
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
375,000
|
|
|
$
|
(1,247
|
)
|
|
$
|
|
|
|
$
|
476
|
|
ECONOMIC UNDESIGNATED HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
243,984
|
|
|
|
(2,639
|
)
|
|
|
683
|
|
|
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
133,339
|
|
|
|
10,782
|
|
|
|
(11,808
|
)
|
|
|
|
|
Embedded options on stock-indexed deposits
|
|
|
133,339
|
|
|
|
(10,782
|
)
|
|
|
11,808
|
|
|
|
|
|
Interest rate caps
|
|
|
1,349
|
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
|
|
Customer interest rate caps
|
|
|
1,349
|
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
Customer interest rate swaps
|
|
|
1,757,008
|
|
|
|
53,206
|
|
|
|
7,536
|
|
|
|
|
|
Interest rate swaps-offsetting position of customer swaps
|
|
|
1,757,009
|
|
|
|
(52,652
|
)
|
|
|
(7,855
|
)
|
|
|
|
|
Interest rate swaps
|
|
|
90,000
|
|
|
|
568
|
|
|
|
1,101
|
|
|
|
|
|
Loan commitments
|
|
|
4,496
|
|
|
|
(116
|
)
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,304
|
|
|
$
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
As of December 31, 2007, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
the year
|
|
|
Loss* for the
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
year ended
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Dec. 31, 2007
|
|
|
Dec. 31, 2007
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
650,000
|
|
|
$
|
(2,027
|
)
|
|
$
|
|
|
|
$
|
(1,023
|
)
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
937,863
|
|
|
|
(4,425
|
)
|
|
|
(465
|
)
|
|
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
133,562
|
|
|
|
22,590
|
|
|
|
134
|
|
|
|
|
|
Embedded options on stock-indexed deposits
|
|
|
133,562
|
|
|
|
(22,590
|
)
|
|
|
(134
|
)
|
|
|
|
|
Interest rate caps
|
|
|
7,381
|
|
|
|
7
|
|
|
|
(58
|
)
|
|
|
|
|
Customer interest rate caps
|
|
|
7,381
|
|
|
|
(7
|
)
|
|
|
58
|
|
|
|
|
|
Customer interest rate swaps
|
|
|
1,496,798
|
|
|
|
44,380
|
|
|
|
44,432
|
|
|
|
|
|
Interest rate swaps-offsetting position of customer swaps
|
|
|
1,498,381
|
|
|
|
(43,589
|
)
|
|
|
(44,068
|
)
|
|
|
|
|
Interest rate swaps
|
|
|
242,000
|
|
|
|
(534
|
)
|
|
|
315
|
|
|
|
|
|
Loan commitments
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249
|
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations principal objective in holding interest rate swap agreements is the
management of interest rate risk and changes in the fair value of assets and liabilities. The
Corporations policy is that each swap contract be specifically tied to assets or liabilities with
the objective of transforming the interest rate characteristic of the hedged instrument. During
2006, the Corporation swapped $825 million of FHLB Adjustable Rate Credit Advances with maturities
between July 2007 and November 2008. The purpose of this swap is to fix the interest paid on the
underlying borrowings. These swaps were designated as cash flow hedges. As of June 30, 2008 and
December 31, 2007, the Corporation had outstanding $375 million and $650 million, respectively, of
interest rate swaps designed as cash flow hedges. As of June 30, 2008 and December 31, 2007 the
total amount, net of tax, included in accumulated other comprehensive income was an unrealized loss
of $761,000 and an unrealized loss of $1.2 million, respectively, of which the Corporation expects
to reclassify approximately $1.0 million into earnings during the next quarter of 2008.
Prior to the adoption of SFAS 159, changes in the value of the derivatives instruments
qualifying as fair value hedge that have been highly effective were recognized in the current
period results of operations along with the change in the value of the designated hedge item. If
the hedge relationship was terminated, hedge accounting was discontinued and any balance related to
the derivative was recognized in current operations, and fair value adjustment to the hedge item
continued to be reported as part of the basis of the item and was amortized to earnings as yield
adjustment. After adoption of SFAS 159 for certain callable brokered certificates of deposits and
subordinated capital notes, the hedge relationship was terminated, and both previously hedged items
and the respective hedging derivatives are presented at fair value with changes recorded in the
current period results of operations.
The Corporation hedges certain callable brokered certificates of deposits and subordinated
capital notes by using interest rate swaps. Prior to the adoption of SFAS 159 as of January 1,
2008, these swaps were designated for hedge accounting treatment under SFAS 133. For designated
fair value hedges, the changes in the fair value of both the hedging instrument and the underlying
hedged instrument were included in other income and the interest flows were included in the net
interest income in the condensed consolidated statements of income. In connection with the adoption
of SFAS 159, the Corporation has the option
to elect fair value for these callable brokered certificates of deposits and subordinated capital
notes and is no longer required to maintain hedge documentation to achieve a similar financial
statements outcome.
26
As of June 30, 2008, the Corporation had outstanding interest rate swap agreements with a
notional amount of approximately $244.0 million, maturing through the year 2024. The weighted
average rate paid and received on these contracts is 2.82% and 5.38%, respectively. As of June 30,
2008, the Corporation had retail fixed rate certificates of deposit amounting to approximately
$117.0 million, with a fair value of $115.7 million, and a subordinated note amounting to
approximately $125 million, with a fair value of $116.0 million, swapped to create a floating rate
source of funds. For the six months ended June 30, 2008, the Corporation recognized a gain of
approximately $0.7 million on these economic hedges, which is included in other income in the
condensed consolidated statements of income and was the result of incorporating the credit risk
component in the fair value of the subordinated note. For the semester ended June 30, 2007, the
Corporation recognized a loss of approximately $1.1 million on these swaps that were classified as
fair value hedges prior to the adoption of SFAS 159 on January 1, 2008.
As of December 31, 2007, the Corporation also had outstanding interest rate swap agreements
with a notional amount of approximately $937.9 million, maturing through the year 2032. The
weighted average rate paid and received on these contracts is 5.10% and 5.39%, respectively. As of
December 31, 2007, the Corporation had retail fixed rate certificates of deposit amounting to
approximately $786 million and a subordinated note amounting to approximately $125 million swapped
to create a floating rate source of funds.
The Corporation issues certificates of deposit, individual retirement accounts and notes with
returns linked to the different equity indexes, which constitute embedded derivative instruments
that are bifurcated from the host deposit and recognized on the condensed consolidated balance
sheets. The Corporation enters into option agreements in order to manage the interest rate risk on
these deposits and notes; however, these options have not been designated for hedge accounting,
therefore gains and losses on the market value of both the embedded derivative instruments and the
option contracts are marked to market through results of operations and recorded in other income in
the condensed consolidated statements of income. For the six months ended June 30, 2008, a gain of
approximately $11.8 million was recorded on embedded options on stock-indexed deposits and notes
and a loss of approximately $11.8 million was recorded on the option contracts. For the semester
ended June 30, 2007, a loss of approximately $2.9 million was recorded on embedded options on
stock-index deposits and notes and a gain of approximately $2.9 million was recorded on the option
contracts.
The Corporation enters into certain derivative transactions to provide derivative products to
customers, which includes interest rate caps, collars and swaps, and simultaneously covers the
Corporations position with related and unrelated third parties under substantially the same terms
and conditions. These derivatives are not linked to specific assets and liabilities on the
condensed consolidated balance sheets or to forecasted transactions in an accounting hedge
relationship and, therefore, do not qualify for hedge accounting. These derivatives are carried at
fair value with changes in fair value recorded as part of other income. For the six months ended
June 30, 2008 and 2007, the Corporation recognized a loss on these transactions of $319,000 and a
gain of $148,000 respectively.
To a lesser extent, the Corporation enters into freestanding derivative contracts as a
proprietary position taker, based on market expectations or on benefits from price differentials
between financial instruments and markets. These derivatives are not linked to specific assets and
liabilities on the condensed consolidated balance sheets or to forecasted transactions in an
accounting hedge relationship and, therefore, do not qualify for hedge accounting. These
derivatives are carried at fair value with changes in fair value recorded as part of other income.
For the six months ended June 30, 2008 and 2007, the Corporation recognized a gain of $1,101,000
and $196,000, respectively, on these transactions.
The Corporation enters into loan commitments with customers to extend mortgage loans at a
specified rate. These loan commitments are written options and are measured at fair value pursuant
to SFAS 157. Prior the adoption of SFAS 157, the loan commitments were measured at fair value
pursuant to SFAS 133. As of June 30, 2008, the Corporation had loan commitments outstanding for
approximately $4.5 million and recognized a loss of $161,000 on these commitments. As of June 30,
2007, a gain of $14,000 was recognized on these commitments.
13. Contingencies:
The Corporation is involved as plaintiff or defendant in a variety of routine litigation
incidental to the normal course of business. Management believes, based on the opinion of legal
counsel, that it has adequate defense with respect to such litigation and that any losses therefrom
will not have a material adverse effect on the condensed consolidated statements of income or
condensed consolidated financial position of the Corporation.
27
14. Employee Benefits Plan:
Pension Plan
The Corporation maintains two inactive qualified noncontributory defined benefit pension
plans. One plan covers substantially all active employees of the Corporation (the Plan) before
January 1, 2007, while the other plan was assumed in connection with the 1996 acquisition of Banco
Central Hispano de Puerto Rico (the Central Hispano Plan).
The components of net periodic benefit for the Plan for the six month periods ended June 30,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Interest cost on projected benefit obligation
|
|
$
|
1,175
|
|
|
$
|
1,140
|
|
Expected return on assets
|
|
|
(1,347
|
)
|
|
|
(1,359
|
)
|
Net amortization
|
|
|
108
|
|
|
|
207
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
(64
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
The expected contribution to the Plan for 2008 is $1,581,000.
The components of net periodic pension cost for the Central Hispano Plan for six month periods
ended June 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Interest cost on projected benefit obligation
|
|
$
|
921
|
|
|
$
|
919
|
|
Expected return on assets
|
|
|
(1,036
|
)
|
|
|
(1,085
|
)
|
Net amortization
|
|
|
251
|
|
|
|
257
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
136
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
The expected contribution to the Central Hispano Plan for 2008 is $1,816,000.
Savings Plan
The Corporation also provides three contributory savings plans pursuant to Section 1165(e) of
the Puerto Rico Internal Revenue Code for substantially all the employees of the Corporation.
Investments in the plans are participant-directed, and employer matching contributions are
determined based on the specific provisions of each plan. Employees are fully vested in the
employers contribution after three and five years of service, respectively. The Corporations
plans contribution for the six months ended June 30, 2008 and 2007 were approximately $394,000 and
$276,000, respectively.
28
15. Long Term Incentive Plans:
Santander Spain sponsors various non-qualified share-based compensation programs for certain
of its employees and those of its subsidiaries, including the Corporation. All of these plans have
been approved by the Board of Directors of the Corporation. A summary of each of the plans
follows:
|
|
|
A long term incentive plan for certain eligible officers and key employees which
contains service, performance and market conditions. This plan provides for settlement in
cash or stock of Santander Spain to the participants and is classified as a liability
plan. Accordingly, the Corporation accrues a liability and recognizes monthly
compensation expense over the fourteen month vesting period through January 2008. The
Corporation recognized a reversal of compensation expense under this plan amounting to
$3.6 million due to a favorable change in plan valuation during the semester ended June
30, 2008 and $4.0 million of compensation expense for the same period in 2007. As options
were exercised as of June 30, 2008, $6.7 million has been reclassified as a capital
contribution.
|
|
|
|
|
The grant of 100 shares of Santander Spain stock to all employees of Santander Groups
operating entities as part of the celebration of Santander Group 150th Anniversary during
2007. The Corporation recognized compensation expense under this plan amounting to $4.3
million in 2007. The shares granted were purchased by an affiliate and recorded as a
capital contribution.
|
|
|
|
|
A long term incentive plan for certain eligible officers and key employees which
contains service, performance and market conditions. This plan comprehends two cycles,
one expiring in 2009 and another expiring in 2010. This plan provides for settlement in
stock of Santander Spain to the participants and is classified as an equity plan.
Accordingly, the Corporation recognizes monthly compensation expense over the two and
three year cycles and credits additional paid in capital. The Corporation recognized
compensation expense under this plan amounting to $1.6 million for the six months ended
June 30, 2008.
|
16. Guarantees:
The Corporation issues financial standby letters of credit to guarantee the performance of its
customers to third parties. If the customer fails to meet its financial performance obligation to
the third party, then the Corporation would be obligated to make the payment to the guaranteed
party. In accordance with the provisions of FIN 45,
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others An
Interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,
the Corporation recorded a liability of $1,183,000 at June 30, 2008, which represents the fair
value of the obligations undertaken in issuing the guarantees under the standby letters of credit
issued or modified after December 31, 2002, net of the related amortization. The fair value
approximates the unamortized fees received from the customers for issuing the standby letters of
credit. The fees are deferred and recognized on a straight-line basis over the commitment period.
Standby letters of credit outstanding at June 30, 2008 had terms ranging from one month to five
years. The aggregate contract amount of the standby letters of credit of approximately $118,368,000
at June 30, 2008, represent the maximum potential amount of future payments the Corporation could
be required to make under the guarantees in the event of non-performance by its customers. These
standby letters of credit typically expire without being drawn upon. Management does not anticipate
any material losses related to these guarantees.
17. Segment Information:
Types of Products and Services
The Corporation has five reportable segments: Commercial Banking, Mortgage Banking, Consumer
Finance, Treasury and Investments and Wealth Management. Insurance operations and International
Banking are other lines of business in which the Corporation commenced its involvement during 2000
and 2001, respectively, and are included in the Other column below since they did not meet the
quantitative thresholds for disclosure of segment information.
Measurement of Segment Profit or Loss and Segment Assets
The Corporations reportable business segments are strategic business units that offer
distinctive products and services that are marketed through different channels. These are managed
separately because of their unique technology, marketing and distribution requirements.
The following present financial information of reportable segments as of and for the six
months ended June 30, 2008 and 2007. General corporate expenses and income taxes have not been
added or deducted in the determination of operating segment profits. The Other column includes
insurance and international banking operations and the items necessary to
29
reconcile the identified
segments to the reported consolidated amounts. Included in the Other column are expenses of the
internal audit, investors relations, strategic planning, administrative services, mail, marketing,
public relations, electronic data processing departments and comptrollers departments. The
Eliminations column includes all intercompany eliminations for consolidation purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
(Dollars in thousands)
|
Total external revenue
|
|
$
|
157,785
|
|
|
$
|
83,876
|
|
|
$
|
71,828
|
|
|
$
|
36,684
|
|
|
$
|
41,271
|
|
|
$
|
22,657
|
|
|
$
|
(18,282
|
)
|
|
$
|
395,819
|
|
Intersegment revenue
|
|
|
1,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446
|
|
|
|
16,677
|
|
|
|
(18,282
|
)
|
|
|
|
|
Interest income
|
|
|
126,743
|
|
|
|
83,932
|
|
|
|
71,427
|
|
|
|
34,768
|
|
|
|
1,442
|
|
|
|
11,087
|
|
|
|
(16,935
|
)
|
|
|
312,464
|
|
Interest expense
|
|
|
31,634
|
|
|
|
39,140
|
|
|
|
13,423
|
|
|
|
53,741
|
|
|
|
1,197
|
|
|
|
10,788
|
|
|
|
(13,104
|
)
|
|
|
136,819
|
|
Depreciation and
amortization
|
|
|
2,159
|
|
|
|
1,230
|
|
|
|
1,534
|
|
|
|
472
|
|
|
|
685
|
|
|
|
1,717
|
|
|
|
|
|
|
|
7,797
|
|
Segment income (loss)
before income tax
|
|
|
32,994
|
|
|
|
37,547
|
|
|
|
3,211
|
|
|
|
(21,221
|
)
|
|
|
14,021
|
|
|
|
(29,500
|
)
|
|
|
(3,831
|
)
|
|
|
33,221
|
|
Segment assets
|
|
|
3,619,519
|
|
|
|
2,762,277
|
|
|
|
679,010
|
|
|
|
1,511,257
|
|
|
|
134,369
|
|
|
|
1,207,869
|
|
|
|
(1,075,610
|
)
|
|
|
8,838,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
(Dollars in thousands)
|
Total external revenue
|
|
$
|
167,766
|
|
|
$
|
93,380
|
|
|
$
|
73,426
|
|
|
$
|
37,776
|
|
|
$
|
29,776
|
|
|
$
|
24,447
|
|
|
$
|
(25,286
|
)
|
|
$
|
401,285
|
|
Intersegment revenue
|
|
|
5,005
|
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
2,104
|
|
|
|
12,577
|
|
|
|
(25,286
|
)
|
|
|
|
|
Interest income
|
|
|
148,218
|
|
|
|
83,479
|
|
|
|
71,357
|
|
|
|
35,593
|
|
|
|
1,173
|
|
|
|
12,484
|
|
|
|
(16,984
|
)
|
|
|
335,320
|
|
Interest expense
|
|
|
48,720
|
|
|
|
49,636
|
|
|
|
19,208
|
|
|
|
56,241
|
|
|
|
1,617
|
|
|
|
15,375
|
|
|
|
(13,076
|
)
|
|
|
177,721
|
|
Depreciation and
amortization
|
|
|
2,020
|
|
|
|
1,018
|
|
|
|
2,199
|
|
|
|
380
|
|
|
|
567
|
|
|
|
2,140
|
|
|
|
|
|
|
|
8,324
|
|
Segment income (loss)
before income tax
|
|
|
54,401
|
|
|
|
25,957
|
|
|
|
(5,896
|
)
|
|
|
(21,544
|
)
|
|
|
7,961
|
|
|
|
(31,323
|
)
|
|
|
(4,667
|
)
|
|
|
24,889
|
|
Segment assets
|
|
|
3,820,064
|
|
|
|
2,776,946
|
|
|
|
724,439
|
|
|
|
1,633,827
|
|
|
|
104,679
|
|
|
|
593,954
|
|
|
|
(457,750
|
)
|
|
|
9,196,159
|
|
Reconciliation of Segment Information to Consolidated Amounts
Information for the Corporations reportable segments in relation to the consolidated totals
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
(Dollars in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
$
|
391,444
|
|
|
$
|
402,124
|
|
Other revenues
|
|
|
22,657
|
|
|
|
24,447
|
|
Elimination of intersegment revenues
|
|
|
(18,282
|
)
|
|
|
(25,286
|
)
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
395,819
|
|
|
$
|
401,285
|
|
|
|
|
|
|
|
|
Total income before tax of reportable segments
|
|
$
|
66,552
|
|
|
$
|
60,879
|
|
Loss before tax of other segments
|
|
|
(29,500
|
)
|
|
|
(31,323
|
)
|
Elimination of intersegment profits
|
|
|
(3,831
|
)
|
|
|
(4,667
|
)
|
|
|
|
|
|
|
|
Consolidated income before tax
|
|
$
|
33,221
|
|
|
$
|
24,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
8,706,432
|
|
|
$
|
9,059,955
|
|
Assets not attributed to segments
|
|
|
1,207,869
|
|
|
|
593,954
|
|
Elimination of intersegment assets
|
|
|
(1,075,610
|
)
|
|
|
(457,750
|
)
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
8,838,691
|
|
|
$
|
9,196,159
|
|
|
|
|
|
|
|
|
30
18. Fair Value Disclosures:
As discussed in Note 1, Summary of Significant Accounting Policies and Other Matters to the
condensed consolidated financial statement, effective January 1, 2008, the Corporation adopted SFAS
157, which provides a framework for measuring fair value under GAAP.
The Corporation also adopted SFAS 159 on January 1, 2008. SFAS 159 allows an entity the
irrevocable option to elect fair value for the initial and subsequent measurement for certain
financial assets and liabilities on a contract-by-contract basis. The Corporation elected to adopt
the fair value option for certain callable brokered certificates of deposits and subordinated notes
on the adoption date. SFAS 159 requires that the difference between the carrying value before
election of the fair value option and the fair value of these instruments be recorded as an
adjustment to beginning retained earnings in the period of adoption.
The following table summarizes the impact of adopting the fair value option for certain
financial instruments on January 1, 2008. Amounts shown represent the carrying value of the
affected instruments before and after the changes in accounting resulting from the adoption SFAS
159.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance as of
|
|
|
|
|
|
Opening Balance as of
|
|
|
|
December 31, 2007
|
|
|
Adoption Net
|
|
|
January 01, 2008
|
|
|
|
(Prior to Adoption)*
|
|
|
Gain (Loss)
|
|
|
(After Adoption)
|
|
Impact of Electing the Fair Value Option under SFAS 159:
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(763,476
|
)
|
|
$
|
64
|
|
|
$
|
(763,412
|
)
|
Subordinated Capital Notes
|
|
|
(123,686
|
)
|
|
|
5,134
|
|
|
|
(118,552
|
)
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect Adjustments (pre-tax)
|
|
$
|
(887,162
|
)
|
|
|
5,198
|
|
|
$
|
(881,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Tax Impact
|
|
|
|
|
|
|
(1,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect Adjustment Increase to Retained Earnings, net of tax
|
|
|
|
|
|
$
|
3,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of debt issue cost, placement fees and basis adjustments as of
December 31, 2007
|
Fair Value Measurement
The Corporation uses fair value measurements to record fair value adjustments to certain
financial instruments. Trading securities, securities available for sale, derivatives and certain
brokered deposits and subordinate notes are financial instruments recorded at fair value on a
recurring basis. The Corporation may be required to record at fair value other financial assets on
a nonrecurring basis such as loans held for sale. These nonrecurring fair value adjustments involve
the application of lower of cost or market accounting.
SFAS 157 defines fair value as the price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. SFAS 157
also establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
|
Level 1:
|
|
Quoted prices in active markets for identical assets or liabilities. Level 1 assets
and liabilities include debt and equity securities and derivative contracts that are traded in an
active exchange market, as well as certain U.S.
treasury, other U.S. Government and agency mortgage-backed debt securities that are highly
liquid and are actively traded in over-the-counter markets.
|
|
|
Level 2:
|
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for substantially the full term of the assets or
liabilities. Level 2 assets and liabilities include securities with quoted prices that are traded
less frequently than exchange-traded instruments, securities and
|
31
|
|
|
derivative contracts and financial
liabilities whose value is determined using a pricing model with inputs that are observable in the
market or can be derived principally from or corroborated by observable market data. This category
generally includes certain mortgage-backed debt securities, corporate debt securities, derivative
contracts, callable brokered certificates of deposits and subordinated notes.
|
|
|
Level 3:
|
|
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models such as discounted cash flow
methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant management judgment or estimation. This category generally includes
certain Puerto Rico corporate debt securities, closed end funds and certain derivatives contract.
|
The following table presents for each of these hierarchy levels, the Corporations assets and
liabilities that are measured at fair value on a recurring basis at June 30, 2008, including
financial instruments for which the Corporation has elected the fair value option:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
$
|
695
|
|
|
$
|
37,816
|
|
|
$
|
30,874
|
|
|
$
|
69,385
|
|
Investment Securities AFS
|
|
|
572,994
|
|
|
|
554,415
|
|
|
|
|
|
|
|
1,127,409
|
|
Derivative Assets
|
|
|
513
|
|
|
|
62,367
|
|
|
|
2,918
|
|
|
|
65,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets, at Fair Value
|
|
$
|
574,202
|
|
|
$
|
654,598
|
|
|
$
|
33,792
|
|
|
$
|
1,262,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (1)
|
|
$
|
|
|
|
$
|
285,527
|
|
|
$
|
|
|
|
$
|
285,527
|
|
Subordinated Capital Notes (2)
|
|
|
|
|
|
|
115,973
|
|
|
|
|
|
|
|
115,973
|
|
Derivative Liabilities
|
|
|
|
|
|
|
65,131
|
|
|
|
3,034
|
|
|
|
68,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, at Fair Value
|
|
$
|
|
|
|
$
|
466,631
|
|
|
$
|
3,034
|
|
|
$
|
469,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represent certain callable brokered certificates of deposits for which the Corporation has elected the fair value option
under SFAS 159.
|
|
(2)
|
|
Amounts represent certain subordinated capital notes for which the Corporation has elected the fair value option under SFAS 159.
|
Level 3 assets and liabilities were 2.70% and 0.65% of Total Assets at fair value and Total
Liabilities at fair value, respectively, at June 30, 2008.
The following table presents the reconciliation for all assets and liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) for the period from
January 1, 2008 to June 30, 2008:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains included in
|
|
|
Transfers
|
|
|
Purchases,
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
in and/or
|
|
|
issuances
|
|
|
|
|
|
|
gains (loss)
|
|
|
|
January 1,
|
|
|
|
|
|
|
Comprehensive
|
|
|
out of
|
|
|
and
|
|
|
June 30,
|
|
|
still
|
|
|
|
2008
|
|
|
Earnings
|
|
|
Income
|
|
|
Level 3
|
|
|
settlements
|
|
|
2008
|
|
|
held (2)
|
|
Trading Securities (1)
|
|
$
|
20,150
|
|
|
$
|
1,529
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,195
|
|
|
$
|
30,874
|
|
|
$
|
32
|
|
Derivatives, net
|
|
|
45
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,195
|
|
|
$
|
1,368
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,195
|
|
|
$
|
30,758
|
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Changes in fair value and gains and losses from sales for these instruments are recorded in other income while interest revenue and expense are included
in the net interest income based on the contractual coupons on the consolidated statements of income. The amounts above do not include interest.
|
|
(2)
|
|
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains (losses)
relating to assets and liabilities classified as Level 3 that are still held at June 30, 2008.
|
32
The table below summarizes gains and losses due to changes in fair value, including both
realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities
for the period from January 1, 2008 to June 30, 2008. These amounts include gains and losses
generated by derivative contracts and trading securities, which are continued to carry at fair
value after the adoption of SFAS 159.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Total Gains and Losses
|
|
|
|
Trading
|
|
|
Net
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
|
(1)
|
|
|
(1)
|
|
Classification of gains and losses (realized/unrealized)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
1,529
|
|
|
$
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.
|
The table below summarizes changes in unrealized gains or losses recorded in earnings for the
period from January 1, 2008 to June 30, 2008 for Level 3 assets and liabilities that are still held
at June 30, 2008. These amounts include changes in fair value for derivative contracts and trading
securities which are continued to carry at fair value after the adoption of SFAS 159.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains (Loss)
|
|
|
|
Trading
|
|
|
Net
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
|
(1)
|
|
|
(1)
|
|
Classification of unrealized gains (losses)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
32
|
|
|
$
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.
|
Determination of Fair Value
The following is a description of the valuation methodologies used for instruments for which
fair value is presented as well as for instruments that the Corporation has elected the fair value
option. The estimated fair value was calculated using certain facts and assumptions, which vary
depending on the specific financial instrument.
Trading Securities
Trading securities are recorded at fair value and consist primarily of US Government and
agencies, US corporate debt and equity securities, Puerto Rico Government, corporate debt and
equity securities. Fair value is generally based on quoted market prices. If these market prices
are not available, fair values are estimated based on dealer quotes, pricing models, discounted
cash flow methodologies or similar techniques for which the determination of fair value may require
significant management judgment or estimation. Level 1 trading securities include those identical
securities traded in active markets. . Level 2 trading securities primarily include Puerto Rico
Government and open ended funds. Investments in Puerto Rico open ended funds are valued using a net
asset value approach and if redeemed must be at net asset value.
Level 3 trading securities primarily include Puerto Rico corporate debt securities and fixed
income closed end funds. At June 30, 2008 the majority of these instruments were valued based on
dealer indicative quotes.
33
Available for Sale Investment Securities
Investment securities available for sale are recorded at fair value on a recurring basis. Fair
value measurement is based upon quoted prices, if available. If quoted prices are not available,
fair values are measured using independent pricing models or other model-based valuation techniques
such as discounted cash flow methodologies, adjusted for the securitys credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1 Investment securities
available for sale include those identical securities traded in active markets, such as U.S.
treasury and agency securities. Level 2 securities primarily include Puerto Rico Government and
mortgage-backed securities.
Derivatives
For exchange-traded contracts, fair value is based on quoted market prices, and accordingly,
classified as Level 1. For non-exchange traded contracts, fair value is based on internally
developed proprietary models or discounted cash flow methodology using various inputs. The inputs
include those characteristics of the derivative that have a bearing on the economics of the
instrument.
The determination of the fair value of many derivatives is mainly derived from inputs that are
observable in the market place. Such inputs include yield curves, publicly available volatilities,
floating indexes, foreign exchange prices, and accordingly, are classified as Level 2 inputs.
Level 3 derivatives include interest rate lock commitments (IRLCs), the fair value for which
is derived from the fair value of related mortgage loans primarily based on observable inputs. In
estimating the fair value of an IRLC, the Corporation assigns a probability to the loan commitment
based on an expectation that it will be exercised and the loan will be funded. In addition, certain
OTC equity linked options are priced by counterparties and such values cannot be observed or
corroborated with market data. Accordingly, these derivatives are classified as Level 3 inputs.
Valuations of derivative assets and liabilities reflect the value of the instruments including
the values associated with counterparty risk. With the issuance of SFAS 157, these values must also
take into account the Corporations own credit standing, thus including in the valuation of the
derivative instrument the value of the net credit differential between the counterparties to the
derivative contract. Effective January 1, 2008, the Corporation updated its methodology to include
the impact of both counterparty and its own credit standing.
Loans Held for Sale
Fair values for loans held for sale are based on observable inputs, such as observable market
prices, credit spreads and interest rate yield curves when available. In instances when significant
valuation assumptions are not readily observable in the market, instruments are valued based on the
best available data in order to approximate fair value. This data may be internally developed and
independent pricing models may be used and considers types of loans, conformity of loans,
delinquency statistics and risk premiums that a market participant would require. Since these
values cannot be observed or corroborated with market data, they are classified as Level 3.
Loans
Any allowance for collateral dependent loans deemed impaired is measured based on the fair
value of the underlying collateral and its estimated dispositions costs. The fair value of
collateral is determined by external valuation specialist, and accordingly classified as Level 3
inputs.
Deposits and Subordinated Capital Notes
The fair value of callable brokered certificates of deposits, included within deposits, and
subordinated capital notes is determined using discounted cash flow analyses over the full term of
the instruments. The valuation uses an industry-standard model for the instruments with callable
option components. The model incorporates such observable inputs as yield curves, publicly
available volatilities and floating indexes and accordingly, is classified as a Level 2 inputs.
Effective January 1, 2008, the Corporation updated its methodology to include the impact of its own
credit standing. As such, the effect of credit component on the fair value of subordinated capital
notes was determined based on the CORP Curve 70 (the US Banks A-rated curve) from Bloomberg.
34
Non-Recurring Measurements
The following table presents the change in carrying value of those financial assets measured
at fair value on a non-recurring basis, for which impairment was recognized in the current period.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as of June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
Carrying
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
Valuation
|
|
|
|
Value
|
|
|
Active Markets for
|
|
|
Other
|
|
|
Unobservable
|
|
|
Allowance
|
|
|
|
as of
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
as of
|
|
|
|
June 30, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
June 30, 2008
|
|
Loans Held for Sale (1)
|
|
$
|
136,745
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
136,745
|
|
|
$
|
2,370
|
|
Loans, net(2)
|
|
|
87,900
|
|
|
|
|
|
|
|
|
|
|
|
87,900
|
|
|
|
10,421
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
224,645
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
224,645
|
|
|
$
|
12,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These balances were not impacted by the election of the fair value option and are measured at fair value on a non-recurring basis in accordance with
applicable accounting policies.
|
|
(2)
|
|
Amount represented loans measured for impairment based on the fair value of the collateral using the practical expedient in SFAS 114,
Accounting by Creditors for Impairment of a Loan.
|
Fair Value Option
Callable Brokered Certificates of Deposits and Subordinated Capital Notes
The Corporation elected to account at fair value certain of its callable brokered certificates
of deposits and subordinated capital notes that were hedged with interest rate swaps designated for
fair value hedge accounting in accordance with SFAS 133. As of June 30, 2008, these callable
brokered certificates of deposits had a fair value of $285.6 million and principal balance of
$286.7 million recorded in interest-bearing deposits; and subordinated capital notes had a fair
value of $116.0 million and principal balance of $125.0 million. Interest expense on these items
is recorded in Net Interest Income whereas net gains (losses) resulting from the changes in fair
value of these items, were recorded within Other Income on the Corporations condensed consolidated
statement of income. Electing the fair value option allows the Corporation to be relieved of the
burden of complying with the requirements for hedge accounting under SFAS 133 (e.g., documentation
and effectiveness assessment) without incremental earnings volatility. Subsequent to the adoption
of SFAS 159, debt issuance costs are recognized in Net Interest Income when incurred. Interest
rate risk on the callable brokered certificates of deposits and subordinated capital notes
measured at fair value under SFAS 159 continues to be economically hedged with callable interest
rate swaps with the same terms and conditions.
As a result of the adoption of SFAS 159, the Corporation elected to also apply the fair value
option to new positions within the brokered certificates of deposits and subordinated capital
notes, where the Corporation would otherwise have hedged with interest rate swaps designated as a
fair value hedge in accordance with SFAS 133.
The following table represents changes in fair value for the six months ended June 30, 2008
which includes the interest expense on callable brokered certificates of deposits of $13.0 million
and interest expense on subordinated capital notes of $3.9 million. Interest expense on callable
brokered certificates of deposits and subordinated capitals notes that the Corporation has elected
to carry at fair value under the provisions of SFAS 159 are recorded in interest expense in the
Condensed consolidated Statements of Income based on their contractual coupons.
35
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Changes in
|
|
|
|
Changes in
|
|
|
Changes in
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
included in
|
|
|
|
included in
|
|
|
included in
|
|
|
Current Period
|
|
|
|
Interest Expense
|
|
|
Other Income
|
|
|
Earnings
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(12,978
|
)
|
|
$
|
(2,375
|
)
|
|
$
|
(15,353
|
)
|
Subordinated Capital Notes
|
|
|
(3,888
|
)
|
|
|
2,579
|
|
|
|
(1,309
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(16,866
|
)
|
|
$
|
204
|
|
|
$
|
(16,662
|
)
|
|
|
|
|
|
|
|
|
|
|
The impacts of changes in the Corporation credit risk on subordinated capital notes for the
six months ended June 30, 2008 presented in the table below have been calculated as the difference
between the fair value of those instruments as of the reporting date and the theoretical fair
values of those instruments calculated by using the yield curve prevailing at the end of the
reporting period, adjusted up or down for changes in the Corporations credit spreads from the
transition date to the reporting date.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Total
|
|
|
|
related
|
|
|
not related
|
|
|
Gains
|
|
|
|
Credit Risk
|
|
|
Credit Risk
|
|
|
(Losses)
|
|
Subordinated Capital Notes
|
|
$
|
2,171
|
|
|
$
|
(3,480
|
)
|
|
$
|
(1,309
|
)
|
|
|
|
|
|
|
|
|
|
|
36
PART I ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Santander BanCorp
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
312,464
|
|
|
$
|
335,320
|
|
|
$
|
153,436
|
|
|
$
|
168,242
|
|
Interest expense
|
|
|
136,819
|
|
|
|
177,721
|
|
|
|
62,391
|
|
|
|
90,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
175,645
|
|
|
|
157,599
|
|
|
|
91,045
|
|
|
|
78,197
|
|
Gain on sale of securities
|
|
|
2,874
|
|
|
|
238
|
|
|
|
|
|
|
|
49
|
|
Broker-dealer, asset management and insurance fees
|
|
|
41,973
|
|
|
|
32,369
|
|
|
|
19,986
|
|
|
|
16,081
|
|
Other income
|
|
|
38,508
|
|
|
|
33,358
|
|
|
|
11,010
|
|
|
|
15,782
|
|
Operating expenses
|
|
|
147,689
|
|
|
|
145,801
|
|
|
|
76,245
|
|
|
|
73,754
|
|
Provision for loan losses
|
|
|
78,090
|
|
|
|
52,874
|
|
|
|
38,515
|
|
|
|
30,850
|
|
Income tax provision
|
|
|
8,983
|
|
|
|
9,064
|
|
|
|
765
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,238
|
|
|
$
|
15,825
|
|
|
$
|
6,516
|
|
|
$
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE DATA*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.52
|
|
|
$
|
0.34
|
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
Book value
|
|
$
|
12.03
|
|
|
$
|
12.26
|
|
|
$
|
12.03
|
|
|
$
|
12.26
|
|
Outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
End of period
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
Cash Dividend per Share
|
|
$
|
0.20
|
|
|
$
|
0.32
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
AVERAGE BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loans losses
|
|
$
|
6,856,580
|
|
|
$
|
6,888,251
|
|
|
$
|
6,751,233
|
|
|
$
|
6,916,569
|
|
Allowance for loan losses
|
|
|
170,994
|
|
|
|
112,513
|
|
|
|
175,460
|
|
|
|
117,151
|
|
Earning assets
|
|
|
8,471,326
|
|
|
|
8,467,210
|
|
|
|
8,537,455
|
|
|
|
8,484,144
|
|
Total assets
|
|
|
9,204,584
|
|
|
|
9,113,814
|
|
|
|
9,241,576
|
|
|
|
9,135,829
|
|
Deposits
|
|
|
5,536,427
|
|
|
|
5,149,455
|
|
|
|
6,066,138
|
|
|
|
5,125,327
|
|
Borrowings
|
|
|
2,795,535
|
|
|
|
3,063,169
|
|
|
|
2,319,625
|
|
|
|
3,104,104
|
|
Common equity
|
|
|
562,704
|
|
|
|
588,392
|
|
|
|
572,550
|
|
|
|
596,328
|
|
PERIOD END BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loans losses
|
|
$
|
6,625,004
|
|
|
$
|
6,882,657
|
|
|
$
|
6,625,004
|
|
|
$
|
6,882,657
|
|
Allowance for loan losses
|
|
|
186,889
|
|
|
|
127,916
|
|
|
|
186,889
|
|
|
|
127,916
|
|
Earning assets
|
|
|
8,206,837
|
|
|
|
8,624,961
|
|
|
|
8,206,837
|
|
|
|
8,624,961
|
|
Total assets
|
|
|
8,838,691
|
|
|
|
9,196,159
|
|
|
|
8,838,691
|
|
|
|
9,196,159
|
|
Deposits
|
|
|
5,978,256
|
|
|
|
5,280,132
|
|
|
|
5,978,256
|
|
|
|
5,280,132
|
|
Borrowings
|
|
|
2,027,176
|
|
|
|
3,015,175
|
|
|
|
2,027,176
|
|
|
|
3,015,175
|
|
Common equity
|
|
|
561,086
|
|
|
|
571,846
|
|
|
|
561,086
|
|
|
|
571,846
|
|
Continued
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
SELECTED RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
margin on a tax-equivalent basis (on an annualized basis)
|
|
|
4.23
|
%
|
|
|
3.86
|
%
|
|
|
4.34
|
%
|
|
|
3.79
|
%
|
Efficiency ratio (1)
|
|
|
58.64
|
%
|
|
|
64.06
|
%
|
|
|
65.55
|
%
|
|
|
65.78
|
%
|
Return on average total assets (on an annualized basis)
|
|
|
0.53
|
%
|
|
|
0.35
|
%
|
|
|
0.28
|
%
|
|
|
0.18
|
%
|
Return on average common equity (on an annualized basis)
|
|
|
8.66
|
%
|
|
|
5.42
|
%
|
|
|
4.58
|
%
|
|
|
2.76
|
%
|
Dividend payout
|
|
|
38.46
|
%
|
|
|
94.12
|
%
|
|
|
71.43
|
%
|
|
|
177.78
|
%
|
Average net loans/average total deposits
|
|
|
123.84
|
%
|
|
|
133.77
|
%
|
|
|
111.29
|
%
|
|
|
134.95
|
%
|
Average earning assets/average total assets
|
|
|
92.03
|
%
|
|
|
92.91
|
%
|
|
|
92.38
|
%
|
|
|
92.87
|
%
|
Average stockholders equity/average assets
|
|
|
6.11
|
%
|
|
|
6.46
|
%
|
|
|
6.20
|
%
|
|
|
6.53
|
%
|
Fee income to average assets (annualized)
|
|
|
1.43
|
%
|
|
|
1.26
|
%
|
|
|
1.35
|
%
|
|
|
1.24
|
%
|
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-adjusted assets
|
|
|
8.08
|
%
|
|
|
7.78
|
%
|
|
|
8.08
|
%
|
|
|
7.78
|
%
|
Total capital to risk-adjusted assets
|
|
|
11.18
|
%
|
|
|
10.81
|
%
|
|
|
11.18
|
%
|
|
|
10.81
|
%
|
Leverage Ratio
|
|
|
5.68
|
%
|
|
|
5.69
|
%
|
|
|
5.68
|
%
|
|
|
5.69
|
%
|
Asset quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
4.09
|
%
|
|
|
1.95
|
%
|
|
|
4.09
|
%
|
|
|
1.95
|
%
|
Annualized net charge-offs to average loans
|
|
|
1.66
|
%
|
|
|
0.92
|
%
|
|
|
1.79
|
%
|
|
|
1.03
|
%
|
Allowance for loan losses to period-end loans
|
|
|
2.74
|
%
|
|
|
1.82
|
%
|
|
|
2.74
|
%
|
|
|
1.82
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
67.11
|
%
|
|
|
93.39
|
%
|
|
|
67.11
|
%
|
|
|
93.39
|
%
|
Allowance for loan losses to non-performing loans plus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accruing loans past-due 90 days or more
|
|
|
64.48
|
%
|
|
|
86.87
|
%
|
|
|
64.48
|
%
|
|
|
86.87
|
%
|
Non-performing assets to total assets
|
|
|
3.36
|
%
|
|
|
1.56
|
%
|
|
|
3.36
|
%
|
|
|
1.56
|
%
|
Recoveries to charge-offs
|
|
|
3.17
|
%
|
|
|
6.48
|
%
|
|
|
2.92
|
%
|
|
|
4.29
|
%
|
EARNINGS TO FIXED CHARGES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
1.56
|
x
|
|
|
1.29
|
x
|
|
|
1.32
|
x
|
|
|
1.12
|
x
|
Including interest on deposits
|
|
|
1.24
|
x
|
|
|
1.14
|
x
|
|
|
1.11
|
x
|
|
|
1.06
|
x
|
OTHER DATA AT END OF PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer financial assets under management
|
|
$
|
14,189,000
|
|
|
$
|
13,568,000
|
|
|
$
|
14,189,000
|
|
|
$
|
13,568,000
|
|
Bank branches
|
|
|
57
|
|
|
|
61
|
|
|
|
57
|
|
|
|
61
|
|
Consumer Finance branches
|
|
|
68
|
|
|
|
69
|
|
|
|
68
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branches
|
|
|
125
|
|
|
|
130
|
|
|
|
125
|
|
|
|
130
|
|
ATMs
|
|
|
143
|
|
|
|
141
|
|
|
|
143
|
|
|
|
141
|
|
(Concluded)
|
|
|
*
|
|
Per share data is based on the average number of shares outstanding during the periods.
|
|
(1)
|
|
Operating expenses, divided by net interest income on a tax equivalent basis, plus other income
excluding gain on sale of securities, gain on equity securities and extinguishment of liabilities.
|
39
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial discussion contains an analysis of the consolidated financial position and
consolidated results of operations of Santander BanCorp and its wholly-owned subsidiaries (the
Corporation) and should be read in conjunction with the consolidated financial statements, notes
and tables included elsewhere in this report.
The Corporation, similarly to other financial institutions, is subject to certain risks, many
of which are beyond managements control, though efforts and initiatives are undertaken to manage
those risks in conjunction with return optimization. Among the risks being managed are: (1) market
risk, which is the risk that changes in market rates and prices will adversely affect the
Corporations financial condition or results of operations, (2) liquidity risk, which is the risk
that the Corporation will have insufficient cash or access to cash to meet operating needs and
financial obligations, (3) credit risk, which is the risk that loan customers or other
counterparties will be unable to perform their contractual obligations, and (4) operational risk,
which is the risk of loss resulting from inadequate or failed internal processes, people and
systems, or from external events. In addition, the Corporation is subject to legal, compliance and
reputational risks, among others.
As a provider of financial services, the Corporations earnings are significantly affected by
general economic and business conditions. Credit, funding, including deposit origination and fee
income generation activities are influenced by the level of business spending and investment,
consumer income, spending and savings, capital market activities, competition, customer
preferences, interest rate conditions and prevailing market rates on competing products. The
Corporation constantly monitors general business and economic conditions, industry-related trends
and indicators, competition from traditional and non-traditional financial services providers,
interest rate volatility, indicators of credit quality, demand for loans and deposits, operational
efficiencies, including systems, revenue and profitability improvement and regulatory changes in
the financial services industry, among others. The Corporation operates in a highly regulated
environment and may be adversely affected by changes in federal and local laws and regulations.
Also, competition with other financial services providers could adversely affect the Corporations
profitability.
In addition to the information contained in this Form 10-Q, readers should consider the
description of the Corporations business contained in Item 1 of the Corporations Form 10-K for
the year ended December 31, 2007. While not all inclusive, Item 1 of the Form 10-K, discusses
additional information about the business of the Corporation and risk factors, many beyond the
Corporations control, that provides further discussion of the operating results, financial
condition and credit, market and liquidity risks is presented in the narrative and tables included
herein.
Critical Accounting Policies
The consolidated financial statements of the Corporation and its wholly-owned subsidiaries are
prepared in accordance with accounting principles generally accepted in the United States of
America (hereinafter referred to as generally accepted accounting principles or GAAP) and with
general practices within the financial services industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The Corporations critical
accounting policies are detailed in the Financial Review and Supplementary Information section of
the Corporations Form 10-K for the year ended December 31, 2007.
Current Accounting Developments
Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements
, for all financial
instruments accounted for at fair value on a recurring basis. In February 2008, the FASB issued a
final staff position (FSP FAS 157-2) that partially delayed the effective date of SFAS 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. As such,
the Corporation did not adopt SFAS 157 for those nonfinancial assets and liabilities eligible for
deferral under FSP FAS 157-2 and is evaluating the impact that this adoption may have on its
consolidated financial statements and disclosures. Adoption of SFAS 157 did not have a material
effect on the Corporations financial position and results of operations. Illiquidity in the credit
markets contributed to the amount of our reported Level 3 instruments, primarily in our trading and
loan portfolios. At June 30, 2008, the aggregate amount of instruments requiring fair value
measurement on a recurring basis included in Level 3 represented approximately 2.70% and 0.65% of
the aggregate amount of consolidated assets and liabilities recorded at fair value respectively.
The amount we report in Level 3 in future periods will be affected by market conditions. See Notes
1 and 18 to the accompanying consolidated financial statements for further information related to
the adoption of SFAS 157.
40
In conjunction with the adoption of SFAS 157, effective January 1, 2008, the Corporation
adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) 159,
The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS 159 provides
an option for most financial assets and liabilities to be reported at fair value on an
instrument-by-instrument basis with changes in fair value reported in earnings. The election is
made at the initial adoption, at the acquisition of a financial asset, financial liability or a
firm commitment and it may not be revoked. Under the SFAS 159 transition provisions, the
Corporation has elected to report certain callable brokered certificates of deposits and
subordinated notes at fair value with future changes in value reported in earnings. SFAS 159
provides an opportunity to mitigate volatility in reported earnings as well as reducing the burden
associated with complex hedge accounting requirements. As a result of this adoption and election
under the fair value option, the Corporation reported an after-tax increase in opening retained
earnings of $3.2 million. See Notes 1 and 18 to the accompanying consolidated financial statements
for further information related to the adoption of SFAS 159.
Fair Value Measurement
The Corporations estimates of fair value for financial instruments are based on the framework
established in SFAS 157. The fair value of a financial instrument is the estimated amount at which
the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated
willing parties, i.e., not in a forced transaction. The disclosure of fair value estimates in the
SFAS 157 hierarchy is based on whether the significant inputs into the valuation are observable.
In determining such estimates and the level of the hierarchy in which the estimate is disclosed,
the highest priority is given to unadjusted quoted prices in active markets, the lowest priority to
unobservable inputs that reflect the Corporations market assumptions. SFAS 157 requires the use
of observable inputs when available. Additionally, the level at which a financial instrument is
reported is based on the lowest level of any significant input into the estimation of fair value.
The three levels of the hierarchy are as follows:
|
|
|
Level 1
-
Unadjusted quoted market prices for identical assets or liabilities in active
markets that the Corporation has the ability to access.
|
|
|
|
|
Level 2
-
Quoted prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in inactive markets; or valuations
based on models where the significant inputs are observable (e.g., interest rates, yield
curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by
observable market data.
|
|
|
|
|
Level 3
-
Valuations based on models where significant inputs are not observable. The
unobservable inputs reflect the Corporations own assumptions about the assumptions that
market participants would use.
|
The Corporation uses quoted market prices, when available, to determine estimates of fair
value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted
market prices are unavailable, the Corporation is assisted to obtain fair value estimates from a
nationally recognized pricing service that determines fair value estimates based on objectively
verifiable information: relevant market information, relevant credit information, perceived market
movements and sector news. The market inputs utilized in the pricing evaluation, listed in the
approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry
and economic events. Depending on the security, the priority of the use of inputs may change or
some market inputs may not be relevant. For some securities additional inputs may be necessary.
The Corporation reviews the estimates of fair value provided by the pricing service and compares
the estimates to the Corporations knowledge of the market to determine if the estimates obtained
are representative of the prices in the market. The Corporation will challenge any prices deemed
not to be representative of fair value. The fair value estimates provided from this pricing service
are included in the amount disclosed in Level 2 of the hierarchy.
If quoted market prices and an estimate from a pricing service are unavailable, the
Corporation produces an estimate of fair value based on internally developed valuation techniques,
which, depending on the level of observable market inputs, will render the fair value estimate as
Level 2 or Level 3. See Note 18 to the accompanying consolidated financial statements for further
information related to valuation methods used by the Corporation for each type of financial
instruments that are carried at fair value.
The Corporation employs control processes to validate the fair value of its financial
instruments. These control processes are designed to assure that the values used for financial
reporting are based on observable inputs wherever possible. In the event that observable inputs are
not available, the control processes are designed to assure that the valuation approach utilized is
appropriate and consistently applied, and the assumptions are reasonable. These control processes
include validation and corroboration procedures over the quotes and prices obtained from brokers
and counterparties, as
41
well as reviews of the pricing models appropriateness by the personnel with relevant expertise,
which are independent from the trading desks on a quarterly basis. In addition, the Corporation is
considering recently executed comparable transaction and other observable market data for purposes
of validating assumptions used in the models.
The Corporation understands that any increases and/or decreases in the aggregate fair value of
its assets and liabilities will not materially affect its liquidity and capital resources
Overview of Results of Operations for the Six-Month and Three-Month Periods Ended June 30, 2008 and 2007
Santander BanCorp is the financial holding company for Banco Santander Puerto Rico and
subsidiary (the Bank), Santander Securities Corporation and subsidiary, Santander Financial
Services, Inc., Santander Insurance Agency, Inc. and Island Insurance Corporation.
For the six-month and three-month periods ended June 30, 2008 and 2007, net income and other
selected financial information, as reported are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
Three months ended
|
($ in thousands, except earnings per share)
|
|
30-Jun-08
|
|
30-Jun-07
|
|
30-Jun-08
|
|
30-Jun-07
|
Net Income
|
|
$
|
24,238
|
|
|
$
|
15,825
|
|
|
$
|
6,516
|
|
|
$
|
4,096
|
|
EPS
|
|
$
|
0.52
|
|
|
$
|
0.34
|
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
ROA
|
|
|
0.53
|
%
|
|
|
0.35
|
%
|
|
|
0.28
|
%
|
|
|
0.18
|
%
|
ROE
|
|
|
8.66
|
%
|
|
|
5.42
|
%
|
|
|
4.58
|
%
|
|
|
2.76
|
%
|
Efficiency Ratio (*)
|
|
|
58.64
|
%
|
|
|
64.06
|
%
|
|
|
65.55
|
%
|
|
|
65.78
|
%
|
|
|
|
(*)
|
|
Operating expenses divided by net interest income on a tax equivalent basis, plus other income
excluding gain on sale of securities, gain on equity securities and extinguishment of liabilities
and derivatives.
|
Results of Operations for the Six-Month Periods and Three-Month Periods ended June 30, 2008 and 2007
The Corporation reported a net income of $24.2 million for the six-month period ended June 30,
2008, compared with net income of $15.8 million for the same period in 2007. Earnings per common
share (EPS) for the six-month periods ended June 30, 2008 and 2007 were $0.52 and $0.34,
respectively, based on 46,639,104 average common shares for each period. Returns on average total
assets (ROA) on an annualized basis and return on average common equity (ROE) on an annualized
basis for the six-month period ended June 30, 2008 were 0.53% and 8.66%, respectively, compared
with 0.35% and 5.42% reported during the same six-month period of 2007. The Efficiency Ratio, on a
tax equivalent basis, for the six months ended June 30, 2008 reached 58.64%, an improvement of 542
basis points compared to 64.06% for the six months ended June 30, 2007. This improvement was mainly
due to higher net interest income and higher other income.
For the quarter ended June 30, 2008, the Corporation reported net income of $6.5 million
compared with $4.1 million for the same quarter in 2007. EPS for the quarters ended June 30, 2008
and 2007 were $0.14 and $0.09, respectively, based on 46,639,104 average common shares for each
period. ROA, on annualized basis, was 0.28% for the quarter ended June 30, 2008 and 0.18% for the
quarter ended June 30, 2007. ROEs, on annualized basis, were 4.58% and 2.76% for the quarters ended
June 30, 2008 and 2007, respectively. The Efficiency Ratio, on a tax equivalent basis, for the
quarter ended June 30, 2008 was 65.55% compared with 65.78% for the quarter ended June 30, 2007.
The Corporations financial results for the semester and quarter ended June 30, 2008 were
impacted by the following:
|
|
|
The provision for loan losses increased $25.2 million or 47.7% for the semester ended
June 30, 2008 compared to the same period in 2007 and $7.7 million or 24.9% for the quarter
ended June 30, 2008 compared to the same period in the prior year. The allowance for loan
losses of $186.9 million as of June 30, 2008 represented 2.74% of total loans, 67.11% of
non-performing loans and 114.66% of non-performing loans excluding loans secured by
|
42
|
|
|
real estate. The increase in the provision for loan losses reflects the current
recessionary cycle in Puerto Rico affecting the loan portfolio, including commercial and
construction loans;
|
|
|
|
|
The provision for loan losses represented 134.28% and 125.15% of the net charge-offs for
the six and three months ended June 30, 2008;
|
|
|
|
|
The Corporation experienced an increment of 37 basis points in net interest margin, on a
tax equivalent basis, to 4.23% for the semester ended June 30, 2008 versus 3.86% for the
same period in 2007 and an increment of 55 basis points to 4.34% for the quarter ended June
30, 2008 compared to 3.79% for the same quarter in 2007;
|
|
|
|
|
Non-interest income for the six months ended June 30, 2008, increased
$17.4 million or
26.4% as compared to the same period in prior year, basically due to higher broker-dealer,
asset management and insurance fees of $9.6 million, an increase in gains on sale of
securities of $2.6 million, an increase in gain on derivatives of $2.1 million and a
gain of $8.6 million on the sale of a portion of the Corporations investment in Visa,
Inc. in connection with its initial public offering. These increases were partially offset by a
decrease in gain on sale of loans of $2.1 million and an unfavorable valuation adjustment
of $4.0 million for loans held for sale recorded through earnings for the semester ended
June 30, 2008. The non-interest income for the quarter ended June 30, 2008 remained
basically flat when compared with the same quarter in prior year;
|
|
|
|
|
Operating expenses experienced an increase of $1.9 million or 1.3% and $2.5 million or
3.4% for the semester and quarter ended June 30, 2008, respectively, when compared to the
same periods in 2007;
|
|
|
|
|
During the quarter ended June 30, 2008, the Corporation sold certain impaired loans to
an affiliate for $91.3 million in cash. These loans had a net book value of $91.3 million
comprised of an outstanding principal balance of $96.8 million and a specific valuation
allowance of $5.5 million. The type of loans by net book value was $76.8 million in
construction loans and $14.5 million in commercial loans. No gain or loss was recognized on
this transaction;
|
|
|
|
|
The common stock dividend for the six-month period ended June 30, 2008 was $0.20 per
share resulting in a current annualized dividend yield of 3.77%.
|
Net Interest Income
The Corporations net interest income for the six months ended June 30, 2008 was $175.6
million, an increase of $18.0 million, or 11.5%, compared with $157.6 million for the six months
ended June 30, 2007. This improvement was mainly due to a decrease in interest expense of $40.9
million or 23.0% when compared with the same period in prior year. The average cost of funds on
interest-bearing liabilities experienced a decrease of 113 basis points from 4.77% for the first
semester ended June 30, 2007 to 3.64% for the same period in 2008. This was influenced by the
reduction in federal funds rates made by the Federal Reserve since June 2007 which resulted in a
lower cost of short term borrowings. Interest income reflected a reduction of $22.9 million or 6.8%
for the six months ended June 30, 2008 compared to the same period in 2007 mainly due to decreases
of $16.4 million or 5.5% in interest income on loans and $6.3 million or 18.8% in interest income
on investment securities.
The Corporations net interest income for the three months ended June 30, 2008 reached $91.0
million compared with $78.2 million for the same period in 2007, reflecting an increase of $12.8
million, or 16.4%. There was a decrease in interest expense of $27.7 million or 30.7% when compared
with the same period in prior year due to a decrease in average cost of funds of 149 basis points
from 4.78% to 3.29% for the quarter ended June 30, 2008. Net interest income reflected a reduction
of $14.8 million or 8.8% for the quarter ended June 30, 2008 from $168.2 million for the quarter
ended June 30, 2007 to $153.4 million for the quarter ended June 30, 2008 mainly due to a decrease
of $11.7 million or 7.8% in interest income on loans.
The table on page 47 and 48, Year to Date Average Balance Sheet and Summary of Net Interest
Income Tax Equivalent Basis and Quarter to Date Average Balance Sheet and Summary of Net Interest
Income Tax Equivalent Basis, presents average balance sheets, net interest income on a tax
equivalent basis and average interest rates for the six-month periods and quarters ended June 30,
2008 and 2007. The table on Interest Variance Analysis Tax Equivalent Basis on
43
page 46, allocates changes in the Corporations interest income (on a tax-equivalent basis) and
interest expense among changes in the average volume of interest earning assets and interest
bearing liabilities and changes in their respective interest rates for the semester and quarter
ended June 30, 2008 compared with the same periods of 2007.
To permit the comparison of returns on assets with different tax attributes, the interest
income on tax-exempt assets has been adjusted by an amount equal to the income taxes which would
have been paid had the income been fully taxable. This tax equivalent adjustment is derived using
the applicable statutory tax rate and resulted in adjustments of $2.5 million and $4.3 million for
the six months ended June 30, 2008 and 2007, respectively. For the quarters ended June 30, 2008 and
2007, the tax equivalent adjustments were $1.0 million and $2.1 million, respectively.
The following table sets forth the principal components of the Corporations net interest
income for the six and three-month periods ended June 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Interest income tax equivalent basis
|
|
$
|
314,938
|
|
|
$
|
339,601
|
|
|
$
|
154,434
|
|
|
$
|
170,298
|
|
Interest expense
|
|
|
136,819
|
|
|
|
177,720
|
|
|
|
62,391
|
|
|
|
90,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income tax equivalent basis
|
|
$
|
178,119
|
|
|
$
|
161,881
|
|
|
$
|
92,043
|
|
|
$
|
80,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin tax equivalent basis (1)
|
|
|
4.23
|
%
|
|
|
3.86
|
%
|
|
|
4.34
|
%
|
|
|
3.79
|
%
|
|
|
|
(1)
|
|
Net interest margin for any period equals tax-equivalent net interest income divided by average
interest-earning assets for the period (on an annualized basis.)
|
For the six-month period ended June 30, 2008, net interest margin, on a tax equivalent basis,
was 4.23% compared to net interest margin, on a tax equivalent basis, of 3.86% for the same period
in 2007. The 37 basis points increase in net interest margin, on a tax equivalent basis, was mainly
due a decrease in interest expense on average interest-bearing liabilities of $40.9 million or
23.0% principally due to decrease in the cost of average interest-bearing liabilities of 113 basis
points. This reduction in interest expense was principally due to the significant reduction of 149
basis points in the cost of funds of average borrowings (comprised of federal funds purchased and
other borrowings, securities sold under agreements to repurchase, commercial paper issued, term
notes and subordinated notes) from 5.57% for the first semester of 2007 to 4.08% for the first
semester of 2008 reflecting the Federal Reserves interest rate cuts. The impact of the decrease in
average cost of funds was partially offset by a 61 basis points decrease in yield on the average
interest-earning assets resulting in a decrease of $24.7 million in interest income, on a tax
equivalent basis, on average interest-earning assets. This decrease was mainly due to a 55 basis
points decrease in the yield on average gross loans.
The average interest-earning assets at June 30, 2008 increased $4.1 million when compared with
figures reported at June 30, 2007. This change was composed of an increase of $152.9 million in
average interest bearing deposits partially offset by a decrease of $117.1 million in average
investment securities due to a sale of $125 million of investment securities available for sale
during the first quarter of 2008. There was a decrease of $31.7 million in average net loans for
the six months ended June 30, 2008 compared with the same period in 2007. The decrease in average
net loans was due to decreases in the leasing and construction loans portfolios of $38.4 million
and $34.4 million, respectively. The decrease in construction loans was due to the sale of $82.9
million to an affiliate during the quarter. These decreases were partially offset by increases of
$16.4 million in average consumer loans, $14.6 million in average mortgage loans and $68.6 million
in average commercial loans.
The increase in average interest-bearing liabilities of $52.1 million for the six-month period
ended June 30, 2008, was driven by an increase in average total interest-bearing deposits of $319.7
million offset by a decrease in average borrowings of $243.8 million when compared to the six-month
period ended June 30, 2007. The increase in average total interest bearing deposits was composed of
$203.8 million and $173.3 million in average other time deposits and average brokered deposits,
respectively, offset by a $57.3 million decrease in average savings and NOW accounts. The increase
in average total interest bearing deposits was principally due to a certificate of deposit for the
amount of $640 million opened by Banco Santander, S.A. in Banco Santander Puerto Rico. The decrease
in average borrowings of $243.8 million was composed of a decrease in average federal funds and
other borrowings of $419.0 million mainly due to the payment of the outstanding indebtedness
incurred under bridge facility agreement among the Corporation, SFS and National Australia Bank
Limited. Average FHLB advances reflected an increase of $380.6 million offset by reductions in
average repurchase agreements of $204.8 million. There was also an increase in average term notes
of $22.3 million for the semester ended June 30, 2008 compared with the same period in 2007.
44
For the three-month period ended June 30, 2008, net interest margin, on a tax equivalent
basis, reflected an increase of 55 basis points from 3.79% for the quarter ended June 30, 2007 to
4.34% for the quarter ended June 30, 2008. The 55 basis points increase in net interest margin, on
a tax equivalent basis, was mainly due a decrease in interest expense on average interest-bearing
liabilities of $27.7 million or 30.7% principally due to a decrease in the cost of average
interest-bearing liabilities of 149 basis points. This reduction in interest expense was
principally due to the significant reduction of 187 basis points in the cost of average borrowings
(comprised of federal funds purchased and other borrowings, securities sold under agreements to
repurchase, commercial paper issued, term notes and subordinated notes) from 5.59% for the second
quarter of 2007 to 3.72% for the second quarter of 2008, reflecting the Federal Reserves interest
rate cuts. The impact of the decrease in average cost of funds was partially offset by a 77 basis
points decrease in yield on the average interest-earning assets resulting in a decrease of $15.9
million in interest income, on a tax equivalent basis, on average interest-earning assets. This
decrease was mainly due to a 55 basis points decrease in the yield on average gross loans.
For the three months ended June 30, 2008, average interest-earning assets increased $53.3
million when compared to same period the prior year. This improvement was mainly due to an increase
of $290.9 million or 220.8% in average interest-bearing deposits partially offset by decreases of
$165.3 million or 2.4% in average net loans and $72.3 million or 5.0% in average investment
securities due to a sale of $125 million of investment securities available for sale during the
first quarter of 2008. The decrease in average net loans was driven principally by an $85.4 million
decrease in average construction loans as a result of the sale of loans with a principal value of
$82.9 million to an affiliate and a reduction in average lease financing portfolio, respectively.
Also there was an increase of average allowance for loan losses of $58.3 million for the quarter.
Average commercial loans reflected an increase of $14.9 million for the quarter ended June 30, 2008
compared with the quarter ended June 30, 2007.
The $69.6 million increase in average interest-bearing liabilities for the quarter ended June
30, 2008, was driven by an increase in average other time deposits and average brokered deposits of
$484.5 million and $363.8 million, respectively. The increase in average interest bearing deposits,
mainly due to a certificate of deposit for the amount of $640 million opened by Banco Santander,
S.A. in Banco Santander Puerto Rico, was offset by $759.1 million decrease in average borrowings
and $22.4 million in average term notes. The reduction in average borrowings was driven by
decreases of $713.9 million in average federal funds purchased and other borrowings, $189.1 million
in average commercial paper and $180.5 in average securities sold under agreements to repurchase.
These decreases were partially offset by an increase in average FHLB advances of $324.5 million for
the quarter ended June 30, 2008 compared with the same period in 2007.
The following table allocates changes in the Corporations interest income, on a
tax-equivalent basis, and interest expense for the six-month and three-month periods ended June 30,
2008, compared to the six-month and three-month periods ended June 30, 2007, among changes related
to the average volume of interest-earning assets and interest-bearing liabilities, and changes
related to interest rates. Volume and rate variances have been calculated based on the activity in
average balances over the period and changes in interest rates on average interest-earning assets
and average interest-bearing liabilities. The changes that are not due solely to volume or rate
are allocated to volume and rate based on the proportion of change in each category.
45
INTEREST VARIANCE ANALYSIS
on a Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
Three Months Ended June 30, 2008
|
|
|
|
Compared to the Six Months
|
|
|
Compared to the Three Months
|
|
|
|
Ended June 30, 2007
|
|
|
Ended June 30, 2007
|
|
|
|
Increase (Decrease) Due to Change in:
|
|
|
Increase (Decrease) Due to Change in:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Interest income, on a tax equivalent basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased
under agreements to resell
|
|
$
|
2,584
|
|
|
$
|
(1,041
|
)
|
|
$
|
1,543
|
|
|
$
|
1,950
|
|
|
$
|
(529
|
)
|
|
$
|
1,421
|
|
Time deposits with other banks
|
|
|
(742
|
)
|
|
|
(942
|
)
|
|
|
(1,684
|
)
|
|
|
(358
|
)
|
|
|
(626
|
)
|
|
|
(984
|
)
|
Investment securities
|
|
|
(2,746
|
)
|
|
|
(4,520
|
)
|
|
|
(7,266
|
)
|
|
|
(854
|
)
|
|
|
(3,198
|
)
|
|
|
(4,052
|
)
|
Loans
|
|
|
(1,376
|
)
|
|
|
(15,880
|
)
|
|
|
(17,256
|
)
|
|
|
(3,547
|
)
|
|
|
(8,702
|
)
|
|
|
(12,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income, on a tax equivalent basis
|
|
|
(2,280
|
)
|
|
|
(22,383
|
)
|
|
|
(24,663
|
)
|
|
|
(2,809
|
)
|
|
|
(13,055
|
)
|
|
|
(15,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
|
(840
|
)
|
|
|
(6,277
|
)
|
|
|
(7,117
|
)
|
|
|
42
|
|
|
|
(4,563
|
)
|
|
|
(4,521
|
)
|
Other time deposits
|
|
|
8,489
|
|
|
|
(14,031
|
)
|
|
|
(5,542
|
)
|
|
|
9,010
|
|
|
|
(10,390
|
)
|
|
|
(1,380
|
)
|
Borrowings
|
|
|
(6,249
|
)
|
|
|
(20,573
|
)
|
|
|
(26,822
|
)
|
|
|
(8,854
|
)
|
|
|
(11,934
|
)
|
|
|
(20,788
|
)
|
Long-term borrowings
|
|
|
(684
|
)
|
|
|
(736
|
)
|
|
|
(1,420
|
)
|
|
|
(361
|
)
|
|
|
(604
|
)
|
|
|
(965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
716
|
|
|
|
(41,617
|
)
|
|
|
(40,901
|
)
|
|
|
(163
|
)
|
|
|
(27,491
|
)
|
|
|
(27,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
$
|
(2,996
|
)
|
|
$
|
19,234
|
|
|
$
|
16,238
|
|
|
$
|
(2,646
|
)
|
|
$
|
14,436
|
|
|
$
|
11,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows average balances and, where applicable, interest amounts earned on a
tax-equivalent basis and average rates for the Corporations assets and liabilities and
stockholders equity for the semesters and quarters ended June 30, 2008 and 2007.
46
SANTANDER BANCORP
YEAR TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
50,374
|
|
|
$
|
576
|
|
|
|
2.30
|
%
|
|
$
|
88,937
|
|
|
$
|
2,260
|
|
|
|
5.12
|
%
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
236,681
|
|
|
|
2,765
|
|
|
|
2.35
|
%
|
|
|
45,203
|
|
|
|
1,222
|
|
|
|
5.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
287,055
|
|
|
|
3,341
|
|
|
|
2.34
|
%
|
|
|
134,140
|
|
|
|
3,482
|
|
|
|
5.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
52,487
|
|
|
|
858
|
|
|
|
3.29
|
%
|
|
|
64,320
|
|
|
|
1,605
|
|
|
|
5.03
|
%
|
Obligations
of other U.S. government
agencies and corporations
|
|
|
562,517
|
|
|
|
9,444
|
|
|
|
3.38
|
%
|
|
|
614,897
|
|
|
|
14,860
|
|
|
|
4.87
|
%
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
100,986
|
|
|
|
2,855
|
|
|
|
5.69
|
%
|
|
|
90,118
|
|
|
|
2,435
|
|
|
|
5.45
|
%
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
537,347
|
|
|
|
12,682
|
|
|
|
4.75
|
%
|
|
|
614,912
|
|
|
|
14,866
|
|
|
|
4.88
|
%
|
Other
|
|
|
74,354
|
|
|
|
2,569
|
|
|
|
6.95
|
%
|
|
|
60,572
|
|
|
|
1,908
|
|
|
|
6.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,327,691
|
|
|
|
28,408
|
|
|
|
4.30
|
%
|
|
|
1,444,819
|
|
|
|
35,674
|
|
|
|
4.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,539,507
|
|
|
|
73,253
|
|
|
|
5.80
|
%
|
|
|
2,470,931
|
|
|
|
85,792
|
|
|
|
7.00
|
%
|
Construction
|
|
|
440,603
|
|
|
|
10,236
|
|
|
|
4.67
|
%
|
|
|
474,970
|
|
|
|
20,523
|
|
|
|
8.71
|
%
|
Consumer
|
|
|
664,583
|
|
|
|
43,015
|
|
|
|
13.02
|
%
|
|
|
641,435
|
|
|
|
37,469
|
|
|
|
11.78
|
%
|
Consumer Finance
|
|
|
604,726
|
|
|
|
71,098
|
|
|
|
23.64
|
%
|
|
|
611,443
|
|
|
|
69,993
|
|
|
|
23.08
|
%
|
Mortgage
|
|
|
2,694,164
|
|
|
|
82,814
|
|
|
|
6.15
|
%
|
|
|
2,679,585
|
|
|
|
82,475
|
|
|
|
6.16
|
%
|
Lease financing
|
|
|
83,991
|
|
|
|
2,773
|
|
|
|
6.64
|
%
|
|
|
122,400
|
|
|
|
4,193
|
|
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
7,027,574
|
|
|
|
283,189
|
|
|
|
8.10
|
%
|
|
|
7,000,764
|
|
|
|
300,445
|
|
|
|
8.65
|
%
|
Allowance for loan losses
|
|
|
(170,994
|
)
|
|
|
|
|
|
|
|
|
|
|
(112,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,856,580
|
|
|
|
283,189
|
|
|
|
8.31
|
%
|
|
|
6,888,251
|
|
|
|
300,445
|
|
|
|
8.80
|
%
|
Total
interest earning assets/ interest income (on a tax equivalent basis)
|
|
|
8,471,326
|
|
|
|
314,938
|
|
|
|
7.48
|
%
|
|
|
8,467,210
|
|
|
|
339,601
|
|
|
|
8.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
733,258
|
|
|
|
|
|
|
|
|
|
|
|
646,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,204,584
|
|
|
|
|
|
|
|
|
|
|
$
|
9,113,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,671,798
|
|
|
$
|
18,982
|
|
|
|
2.28
|
%
|
|
$
|
1,729,127
|
|
|
$
|
26,099
|
|
|
|
3.04
|
%
|
Other time deposits
|
|
|
1,579,936
|
|
|
|
25,959
|
|
|
|
3.30
|
%
|
|
|
1,376,182
|
|
|
|
31,412
|
|
|
|
4.60
|
%
|
Brokered deposits
|
|
|
1,521,391
|
|
|
|
35,227
|
|
|
|
4.66
|
%
|
|
|
1,348,079
|
|
|
|
35,316
|
|
|
|
5.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
4,773,125
|
|
|
|
80,168
|
|
|
|
3.38
|
%
|
|
|
4,453,388
|
|
|
|
92,827
|
|
|
|
4.20
|
%
|
Borrowings
|
|
|
2,533,005
|
|
|
|
49,498
|
|
|
|
3.93
|
%
|
|
|
2,776,766
|
|
|
|
76,320
|
|
|
|
5.54
|
%
|
Term Notes
|
|
|
19,524
|
|
|
|
309
|
|
|
|
3.18
|
%
|
|
|
41,858
|
|
|
|
687
|
|
|
|
3.31
|
%
|
Subordinated Notes
|
|
|
243,006
|
|
|
|
6,844
|
|
|
|
5.66
|
%
|
|
|
244,545
|
|
|
|
7,886
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
7,568,660
|
|
|
|
136,819
|
|
|
|
3.64
|
%
|
|
|
7,516,557
|
|
|
|
177,720
|
|
|
|
4.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
1,073,220
|
|
|
|
|
|
|
|
|
|
|
|
1,008,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,641,880
|
|
|
|
|
|
|
|
|
|
|
|
8,525,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
562,704
|
|
|
|
|
|
|
|
|
|
|
|
588,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
9,204,584
|
|
|
|
|
|
|
|
|
|
|
$
|
9,113,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
178,119
|
|
|
|
|
|
|
|
|
|
|
$
|
161,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.84
|
%
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
4.23
|
%
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
|
|
|
3.86
|
%
|
47
SANTANDER BANCORP
QUARTER TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
49,548
|
|
|
$
|
126
|
|
|
|
1.02
|
%
|
|
$
|
90,599
|
|
|
$
|
1,110
|
|
|
|
4.91
|
%
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
373,095
|
|
|
|
1,977
|
|
|
|
2.13
|
%
|
|
|
41,117
|
|
|
|
556
|
|
|
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
422,643
|
|
|
|
2,103
|
|
|
|
2.00
|
%
|
|
|
131,716
|
|
|
|
1,666
|
|
|
|
5.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
40,035
|
|
|
|
235
|
|
|
|
2.36
|
%
|
|
|
64,160
|
|
|
|
796
|
|
|
|
4.98
|
%
|
Obligations
of other U.S. government
agencies and corporations
|
|
|
617,261
|
|
|
|
4,457
|
|
|
|
2.90
|
%
|
|
|
622,599
|
|
|
|
7,414
|
|
|
|
4.78
|
%
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
106,981
|
|
|
|
1,515
|
|
|
|
5.70
|
%
|
|
|
91,518
|
|
|
|
1,251
|
|
|
|
5.48
|
%
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
530,319
|
|
|
|
6,229
|
|
|
|
4.72
|
%
|
|
|
600,712
|
|
|
|
7,196
|
|
|
|
4.80
|
%
|
Other
|
|
|
68,983
|
|
|
|
1,180
|
|
|
|
6.88
|
%
|
|
|
56,870
|
|
|
|
1,011
|
|
|
|
7.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,363,579
|
|
|
|
13,616
|
|
|
|
4.02
|
%
|
|
|
1,435,859
|
|
|
|
17,668
|
|
|
|
4.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,479,583
|
|
|
|
33,706
|
|
|
|
5.47
|
%
|
|
|
2,464,685
|
|
|
|
43,231
|
|
|
|
7.04
|
%
|
Construction
|
|
|
408,971
|
|
|
|
4,625
|
|
|
|
4.55
|
%
|
|
|
494,334
|
|
|
|
10,568
|
|
|
|
8.57
|
%
|
Consumer
|
|
|
656,863
|
|
|
|
21,513
|
|
|
|
13.17
|
%
|
|
|
659,926
|
|
|
|
19,538
|
|
|
|
11.88
|
%
|
Consumer Finance
|
|
|
605,626
|
|
|
|
36,155
|
|
|
|
24.01
|
%
|
|
|
606,580
|
|
|
|
34,257
|
|
|
|
22.65
|
%
|
Mortgage
|
|
|
2,695,108
|
|
|
|
41,394
|
|
|
|
6.14
|
%
|
|
|
2,690,971
|
|
|
|
41,406
|
|
|
|
6.15
|
%
|
Lease financing
|
|
|
80,542
|
|
|
|
1,322
|
|
|
|
6.60
|
%
|
|
|
117,224
|
|
|
|
1,964
|
|
|
|
6.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
6,926,693
|
|
|
|
138,715
|
|
|
|
8.05
|
%
|
|
|
7,033,720
|
|
|
|
150,964
|
|
|
|
8.61
|
%
|
Allowance for loan losses
|
|
|
(175,460
|
)
|
|
|
|
|
|
|
|
|
|
|
(117,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,751,233
|
|
|
|
138,715
|
|
|
|
8.26
|
%
|
|
|
6,916,569
|
|
|
|
150,964
|
|
|
|
8.75
|
%
|
Total interest earning assets/ interest
income (on a tax equivalent basis)
|
|
|
8,537,455
|
|
|
|
154,434
|
|
|
|
7.28
|
%
|
|
|
8,484,144
|
|
|
|
170,298
|
|
|
|
8.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
704,121
|
|
|
|
|
|
|
|
|
|
|
|
651,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,241,576
|
|
|
|
|
|
|
|
|
|
|
$
|
9,135,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,712,086
|
|
|
$
|
8,232
|
|
|
|
1.93
|
%
|
|
$
|
1,706,387
|
|
|
$
|
12,753
|
|
|
|
3.00
|
%
|
Other time deposits
|
|
|
1,870,175
|
|
|
|
13,543
|
|
|
|
2.91
|
%
|
|
|
1,385,663
|
|
|
|
16,155
|
|
|
|
4.68
|
%
|
Brokered deposits
|
|
|
1,730,902
|
|
|
|
19,188
|
|
|
|
4.46
|
%
|
|
|
1,367,067
|
|
|
|
17,956
|
|
|
|
5.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
5,313,163
|
|
|
|
40,963
|
|
|
|
3.10
|
%
|
|
|
4,459,117
|
|
|
|
46,864
|
|
|
|
4.22
|
%
|
Borrowings
|
|
|
2,058,420
|
|
|
|
18,089
|
|
|
|
3.53
|
%
|
|
|
2,817,478
|
|
|
|
38,877
|
|
|
|
5.53
|
%
|
Term Notes
|
|
|
19,598
|
|
|
|
160
|
|
|
|
3.28
|
%
|
|
|
42,015
|
|
|
|
352
|
|
|
|
3.36
|
%
|
Subordinated Notes
|
|
|
241,607
|
|
|
|
3,179
|
|
|
|
5.29
|
%
|
|
|
244,611
|
|
|
|
3,952
|
|
|
|
6.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
7,632,788
|
|
|
|
62,391
|
|
|
|
3.29
|
%
|
|
|
7,563,221
|
|
|
|
90,045
|
|
|
|
4.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
1,036,238
|
|
|
|
|
|
|
|
|
|
|
|
976,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,669,026
|
|
|
|
|
|
|
|
|
|
|
|
8,539,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
572,550
|
|
|
|
|
|
|
|
|
|
|
|
596,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
9,241,576
|
|
|
|
|
|
|
|
|
|
|
$
|
9,135,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
92,043
|
|
|
|
|
|
|
|
|
|
|
$
|
80,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
3.27
|
%
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
4.26
|
%
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
|
|
3.79
|
%
|
48
Provision for Loan Losses
The Corporations provision for loan losses increased $25.2 million or 47.7% from $52.9
million for the six months ended June 30, 2007 to $78.1 million for the same period in 2008 and
$7.7 million or 24.9% for the quarter ended June 30, 2008 when compared with the same period in
prior year. The increase in the provision for loan losses was due primarily to increases in
non-performing loans due to the deterioration in economic conditions in Puerto Rico, requiring the
Corporation to increase the level of its allowance for loan losses. There was an increase of $142.6
million in past-due loans (non-performing loans and accruing loans past-due 90 days or more) which
reached $289.8 million as of June 30, 2008, from $147.3 million as of June 30, 2007, and $301.6
million as of December 31, 2007. Non-performing loans were $278.5 million as of June 30, 2008, an
increase of $141.5 million or 103.3%, compared to non-performing loans as of June 30, 2007.
Refer to the discussions under Allowance for Loan Losses and Risk Management for further
analysis of the allowance for loan losses and non-performing assets and related ratios.
Other Income
Other income consists of service charges on the Corporations deposit accounts, other service
fees, including mortgage servicing fees and fees on credit cards, broker-dealer, asset management
and insurance fees, gains and losses on sales of securities, gain on sale of mortgage servicing
rights, certain other gains and losses and certain other income.
The following table sets forth the components of the Corporations other income for the
periods indicated:
OTHER INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
For the three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Bank service fees on deposit accounts
|
|
$
|
6,922
|
|
|
$
|
6,539
|
|
|
$
|
3,342
|
|
|
$
|
3,297
|
|
Other service fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card and payment processing fees
|
|
|
4,128
|
|
|
|
6,538
|
|
|
|
2,109
|
|
|
|
2,057
|
|
Mortgage servicing fees
|
|
|
1,702
|
|
|
|
1,440
|
|
|
|
849
|
|
|
|
737
|
|
Trust fees
|
|
|
823
|
|
|
|
989
|
|
|
|
447
|
|
|
|
554
|
|
Confirming advances fees
|
|
|
3,989
|
|
|
|
1,726
|
|
|
|
1,582
|
|
|
|
888
|
|
Other fees
|
|
|
5,961
|
|
|
|
7,219
|
|
|
|
2,773
|
|
|
|
4,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
23,525
|
|
|
|
24,451
|
|
|
|
11,102
|
|
|
|
12,134
|
|
Broker/dealer, asset management, and insurance fees
|
|
|
41,973
|
|
|
|
32,369
|
|
|
|
19,986
|
|
|
|
16,081
|
|
Gain on sale of securities, net
|
|
|
2,874
|
|
|
|
238
|
|
|
|
|
|
|
|
49
|
|
Gain on sale of loans
|
|
|
2,267
|
|
|
|
4,338
|
|
|
|
829
|
|
|
|
1,990
|
|
Gain on sale of mortgage servicing rights
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
99
|
|
Trading gains
|
|
|
1,994
|
|
|
|
1,241
|
|
|
|
412
|
|
|
|
511
|
|
Gain (loss) on derivatives
|
|
|
1,304
|
|
|
|
(758
|
)
|
|
|
(2,466
|
)
|
|
|
(541
|
)
|
Other gains (losses), net
|
|
|
5,998
|
|
|
|
2,104
|
|
|
|
(1,440
|
)
|
|
|
907
|
|
Other
|
|
|
3,420
|
|
|
|
1,814
|
|
|
|
2,573
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,355
|
|
|
$
|
65,965
|
|
|
$
|
30,996
|
|
|
$
|
31,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The table below details the breakdown of fees from broker-dealer, asset management and
insurance agency operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
For the three months ended
|
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Broker-dealer
|
|
$
|
24,177
|
|
|
$
|
13,524
|
|
|
$
|
11,091
|
|
|
$
|
7,025
|
|
Asset management
|
|
|
13,281
|
|
|
|
11,796
|
|
|
|
6,683
|
|
|
|
6,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Santander Securities
|
|
|
37,458
|
|
|
|
25,320
|
|
|
|
17,774
|
|
|
|
13,170
|
|
Insurance
|
|
|
4,515
|
|
|
|
7,049
|
|
|
|
2,212
|
|
|
|
2,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,973
|
|
|
$
|
32,369
|
|
|
$
|
19,986
|
|
|
$
|
16,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2008, other income reached $83.4 million, a $17.4 million or
26.4% increase when compared to $66.0 million for the same period in 2007. For the quarter ended
June 30, 2008, other income remained basically flat when compare to the figures reported for the
same period the prior year. The other income was impacted by the following:
|
|
|
Broker-dealer, asset management and insurance fees reflected an increase of $ 9.6
million for the six-month period ended June 30, 2008, due to increases in broker-dealer
and asset management fees of $12.1 million partially offset by a decrease of $2.5 million
in insurance fees due to a reduction in credit life commissions
generated from the Island Finance
operation. For the quarter ended June 30, 2008, the $4.6 million increase in broker-dealer
and asset management fees was partially offset by a $0.7 million decrease in insurance
fees. The broker-dealer operation is carried out through Santander
Securities Corporation, whose business includes securities underwriting and distribution,
sales, trading, financial planning and securities brokerage services. In addition,
Santander Securities provides investment management services through
its wholly-owned
subsidiary, Santander Asset Management Corporation. The broker-dealer, asset management and
insurance operations contributed 50.35% and 64.48% to the Corporations other income for
the semester and quarter ended June 30, 2008, respectively, and 49.07% and 50.39% to the
semester and quarter ended June 30, 2007.
|
|
|
|
|
There was an increase in gain on sale of securities available for sale of $2.6 million
for the six months ended June 30, 2008 due to the sale of $125 million in securities during
the first quarter of 2008, partially offset by a loss of $0.4 million on the extinguishment
of certain repurchase agreements that were funding part of the securities sold.
|
|
|
|
|
The Corporation reported an increase in gain on derivative instruments of $2.1 million
for the six months ended June 30, 2008 compared with the same period during the prior year
due to the net effect of incorporating the Corporations credit risk in the derivative
fair value calculation methodology pursuant the adoption of SFAS 157. For the quarter ended June
30, 2008, there was an increase in losses on derivative instruments of $1.9 million when
compared with the quarter ended June 30, 2007 mostly resulting from a loss of $1.7 million arising from the
credit risk component incorporated into the fair value calculation of a subordinated note recognized during the
quarter pursuant to SFAS 157.
|
|
|
|
|
There were decreases in gain on sale of residential mortgage loans of $2.1 million and
$1.2 million in gain on sale of residential mortgage loans for the six-month and
three-month periods ended June 30, 2008, respectively, compared with the same periods the
prior year, due to a decrease in mortgage loans sold of $87.8 million and $35.9 million
for the semester and quarter ended June 30, 2008, respectively compared with the same
period in 2007
|
|
|
|
|
During the first quarter of 2008 a gain of $8.6 million on the sale of part of the investment in Visa, Inc. in connection
with its initial public offering was recognized through earnings.
|
|
|
|
|
An unfavorable valuation adjustment of $4.0 million and $2.2 million for loans held for
sale was recorded through earnings for the semester and quarter ended June 30, 2008.
|
50
Operating Expenses
The following table presents the detail of other operating expenses for the periods indicated:
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Salaries
|
|
$
|
34,846
|
|
|
$
|
35,883
|
|
|
$
|
17,018
|
|
|
$
|
17,509
|
|
Stock incentive plans
|
|
|
(2,094
|
)
|
|
|
8,288
|
|
|
|
887
|
|
|
|
5,814
|
|
Pension and other benefits
|
|
|
33,277
|
|
|
|
28,020
|
|
|
|
15,981
|
|
|
|
13,934
|
|
Expenses deferred as loan origination costs
|
|
|
(4,517
|
)
|
|
|
(6,289
|
)
|
|
|
(2,361
|
)
|
|
|
(3,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personnel costs
|
|
|
61,512
|
|
|
|
65,902
|
|
|
|
31,525
|
|
|
|
34,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy costs
|
|
|
13,222
|
|
|
|
11,488
|
|
|
|
6,806
|
|
|
|
5,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment expenses
|
|
|
2,252
|
|
|
|
2,241
|
|
|
|
1,059
|
|
|
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDP servicing expense, amortization and technical services
|
|
|
21,061
|
|
|
|
18,074
|
|
|
|
10,883
|
|
|
|
8,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication expenses
|
|
|
5,181
|
|
|
|
5,451
|
|
|
|
2,646
|
|
|
|
2,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business promotion
|
|
|
3,786
|
|
|
|
8,000
|
|
|
|
1,821
|
|
|
|
4,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes
|
|
|
6,756
|
|
|
|
4,948
|
|
|
|
3,349
|
|
|
|
1,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
9,222
|
|
|
|
6,383
|
|
|
|
5,203
|
|
|
|
3,280
|
|
Amortization of intangibles
|
|
|
1,485
|
|
|
|
2,428
|
|
|
|
750
|
|
|
|
1,228
|
|
Printing and supplies
|
|
|
923
|
|
|
|
1,058
|
|
|
|
534
|
|
|
|
579
|
|
Credit card expenses
|
|
|
2,220
|
|
|
|
4,103
|
|
|
|
1,241
|
|
|
|
1,231
|
|
Insurance
|
|
|
1,924
|
|
|
|
1,905
|
|
|
|
887
|
|
|
|
1,078
|
|
Examinations and FDIC assessment
|
|
|
2,977
|
|
|
|
958
|
|
|
|
1,488
|
|
|
|
479
|
|
Transportation and travel
|
|
|
1,406
|
|
|
|
1,526
|
|
|
|
732
|
|
|
|
816
|
|
Repossessed assets provision and expenses
|
|
|
2,584
|
|
|
|
2,527
|
|
|
|
1,259
|
|
|
|
1,202
|
|
Collections and related legal costs
|
|
|
663
|
|
|
|
653
|
|
|
|
341
|
|
|
|
186
|
|
All other
|
|
|
10,515
|
|
|
|
8,156
|
|
|
|
5,721
|
|
|
|
4,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
33,919
|
|
|
|
29,697
|
|
|
|
18,156
|
|
|
|
14,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-personnel expenses
|
|
|
86,177
|
|
|
|
79,899
|
|
|
|
44,720
|
|
|
|
39,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating expenses
|
|
$
|
147,689
|
|
|
$
|
145,801
|
|
|
$
|
76,245
|
|
|
$
|
73,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations operating expenses reflected increases of $1.9 million and $2.5 million for
the six-month and three-month periods ended June 30, 2008 when compared with six-month and
three-month period ended June 30, 2007. The variances in operating expenses are described below:
|
|
|
During the first semester of 2008, total salaries and other employee benefits reflected
a decrease of $4.4 million compared with the same period the prior year. A $10.4 million
decrease in expense for stock incentive plans was partially offset by an increase of $5.3
million in other compensation. The increase in other compensation is mainly due
to a $5.4 million increment in commissions and bonuses. For the quarter ended June 30,
2008, total salaries and other employee benefits decreased $2.5 million compared with the
quarter ended June 30, 2007. This decrease was mainly due to a $4.9 million reduction in
stock incentive plans expense partially offset by $2.0 increase in other employee benefits.
|
51
|
|
The Corporations non-personnel expenses increased $6.3 million and $5.0 million for the
six months and three months ended June 30, 2008 compared with the same period in prior
year. There were increases of $3.0 million in EDP servicing expenses, amortization and
technical services mainly due to an increase in technical assistance expense charged by
affiliates for software development; $2.8 million in professional fees principally due to
an increment in consulting fees regarding the adoption of new accounting pronouncements and
review of other operational procedures; $2.0 million in FDIC assessment due to the 2007
assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005 (the
Reform Act) that imposed insurance premiums based on factors such as capital level,
supervisory rating, certain financial ratios and risk information; $1.7 million in
occupancy cost due to the sale and leaseback of the Corporations two principal properties
in December 2007; and $1.8 million in other taxes. These increases were partially offset
by a $4.2 million decrease in business promotion expenses and a $1.9 million decrease in credit card
expenses due to the sale of the Corporations merchant business during the first quarter of
2007.
|
|
|
|
For the quarter ended June 30, 2008, non-personnel expenses increased $5.0 million
compared with the quarter ended June 30, 2007. This increment was due to increases in EDP
servicing expenses, amortization and technical services of $2.2 million, professional fees
of $1.9 million, other taxes of $1.5 million, FDIC assessment due of $1.0 million and
occupancy cost of $0.9 million. These increases were partially offset by $2.7 million
decrease in business promotion.
|
The Efficiency Ratio, on a tax equivalent basis, for the six months ended June 30, 2008 and
2007 was 58.64% and 64.06%, respectively, reflecting an improvement of 542 basis points. For the
six months ended June 30, 2008 there was a decrease of $10.4 million in compensation expense due to
a favorable change in Long Term Incentive Plan valuation and because the majority of the options
granted under this plan were exercised during the six months ended June 30, 2008, which resulted in
no additional valuation adjustments.
The Efficiency Ratio, on a tax equivalent basis, for the three months ended June 30, 2008 and
2007 was 65.55% and 65.78%, respectively, reflecting an improvement of 23 basis points. For the
three months ended June 30, 2008 there was a decrease of $4.9 million in compensation expense
mostly attributed to the fact that during 2007 the Santander Group
granted of 100 shares of its stock to all
employees as part of the celebration of its 150
th
anniversary and during the
quarter ended June 30, 2008 the majority of the options granted to certain employees under a Long Term Incentive Plan
sponsored by the Santander Group were exercised, which resulted in no additional valuation adjustments.
Further, there a favorable change in Long Term Incentive Plan valuation during the quarter
ended June 30, 2008.
Provision for Income Tax
The Corporation and each of its subsidiaries are treated as separate taxable entities and are
not entitled to file consolidated tax returns in Puerto Rico. The maximum statutory marginal
corporate income tax rate is 39%. Furthermore, there is an alternative minimum tax of 22%. The
difference between the statutory marginal tax rate and the effective tax rate is primarily due to
the interest income earned on certain investments and loans, which is exempt from income tax (net
of the disallowance of expenses attributable to the exempt income) and to the disallowance of
certain expenses and other items.
The Corporation is also subject to municipal license tax at various rates that do not exceed
1.5% on the Corporations taxable gross income. Under the Puerto Rico Internal Revenue Code, as
amended (the PR Code), the Corporation and each of its subsidiaries are treated as separate
taxable entities and are not entitled to file consolidated tax returns. The PR Code provides
dividends received deduction of 100% on dividends received from controlled subsidiaries subject to
taxation in Puerto Rico.
Puerto Rico international banking entities, or IBEs, such as Santander International Bank
(SIB), are currently exempt from taxation under Puerto Rico law. During 2004, the Legislature of
Puerto Rico and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes
income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBEs
net income generated was 20% of the banks net income in the taxable year commencing on July 1,
2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of
a bank as is the case of SIB.
During June 2006, the FASB issued Interpretation No.48 (FIN 48),
Accounting for Uncertainty
in Income Tax an interpretation of FASB Statement No 109.
FIN 48 clarifies the accounting for
uncertainty of income tax recognized in
52
a enterprises financial statements in accordance with SFAS No 109,
Accounting for Income Tax.
This interpretation prescribes a recognition threshold and measurement attribute for the financial
statements recognition and measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
The Corporation adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million in the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which the temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income, management believes it is more likely than not,
the Corporation will not realize the benefits of the deferred tax assets related principally to
Santander Financial Services, Inc. amounting to $22.1 million at June 30, 2008. Accordingly, a
deferred tax asset valuation allowance of $22.1 million was recorded at June 30, 2008.
The provision for income tax amounted to $9.0 million, or 27.0% of pretax earnings, for the
six months ended June 30, 2008 compared to $9.0 million, or 36.4% of pretax earnings, for the same
period in 2007. A gain of $8.6 million on the sale of a portion of the Corporations investment in
Visa, Inc. recognized during 2008 in connection with its initial public offering qualify as a
capital gain at a preferential rate of 15%. For the quarter ended June 30, 2008, the provision for
income tax amounted $0.8 million or 10.5% of pretax earnings compared to $1.4 million or 25.6%
pretax earnings for the same period in 2007. The decrease in provision for income tax for the
quarter ended June 30, 2008 when compared to the same period in
prior year was principally due to the deferred tax benefit related
to $1.7 million loss on the credit risk component of the fair value of
the subordinated capital note recognized during the quarter pursuant
SFAS 157.
53
Financial Position June 30, 2008
Assets
The Corporations assets reached $8.8 billion as of June 30, 2008, a 3.5% or $321.5 million
decrease compared to total assets of $9.2 billion at
December 31, 2007, and a 3.9% or $357.4 million
decrease compared to total assets of $9.2 billion at June 30, 2007. This reduction was mainly due
to a decrease of $286.4 million in net loan portfolio as of June 30, 2008 compared with December
31, 2007 and a decrease of $140.8 million in investment securities due to the sale of $125 million
of investment securities available for sale during the first quarter of 2008. These
decreases were partially offset by an increase in cash and cash equivalents of $118.6 million.
The composition of the loan portfolio, including loans held for sale, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Dec. 31,
|
|
|
Jun. 08/Dec.07
|
|
|
June 30,
|
|
|
Jun. 08/Jun. 07
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
2007
|
|
|
Variance
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,409,723
|
|
|
$
|
2,530,030
|
|
|
$
|
(120,307
|
)
|
|
$
|
2,403,375
|
|
|
$
|
6,348
|
|
Construction
|
|
|
383,704
|
|
|
|
484,237
|
|
|
|
(100,533
|
)
|
|
|
500,328
|
|
|
|
(116,624
|
)
|
Mortgage
|
|
|
2,686,556
|
|
|
|
2,685,962
|
|
|
|
594
|
|
|
|
2,710,573
|
|
|
|
(24,017
|
)
|
Consumer
|
|
|
649,560
|
|
|
|
674,349
|
|
|
|
(24,789
|
)
|
|
|
670,367
|
|
|
|
(20,807
|
)
|
Consumer Finance
|
|
|
606,327
|
|
|
|
611,113
|
|
|
|
(4,786
|
)
|
|
|
613,924
|
|
|
|
(7,597
|
)
|
Leasing
|
|
|
76,023
|
|
|
|
92,641
|
|
|
|
(16,618
|
)
|
|
|
112,006
|
|
|
|
(35,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
6,811,893
|
|
|
|
7,078,332
|
|
|
|
(266,439
|
)
|
|
|
7,010,573
|
|
|
|
(198,680
|
)
|
Allowance for loan losses
|
|
|
(186,889
|
)
|
|
|
(166,952
|
)
|
|
|
(19,937
|
)
|
|
|
(127,916
|
)
|
|
|
(58,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
6,625,004
|
|
|
$
|
6,911,380
|
|
|
$
|
(286,376
|
)
|
|
$
|
6,882,657
|
|
|
$
|
(257,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net loan portfolio, including loans held for sale, reflected a decrease of $286.4 million
or 4.1%, reaching $6.6 billion at June 30, 2008, compared to the figures reported as of December
31, 2007, and a decrease of $257.7 million or 3.7%, when compared to June 30, 2007. The reduction in
net loan portfolio was basically due to the sale of $96.8 million of certain impaired commercial
and construction loans to an affiliate and repayments of approximately of $226.3 million in the
retail and corporate loan portfolio during the six months ended June 30, 2008. The mortgage loan
portfolio at June 30, 2008 remained basically flat when compared to December 31, 2007 and reflected
a decrease of $24.0 million when compared to June 30, 2007. Residential mortgage loan origination
for the semester ended June 30, 2008 was $214.9 million, $127.4 million or 37.2% less than the
$342.3 million originated during the same period in 2007. Total mortgage loans sold and securitized
during the six months ended June 30, 2008 were $96.0 million compared to $167.2 million during the
same period in 2007. The consumer loan portfolio (including consumer finance) also reflected a
decrease of $29.6 million or 2.3% as of June 30, 2008, compared to December 31, 2007. Compared to
June 30, 2007, the consumer loan portfolio reflected a decrease of $28.4 million or 2.2%. The
commercial loan portfolio (including leasing) decreased $136.9 million or 5.2% and $29.6 million or
1.2% compared with December 31, 2007 and June 30, 2007, respectively.
Allowance for Loan Losses
The Corporation assesses the overall risks in its loan portfolio and establishes and maintains
a reserve for probable losses thereon. The allowance for loan losses is maintained at a level
sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks
in the Corporations loan portfolio. The Corporations management evaluates the adequacy of the
allowance for loan losses on a monthly basis.
The determination of the allowance for loan losses is one of the most complex and critical
accounting estimates the Corporations management makes. The allowance for loan losses is composed
of three different components. An asset-specific reserve based on the provisions of Statements of
Financial Accounting Standards (SFAS) No. 114 Accounting by Creditors for Impairment of a Loan
(as amended), an expected loss estimate based on the provisions of SFAS No. 5 Accounting for
Contingencies, and an unallocated reserve based on the effect of probable economic deterioration
above and beyond what is reflected in the asset-specific component of the allowance.
54
Commercial, construction loans and certain mortgage loans exceeding a predetermined monetary
threshold are identified for evaluation of impairment on an individual basis pursuant to SFAS No.
114. The Corporation considers a loan impaired when interest and/or principal is past due 90 days
or more, or, when based on current information and events it is probable that the Corporation will
be unable to collect all amounts due according to the contractual terms of the loan agreement. The
asset-specific reserve on each individual loan identified as impaired is measured based on the
present value of expected future cash flows discounted at the loans effective interest rate,
except as a practical expedient, the Corporation may measure impairment based on the loans
observable market price, or the fair value of the collateral, net of estimated disposal costs, if
the loan is collateral dependent. Most of the asset-specific reserves of the Corporations impaired
loans are measured on the basis of the fair value of the collateral. The fair value of the
collateral is determined by external valuation specialist and since these values cannot be observed
or corroborated with market data, they are classified as Level 3 and presented as part of
non-recurring measurement disclosures.
A reserve for expected losses is determined under the provisions of SFAS No. 5 for all loans
not evaluated individually for impairment, based on historical loss experience by loan type,
management judgment of the quantitative factors (historical net charge-offs, statistical loss
estimates, etc.), as well as qualitative factors (current economic conditions, portfolio
composition, delinquency trends, industry concentrations, etc.). The Corporation groups small
homogeneous loans by type of loan (consumer, credit card, mortgage, etc.) and applies a loss
factor, which is determined using an average history of actual net losses and other statistical
loss estimates. Historical loss rates are reviewed at least quarterly and adjusted based on
changing borrower and/or collateral conditions and actual collections and charge-off experience.
Historical loss rates for the different portfolios may be adjusted for significant factors that in
managements judgment reflect the impact of any current conditions on loss recognition. Factors
that management considers in the analysis include the effect of the trends in the nature and volume
of loans (delinquency, charge-offs, non accrual), changes in the mix or type of collateral, asset
quality trends, changes in the internal lending policies and credit standards, collection practices
and examination results from internal and external agencies.
An additional, or unallocated, reserve is maintained to cover the effect of probable economic
deterioration above and beyond what is reflected in the asset-specific component of the allowance.
This component represents managements view that given the complexities of the lending portfolio
and the assessment process, including the inherent imprecision in the financial models used in the
loss forecasting process, there are estimable losses that have been incurred but not yet
specifically identified, and as a result not fully provided for in the asset-specific component of
the allowance. The level of the unallocated reserve may change periodically after evaluating
factors impacting assumptions used in the calculation of the asset specific component of the
reserve.
The underlying assumptions, estimates and assessments used by management to determine the
components of the allowance for loan losses are periodically evaluated and updated to reflect
managements current view of overall economic conditions and other relevant factors impacting
credit quality and inherent losses. Changes in such estimates could significantly impact the
allowance and provision for loan losses. The Corporation could experience loan losses that are
different from the current estimates made by management. Based on current and expected economic
conditions, the expected level of net loan losses and the methodology established to evaluate the
adequacy of the allowance for loan losses, management considers that the Corporation has
established an adequate position in its allowance for loan losses. Refer to the Non-performing
Assets and Past Due Loans section for further information.
55
ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
For the three months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
179,150
|
|
|
$
|
115,171
|
|
Provision for loan losses
|
|
|
78,090
|
|
|
|
52,874
|
|
|
|
38,515
|
|
|
|
30,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,042
|
|
|
|
159,737
|
|
|
|
217,665
|
|
|
|
146,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
4,150
|
|
|
|
3,484
|
|
|
|
1,818
|
|
|
|
1,568
|
|
Construction
|
|
|
5,358
|
|
|
|
|
|
|
|
5,344
|
|
|
|
|
|
Mortgage
|
|
|
64
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
19,975
|
|
|
|
11,717
|
|
|
|
10,438
|
|
|
|
6,970
|
|
Consumer finance
|
|
|
29,458
|
|
|
|
16,190
|
|
|
|
13,541
|
|
|
|
9,863
|
|
Leasing
|
|
|
1,050
|
|
|
|
1,485
|
|
|
|
562
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,055
|
|
|
|
34,026
|
|
|
|
31,703
|
|
|
|
18,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
293
|
|
|
|
799
|
|
|
|
137
|
|
|
|
104
|
|
Consumer
|
|
|
579
|
|
|
|
429
|
|
|
|
234
|
|
|
|
263
|
|
Consumer finance
|
|
|
779
|
|
|
|
723
|
|
|
|
403
|
|
|
|
370
|
|
Leasing
|
|
|
251
|
|
|
|
254
|
|
|
|
153
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,902
|
|
|
|
2,205
|
|
|
|
927
|
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
58,153
|
|
|
|
31,821
|
|
|
|
30,776
|
|
|
|
18,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
186,889
|
|
|
$
|
127,916
|
|
|
$
|
186,889
|
|
|
$
|
127,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
2.74
|
%
|
|
|
1.82
|
%
|
|
|
2.74
|
%
|
|
|
1.82
|
%
|
Recoveries to charge-offs
|
|
|
3.17
|
%
|
|
|
6.48
|
%
|
|
|
2.92
|
%
|
|
|
4.29
|
%
|
Annualized net charge-offs to average loans
|
|
|
1.66
|
%
|
|
|
0.92
|
%
|
|
|
1.79
|
%
|
|
|
1.03
|
%
|
The Corporations allowance for loan losses was $186.9 million or 2.74% of period-end loans at
June 30, 2008, a 92 basis point increase compared to $127.9 million, or 1.82% of period-end loans
at June 30, 2007. The $186.9 million in the allowance for loan losses is comprised of $117.3
million related to commercial banking and $69.6 million to the
consumer finance operations, with a
provision for loan losses of $48.1 million and $30.0 million for each respective segment for the
six months ended June 30, 2008. At June 30, 2007, the $127.9 million in the allowance for loan
losses is comprised of $68.0 million related to commercial
banking and $59.9 million to the
consumer finance operations, with a provision for loan losses
of $18.8 million and $34.1 million for the same period for each respective segment.
The increment in the allowance for loan losses to period-end loan was due to the increase in
non-performing loans and loans past due 90 days or more of $142.6 million from $147.3
million at June 30, 2007 to $289.8 million at June 30, 2008.
The ratio of allowance for loan losses to non-performing loans and accruing loans past due 90
days or more was 64.48% and 86.87% at June 30, 2008 and June 30, 2007, respectively, a decrease of
22.39 percentage points. At June 30, 2008, this ratio increased 9.12 percentage points when
compared to 55.36% at December 31, 2007. Excluding non-performing mortgage loans (for which the
Corporation has historically had a minimal loss experience) this
ratio was 107.18% at June 30, 2008
compared to 181.39% as of June 30, 2007 and 79.51% as of December 31, 2007.
The annualized ratio of net charge-offs to average loans for the six-month period ended June
30, 2008 was 1.66%, increasing 74 basis points from 0.92% for the same period in 2007. This change
was due to an increment in net charge-offs of $26.3 million during 2008 when compared with
the same period in 2007.
At June 30, 2008, impaired loans (loans evaluated individually for impairment) with related
allowance amounted to approximately $184.0 million and $30.9 million, respectively. At December 31,
2007 impaired loans with related allowance amounted to $205.6 million and $25.6 million,
respectively.
56
Although the Corporations provision and allowance for loan losses will fluctuate from time to
time based on economic conditions, net charge-off levels and changes in the level and mix of the
loan portfolio, management considers that the allowance for loan losses is adequate to absorb
probable losses on its loan portfolio.
Non-performing Assets and Past Due Loans
As of June 30, 2008, the Corporations total non-performing loans (excluding other real estate
owned) reached $278.5 million or 4.09% of total loans from $294.4 million or 4.16% of total loans
as of December 31, 2007 and from $137.0 million or 1.95% of total loans as of June 30, 2007. The
Corporations non-performing loans reflected an increase of $141.5 million or 103.3% compared to
non-performing loans as of June 30, 2007 and a decrease of $16.0 million or 5.4% compared to
non-performing loans as of December 31, 2007. The increase in non-performing loans was principally
due to the $87.5 million increase in nonperforming construction loans and the $39.1 million
increase in non-performing residential mortgages when compared to June 30, 2007. Compared to
December 31, 2007, the increase was composed mainly of increases in non-performing residential
mortgages of $24.3 million or 30.0% partially offset by $49.6 million decrease in non-performing
construction loans mainly due to the sale of $82.9 million of certain impaired construction loans to an
affiliate.
Non-performing loans and accruing loans past due 90 days or more in the Island Finance
portfolio totaled $36.5 million at June 30, 2008, reflecting an decrease of $1.8 million compared
to December 31, 2007 and an increase of $1.3 million compared to June 30, 2007.
The Corporation continuously monitors non-performing assets and has deployed significant
resources to manage the non-performing loan portfolio. Management expects to continue to improve
its collection efforts by devoting more full time employees and outside resources.
Non-performing Assets and Past Due Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial and Industrial
|
|
$
|
30,866
|
|
|
$
|
21,236
|
|
|
$
|
22,333
|
|
Construction
|
|
|
91,499
|
|
|
|
141,140
|
|
|
|
3,966
|
|
Mortgage
|
|
|
105,062
|
|
|
|
80,805
|
|
|
|
65,923
|
|
Consumer
|
|
|
13,569
|
|
|
|
10,818
|
|
|
|
8,513
|
|
Consumer Finance
|
|
|
34,337
|
|
|
|
37,412
|
|
|
|
33,615
|
|
Leasing
|
|
|
2,460
|
|
|
|
2,334
|
|
|
|
2,223
|
|
Restructured Loans
|
|
|
687
|
|
|
|
693
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
278,480
|
|
|
|
294,438
|
|
|
|
136,965
|
|
Repossessed Assets
|
|
|
18,249
|
|
|
|
16,447
|
|
|
|
6,898
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
296,729
|
|
|
$
|
310,885
|
|
|
$
|
143,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past-due 90 days or more
|
|
$
|
11,369
|
|
|
$
|
7,162
|
|
|
$
|
10,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing loans to total loans
|
|
|
4.09
|
%
|
|
|
4.16
|
%
|
|
|
1.95
|
%
|
Non-Performing loans plus accruing loans
past due 90 days or more to total loans
|
|
|
4.26
|
%
|
|
|
4.26
|
%
|
|
|
2.10
|
%
|
Non-Performing assets to total assets
|
|
|
3.36
|
%
|
|
|
3.39
|
%
|
|
|
1.56
|
%
|
57
Liabilities
The Corporations total liabilities reached $8.3 billion as of June 30, 2008, reflecting a
decrease of $346.1 million compared to December 31, 2007. This reduction in total liabilities was
principally due to a decrease in total borrowings (comprised of federal funds purchased and other
borrowings, securities sold under agreements to repurchase, commercial paper issued, federal home
loan advances, term and capital notes) of $1.1 billion or 35.4% at June 30, 2008 from $3.1 billion
at December 31, 2007. This decrease was partially offset by an increase in total deposits of $817.6
million or 15.8% to $6.0 billion as of June 30, 2008 from $5.2 billion as of June 30, 2007.
Total deposits of $6.0 billion as of June 30, 2008 were composed of $1.6 billion in brokered
deposits and $4.4 billion of customer deposits. Compared to December 31, 2007, brokered deposits
reflected an increase of $162.4 million or 11.2% and customer deposits reflected increases of
$655.2 million, or 17.7% as of June 30, 2008. The increase in customer deposits was due to a
certificate of deposit for the amount of $640 million opened by
Banco Santander, S.A. at Banco
Santander Puerto Rico, described below.
Total borrowings at June 30, 2008 (comprised of federal funds purchased and other borrowings,
securities sold under agreements to repurchase, commercial paper issued, federal home loan bank
advances and term and capital notes) decreased $1.1 billion or 35.4% and $988.0 million or 32.8%
compared to borrowings at December 31, 2007 and June 30, 2007, respectively. The $1.1 million
decrease for the six months ended June 30, 2008 when compared with December 31, 2007 includes a
decrease in fed funds purchased and other borrowings of $653.3 million due to the refinancing of
the outstanding indebtedness incurred under bridge facility agreement among the Corporation, SFS
and National Australia Bank Limited. Also, there were decreases in commercial paper issued of
$234.7 million, federal home loan bank advances of $165.0 million, securities sold under agreements
to repurchase of $51.7 million and subordinated capital notes of $7.1 million.
On March 25, 2008, the Corporation and SFS., entered into a fully-collateralized Loan
Agreement (the Loan) with the Bank. The proceeds of the Loan were used to refinance the
outstanding indebtedness incurred under the previously announced bridge facility agreement among
the Corporation, SFS and National Australia Bank Limited, and for general corporate purposes. Under
the Loan, the Corporation and SFS had available $186 million and $454 million, respectively, all of
which was drawn on March 25, 2008. The Loan is fully-collateralized by a certificate of deposit in
the amount of $640 million opened by Banco Santander, S.A., the parent of the Corporation, and
provided as security for the Loan pursuant to the terms of a Security Agreement, Pledge and
Assignment between the Bank and Banco Santander, S.A. The Corporation and SFS have agreed to pay a
fee of 0.10% net of taxes, deduction and withholdings, on an annualized basis, to Banco Santander,
S.A. in connection with its agreement to collateralize the loan with the deposit.
The amounts drawn under the Loan bear interest at an annual rate equal to the applicable
LIBOR rate plus 0.465% per annum. Interest under the Loan is payable at maturity. The Corporation
and SFS did not pay any facility fee or commission to the Bank in connection with the Loan. The
entire principal balance of the Loan is due and payable on September 25, 2008. Upon the occurrence
and during the continuance of an Event of Default as defined in the Loan the Bank shall have the
right to declare the outstanding balance of the Loan, together with accrued interest and any other
amount owing to the Bank, due and payable on demand or immediately due for payment. In addition,
the Corporation and SFS will be required to pay interest on any overdue amounts at a default rate
that is equal to the then applicable interest rate payable on the Loan plus 2% per annum. The
Corporations and SFSs obligations to pay interest and principal under the Loan are several and
not joint. However, the Corporation and SFS are jointly and severally responsible for all other
amounts payable under the Loan.
During October 2006, the Corporation also completed the private placement of $125 million
Trust Preferred Securities (Preferred Securities) and issued Junior Subordinated Debentures in
the aggregate principal amount of $129 million in connection with the issuance of the Preferred
Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent
described in the guarantee agreement between the Corporation and the guarantee trustee, for the
benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust
Preferred Securities were acquired by an affiliate of the Corporation. In connection with the
issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of
$129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037.
58
Capital and Dividends
As an investment-grade rated entity by several nationally recognized rating agencies, the
Corporation has access to a variety of capital issuance alternatives in the United States and
Puerto Rico capital markets. The Corporation continuously monitors its capital issuance
alternatives. It may issue capital in the future, as needed, to maintain its well-capitalized
status.
Stockholders equity was $561.1 million, or 6.4% of total assets at June 30, 2008, compared to
$536.5 million or 5.9% of total assets at December 31, 2007. The $24.6 million increase in
stockholders equity was composed of net income of $24.2 million, stock incentive plan expense
recognized as capital contribution of $7.7 million and the cumulative effect of the adoption of
SFAS 159 of $3.2 million This increase was partially offset by dividend declared of $9.3 million
during the semester ended June 30, 2008 and an increase in accumulated other comprehensive loss of
$1.3 million.
The Corporation declared a cash dividend of $0.20 per common share during the six-month period
ended June 30, 2008 to all stockholders and expects to continue to pay quarterly dividends. The
current annualized dividend yield is 3.8%.
The Corporation adopted and implemented various Stock Repurchase Programs in May 2000,
December 2000 and June 2001. Under these programs the Corporation acquired 3% of its then
outstanding common shares. During November 2002, the Corporation started a fourth Stock Repurchase
program under which it planned to acquire 3% of its outstanding common shares. In November 2002,
the Corporations Board of Directors authorized the Corporation to repurchase up to 928,204 shares,
or approximately 3%, of its shares of outstanding common stock, of which 325,100 shares have been
purchased. The Board felt that the Corporations shares of common stock represented an attractive
investment at prevailing market prices at the time of the adoption of the common stock repurchase
program and that, given the relatively small amount of the program, the stock repurchases would not
have any significant impact on the Corporations liquidity and capital positions. The program has
no time limitation and management is authorized to effect repurchases at its discretion. The
authorization permits the Corporation to repurchase shares from time to time in the open market or
in privately negotiated transactions. The timing and amount of any repurchases will depend on many
factors, including the Corporations capital structure, the market price of the common stock and
overall market conditions. All of the repurchased shares will be held by the Corporation as
treasury stock and reserved for future issuance for general corporate purposes.
During the six months ended June 30, 2008 and 2007, the Corporation did not repurchase any
shares of common stock. As of June 30, 2008, the Corporation had repurchased 4,011,260 shares of
its common stock under these programs at a cost of $67.6 million. The Corporations management
believes that the repurchase program will not have a significant effect on the Corporations
liquidity and capital positions.
The Corporation has a Dividend Reinvestment Plan and a Cash Purchase Plan wherein holders of
common stock have the opportunity to automatically invest cash dividends to purchase more shares of
the Corporation. Shareholders may also make, as frequently as once a month, optional cash payments
for investment in additional shares of the Corporations common stock.
As of June 30, 2008, the Corporations common stock price per share was $10.61, resulting in a
market capitalization of $494.8 million, including affiliated holdings compared to book value equity of $561.1 million.
The Corporation is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporations consolidated financial statements. The
regulations require the Corporation to meet specific capital guidelines that involve quantitative
measures of the Corporations assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporations capital classification is also
subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
As of June 30, 2008, the Corporation was well capitalized under the regulatory framework for
prompt corrective action. At June 30, 2008 the Corporation continued to exceed the regulatory
risk-based capital requirements for well-capitalized institutions. Tier I capital to risk-adjusted
assets and total capital ratios at June 30, 2008 were 8.08% and 11.18%, respectively, and the
leverage ratio was 5.68%.
59
Liquidity
The Corporations general policy is to maintain liquidity adequate to ensure its ability to
honor withdrawals of deposits, make repayments at maturity of other liabilities, extend loans and
meet its own working capital needs. Liquidity is derived from the Corporations capital, reserves,
and securities portfolio. The Corporation has established lines of credit with foreign and
domestic banks, has access to U.S. markets through its commercial paper program, and also has
broadened its relations in the federal funds and repurchase agreement markets to increase the
availability of other sources of funds and to augment liquidity as necessary.
Management monitors liquidity levels continuously. The focus is on the liquidity ratio, which
presents total liquid assets over net volatile liabilities and core deposits. The Corporation
believes it has sufficient liquidity to meet current obligations.
Derivative Financial Instruments:
The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows. Refer to Notes 1,
12 and 18 to the accompanying consolidated financial statements for additional details of the
Corporations derivative transactions as of June 30, 2008 and December 31, 2007.
In the normal course of business, the Corporation utilizes derivative instruments to manage
exposure to fluctuations in interest rates, currencies and other markets, to meet the needs of
customers and for proprietary trading activities. The Corporation uses the same credit risk
management procedures to assess and approve potential credit exposures when entering into
derivative transactions as those used for traditional lending.
Hedging Activities:
The following table summarizes the derivative contracts designated as hedges and economic
undesignated hedges as of June 30, 2008 and December 31, 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
(In thousands)
|
|
Amounts
|
|
|
Fair Value
|
|
|
Gain
|
|
|
Loss*
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
375,000
|
|
|
$
|
(1,247
|
)
|
|
$
|
|
|
|
$
|
(476
|
)
|
Economic Undesignated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
243,984
|
|
|
|
(2,639
|
)
|
|
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
618,984
|
|
|
$
|
(3,886
|
)
|
|
$
|
683
|
|
|
$
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
(In thousands)
|
|
Amounts
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Loss*
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
650,000
|
|
|
$
|
(2,027
|
)
|
|
$
|
|
|
|
$
|
(1,023
|
)
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
937,863
|
|
|
|
(4,425
|
)
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,587,863
|
|
|
$
|
(6,452
|
)
|
|
$
|
(465
|
)
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Cash Flow Hedges:
The Corporation designates hedges as Cash Flow Hedges when its main purpose is to reduce the
exposure associated with the variability of future cash flows related to fluctuations in short term
financing rates (such as LIBOR). At the inception of each hedge, management documents the hedging
relationship, including its objective and probable effectiveness. To assess ongoing effectiveness
of the hedges, the Corporation compares the hedged items periodic variable rate with the hedging
items benchmark rate (LIBOR) at every reporting period to determine the effectiveness of the
hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in condensed
consolidated statements of income.
As of June 30, 2008, the total amount, net of tax, included in accumulated other comprehensive
income pertaining to interest rate swaps designated as cash flow hedges was an unrealized loss, net
ox tax of $761,000. As of December 31, 2007, the total amount, net of tax, included in accumulated
other comprehensive income pertaining to the cash flow hedges was an unrealized loss, net of tax of
$1.2 million.
Economic Undesignated Hedges:
The Corporation adopted SFAS 159 effective January 1, 2008 which permit the measurement of
selected financial instruments at fair value. The Corporation elected to account at fair value
certain of its brokered deposits and subordinated capital notes that were previously designated for
fair value hedge accounting in accordance with SFAS 133. The selected financial instruments are
reported at fair value with changes in fair value reported in condensed consolidated statements of
income.
As of June 30, 2008 the economic undesignated hedges have maturities through the year 2024.
The weighted average rate paid and received on these contracts is 2.82% and 5.38% as of June 30,
2008.
The Corporation had issued fixed rate debt swapped to create a floating rate source of funds.
In this case, the Corporation matches all of the relevant economics variables (notional, coupon,
payments date and exchanges, etc) of the fixed rate sources of funds to the fixed rate portion of
the interest rate swaps, (which it received from counterparty), and pays the floating rate portion
of the interest swaps. The effectiveness of these transactions is very high since all of the
relevant economic variables are matched. As of June 30, 2008, the Corporation has $244.0 million of
these economic undesignated hedges.
Fair Value Hedges:
The Corporation designates hedges as Fair Value Hedges when its main purpose is to hedge the
changes in market value of an associated asset or liability. The Corporation only designates these
types of hedges if at inception it is believed that the relationship in the changes in the market
value of the hedged item and hedging item will offset each other in a highly effective manner. At
the inception of each hedge, management documents the hedging relationship, including its objective
and probable effectiveness. To assess ongoing effectiveness of the hedges, the Corporation marks to
market both the hedging item and the hedged item at every reporting period to determine the
effectiveness of the hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or
loss in condensed consolidated statements of income.
The Corporation hedges its certain callable brokered certificates of deposits and subordinated
capital notes by using interest rate swaps. These swaps were designated for hedge accounting
treatment under SFAS 133. For designated fair value hedges, the changes in the fair value of both
the hedging instrument and the underlying hedged instrument were included in other income and the
interest flows were included in the net interest income in condensed consolidated statements of
income.
Prior to the adoption of SFAS 159, changes in the value of the derivatives instruments
qualifying as fair value hedge that have been highly effective were recognized in the current
period results of operations along with the change in the value of the designated hedge item. If
the hedge relationship was terminated, hedge accounting was discontinued and any balance related to
the derivative was recognized in current operations, and fair value adjustment to the hedge item
continued to be reported as part of the basis of the item and was amortized to earnings as yield
adjustment. After adoption of SFAS 159 for certain callable brokered certificates of deposits and
subordinated capital notes, the hedge relationship was terminated, and both previously hedged items
and the respective hedging derivatives are presented at fair value with changes recorded in the
condensed consolidated statements of income.
61
The fair value hedges have maturities through the year 2032 as of December 31, 2007. The
weighted-average rate paid and received on these contracts is 5.10% and 5.39%, as of December 31,
2007.
The $937.9 million fair value hedges are associated to the swapping of fixed rate debt as
December 31, 2007. The Corporation regularly issues term fixed rate debt, which it in turn swaps to
floating rate debt via interest rate swaps. In these cases the Corporation matches all of the
relevant economic variables (notional, coupon, payment dates and conventions etc.) of the fixed
rate debt it issues to the fixed rate leg of the interest rate swap ( which it receives from the
counterparty) and pays the floating rate leg of the interest rate swap. The effectiveness of these
transactions is very high since all of the relevant economic variables are matched.
Derivative instruments not designated as hedging instruments:
Any derivative not associated to hedging activity is booked as a freestanding derivative. In
the normal course of business the Corporation may enter into derivative contracts as either a
market maker or proprietary position taker. The Corporations mission as a market maker is to meet
the clients needs by providing them with a wide array of financial products, which include
derivative contracts. The Corporations major role in this aspect is to serve as a derivative
counterparty to these clients. Positions taken with these clients are hedged (although not
designated as hedges) in the OTC market with interbank participants or in the organized futures
markets. To a lesser extent, the Corporation enters into freestanding derivative contracts as a
proprietary position taker, based on market expectations or to benefit from price differentials
between financial instruments and markets. These derivatives are not linked to specific assets and
liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship
and, therefore, do not qualify for hedge accounting. These derivatives are carried at fair value
and changes in fair value are recorded in earnings. The market and credit risk associated with
these activities is measured, monitored and controlled by the Corporations Market Risk Group, a
unit independent from the treasury department. Among other things, this group is responsible for:
policy, analysis, methodology and reporting of anything related to market risk and credit risk. The
following table summarizes the aggregate notional amounts and the reported derivative assets or
liabilities (i.e. the fair value of the derivative contracts) as of June 30, 2008 and December 31,
2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
Notional
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
Gain
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,604,017
|
|
|
$
|
1,122
|
|
|
$
|
782
|
|
Interest Rate Caps
|
|
|
2,698
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
4,496
|
|
|
|
(116
|
)
|
|
|
(161
|
)
|
Equity Derivatives
|
|
|
266,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,877,889
|
|
|
$
|
1,006
|
|
|
$
|
621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Notional
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
Gain
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,237,179
|
|
|
$
|
257
|
|
|
$
|
679
|
|
Interest Rate Caps
|
|
|
14,762
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
Equity Derivatives
|
|
|
267,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,520,516
|
|
|
$
|
302
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The notional amount represents the gross sum of long and short.
|
62
PART I ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Asset and Liability Management
The Corporations policy with respect to asset liability management is to maximize its net
interest income, return on assets and return on equity while remaining within the established
parameters of interest rate and liquidity risks provided by the Board of Directors and the relevant
regulatory authorities. Subject to these constraints, the Corporation takes mismatched interest
rate positions. The Corporations asset and liability management policies are developed and
implemented by its Asset and Liability Committee (ALCO), which is composed of senior members of
the Corporation including the President, Chief Operating Officer, Chief Accounting Officer,
Treasurer and other executive officers of the Corporation. The ALCO reports on a monthly basis to
the members of the Banks Board of Directors.
Market Risk and Interest Rate Sensitivity
A key component of the Corporations asset and liability policy is the management of interest
rate sensitivity. Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the maturity or repricing characteristics of interest-earning assets and
interest-bearing liabilities. For any given period, the pricing structure is matched when an equal
amount of such assets and liabilities mature or reprice in that period. Any mismatch of
interest-earning assets and interest-bearing liabilities is known as a gap position. A positive
gap denotes asset sensitivity, which means that an increase in interest rates would have a positive
effect on net interest income, while a decrease in interest rates would have a negative effect on
net interest income. A negative gap denotes liability sensitivity, which means that a decrease in
interest rates would have a positive effect on net interest income, while an increase in interest
rates would have a negative effect on net interest income. Because different types of assets and
liabilities with the same or similar maturities may react differently to changes in overall market
rates or conditions, changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity category.
The Corporations one-year cumulative GAP position at June 30, 2008, was negative $1.5 billion
or -18.17% of total earning assets. This is a one-day position that is continually changing and is
not indicative of the Corporations position at any other time. This denotes liability
sensitivity, which means that an increase in interest rates would have a negative effect on net
interest income while a decrease in interest rates would have a positive effect on net interest
income. While the GAP position is a useful tool in measuring interest rate risk and contributes
toward effective asset and liability management, shortcomings are inherent in GAP analysis since
certain assets and liabilities may not move proportionally as interest rates change.
The Corporations interest rate sensitivity strategy takes into account not only rates of
return and the underlying degree of risk, but also liquidity requirements, capital costs and
additional demand for funds. The Corporations maturity mismatches and positions are monitored by
the ALCO and managed within limits established by the Board of Directors.
The following table sets forth the repricing of the Corporations interest earning assets and
interest bearing liabilities at June 30, 2008 and may not be representative of interest rate gap
positions at other times. In addition, variations in interest rate sensitivity may exist within
the repricing period presented due to the differing repricing dates within the period. In preparing
the interest rate gap report, the following assumptions are made, all assets and liabilities are
reported according to their repricing characteristics. For example, a commercial loan maturing in
five years with monthly variable interest rate payments is stated in the column of up to 90 days.
The investment portfolio is reported considering the effective duration of the securities. Expected
prepayments and remaining terms are considered for the residential mortgage portfolio. Core
deposits are reported in accordance with their effective duration. Effective duration of core
deposits is based on price and volume elasticity to market rates. The Corporation reviews on a
monthly basis the effective duration of core deposits. Assets and liabilities with embedded options
are stated based on full valuation of the asset/liability and the option to ascertain their
effective duration.
63
SANTANDER BANCORP
MATURING GAP ANALYSIS
As of June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 3
|
|
3 months
|
|
1 to 3
|
|
3 to 5
|
|
5 to 10
|
|
More than
|
|
No Interest
|
|
|
|
|
months
|
|
to a Year
|
|
Years
|
|
Years
|
|
Years
|
|
10 Years
|
|
Rate Risk
|
|
Total
|
|
|
(dollars in thousands)
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Portfolio
|
|
$
|
345,471
|
|
|
$
|
1,504
|
|
|
$
|
257,922
|
|
|
$
|
315,496
|
|
|
$
|
204,990
|
|
|
$
|
|
|
|
$
|
128,318
|
|
|
$
|
1,253,701
|
|
Deposits in Other Banks
|
|
|
203,851
|
|
|
|
7,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,541
|
|
|
|
328,132
|
|
Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,168,269
|
|
|
|
253,809
|
|
|
|
377,174
|
|
|
|
200,915
|
|
|
|
249,501
|
|
|
|
78,944
|
|
|
|
157,134
|
|
|
|
2,485,746
|
|
Construction
|
|
|
348,839
|
|
|
|
4,665
|
|
|
|
10,070
|
|
|
|
10,257
|
|
|
|
5,355
|
|
|
|
3,196
|
|
|
|
1,322
|
|
|
|
383,704
|
|
Consumer
|
|
|
384,279
|
|
|
|
206,147
|
|
|
|
407,965
|
|
|
|
202,159
|
|
|
|
56,330
|
|
|
|
16
|
|
|
|
(1,009
|
)
|
|
|
1,255,887
|
|
Mortgage
|
|
|
85,244
|
|
|
|
272,694
|
|
|
|
645,683
|
|
|
|
555,182
|
|
|
|
1,010,250
|
|
|
|
106,256
|
|
|
|
11,247
|
|
|
|
2,686,556
|
|
Fixed and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444,965
|
|
|
|
444,965
|
|
|
|
|
Total Assets
|
|
$
|
2,535,953
|
|
|
$
|
746,559
|
|
|
$
|
1,698,814
|
|
|
$
|
1,284,009
|
|
|
$
|
1,526,426
|
|
|
$
|
188,412
|
|
|
$
|
858,518
|
|
|
$
|
8,838,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Funds Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
$
|
49,779
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49,779
|
|
Repurchase Agreements
|
|
|
8,875
|
|
|
|
75,000
|
|
|
|
300,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
583,875
|
|
Federal
Funds Purchased and Other
Borrowings
|
|
|
537,000
|
|
|
|
121,790
|
|
|
|
475,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,133,790
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
1,826,644
|
|
|
|
1,185,997
|
|
|
|
225,998
|
|
|
|
78,104
|
|
|
|
105,869
|
|
|
|
55,812
|
|
|
|
(1,196
|
)
|
|
|
3,477,228
|
|
Demand Deposits and Savings Account
|
|
|
137,692
|
|
|
|
|
|
|
|
141,560
|
|
|
|
491,014
|
|
|
|
|
|
|
|
|
|
|
|
(15,895
|
)
|
|
|
754,371
|
|
Transactional Accounts
|
|
|
263,397
|
|
|
|
360,788
|
|
|
|
|
|
|
|
1,122,350
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
1,746,657
|
|
Term and Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
9,472
|
|
|
|
10,000
|
|
|
|
240,068
|
|
|
|
|
|
|
|
192
|
|
|
|
259,732
|
|
Other Liabilities and Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
833,259
|
|
|
|
833,259
|
|
|
|
|
Total Liabilities and Capital
|
|
$
|
2,823,387
|
|
|
$
|
1,743,575
|
|
|
$
|
1,152,030
|
|
|
$
|
1,901,468
|
|
|
$
|
345,937
|
|
|
$
|
55,812
|
|
|
$
|
816,482
|
|
|
$
|
8,838,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (Assets)
|
|
$
|
2,253,371
|
|
|
$
|
57,600
|
|
|
$
|
161,641
|
|
|
$
|
14,068
|
|
|
$
|
1,533,865
|
|
|
$
|
202,456
|
|
|
$
|
|
|
|
$
|
4,223,001
|
|
Interest Rate Swaps (Liabilities)
|
|
|
2,433,711
|
|
|
|
117,600
|
|
|
|
136,641
|
|
|
|
14,068
|
|
|
|
1,343,865
|
|
|
|
177,116
|
|
|
|
|
|
|
|
4,223,001
|
|
Caps
|
|
|
1,349
|
|
|
|
|
|
|
|
521
|
|
|
|
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
2,698
|
|
Caps Final Maturity
|
|
|
1,349
|
|
|
|
|
|
|
|
521
|
|
|
|
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
2,698
|
|
|
|
|
GAP
|
|
$
|
(467,774
|
)
|
|
$
|
(1,057,016
|
)
|
|
$
|
571,784
|
|
|
$
|
(617,459
|
)
|
|
$
|
1,370,489
|
|
|
$
|
157,940
|
|
|
$
|
42,036
|
|
|
$
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(467,774
|
)
|
|
$
|
(1,524,790
|
)
|
|
$
|
(953,006
|
)
|
|
$
|
(1,570,465
|
)
|
|
$
|
(199,976
|
)
|
|
$
|
(42,036
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
Cumulative interest rate gap to
earning assets
|
|
|
-5.57
|
%
|
|
|
-18.17
|
%
|
|
|
-11.35
|
%
|
|
|
-18.71
|
%
|
|
|
-2.38
|
%
|
|
|
-0.50
|
%
|
|
|
|
|
|
|
|
|
Interest rate risk is the primary market risk to which the Corporation is exposed. Nearly all
of the Corporations interest rate risk arises from instruments, positions and transactions entered
into for purposes other than trading. They include loans, investment securities, deposits,
short-term borrowings, senior and subordinated debt and derivative financial instruments used for
asset and liability management.
As part of its interest rate risk management process, the Corporation analyzes on an ongoing
basis the profitability of the balance sheet structure, and how this structure will react under
different market scenarios. In order to carry out this task, management prepares three
standardized reports with detailed information on the sources of interest income and expense: the
Financial Profitability Report, the Net Interest Income Shock Report and the Market Value
Shock Report. The former report deals with historical data while the latter two deal with expected
future earnings.
The Financial Profitability Report identifies individual components of the Corporations
non-trading portfolio independently with their corresponding interest income or expense. It uses
the historical information at the end of each month to track the yield of such components and to
calculate net interest income for such time period.
64
The Net Interest Income Shock Report uses a simulation analysis to measure the amount of net
interest income the Corporation would have from its operations throughout the next twelve months
and the sensitivity of these earnings to assumed shifts in market interest rates throughout the
same period. The important assumptions of this analysis are: ( i ) rate shifts are parallel and
immediate throughout the yield curve; (ii) rate changes affect all assets and liabilities equally;
(iii) interest-bearing demand accounts and savings passbooks will run off in a period of one year;
and (iv) demand deposit accounts will run off in a period of one to three years. Cash flows from
assets and liabilities are assumed to be reinvested at market rates in similar instruments. The
object is to simulate a dynamic gap analysis enabling a more accurate interest rate risk
assessment.
The ALCO monitors interest rate gaps in combination with net interest margin (NIM) sensitivity
and duration of market value equity (MVE).
NIM sensitivity analysis captures the maximum acceptable net interest margin loss for a one
percent parallel change of all interest rates across the curve. Duration of market value equity
analysis entails a valuation of all interest bearing assets and liabilities under parallel
movements in interest rates. The ALCO has established limits of $35 million of maximum NIM loss for
a 1% parallel shock and $140 million maximum MVE loss for a 1% parallel shock.
As of June 30, 2008, it was determined for purposes of the Net Interest Income Shock Report
that the Corporation had a potential loss in net interest income of approximately $13.0 million if
market rates were to increase 100 basis points immediately parallel across the yield curve, less
than the $35.0 million limit. For purposes of the Market Value Shock Report it was determined that
the Corporation had a potential loss of approximately $58.1 million if market rates were to
increase 100 basis points immediately parallel across the yield curve, less than the $140.0 million
limit. The tables below present a summary of the Corporations net interest margin and market value
shock reports, considering several scenarios as of June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST MARGIN SHOCK REPORT
|
|
|
June 30, 2008
|
(In millions)
|
|
-200 BPs
|
|
-100 BPs
|
|
-50 BPs
|
|
Base Case
|
|
+50 BPs
|
|
+100 BPs
|
|
+200 BPs
|
Gross Interest Margin
|
|
$
|
339.2
|
|
|
$
|
323.8
|
|
|
$
|
318.6
|
|
|
$
|
313.1
|
|
|
$
|
307.2
|
|
|
$
|
300.1
|
|
|
$
|
285.3
|
|
Sensitivity
|
|
$
|
26.1
|
|
|
$
|
10.7
|
|
|
$
|
5.5
|
|
|
|
|
|
|
$
|
(5.9
|
)
|
|
$
|
(13.0
|
)
|
|
$
|
(27.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARKET VALUE SHOCK REPORT
|
|
|
June 30, 2008
|
(In millions)
|
|
-200 BPs
|
|
-100 BPs
|
|
-50 BPs
|
|
Base Case
|
|
+50 BPs
|
|
+100 BPs
|
|
+200 BPs
|
Market Value of Equity
|
|
$
|
730.3
|
|
|
$
|
706.5
|
|
|
$
|
677.9
|
|
|
$
|
640.9
|
|
|
$
|
610.4
|
|
|
$
|
582.8
|
|
|
$
|
523.9
|
|
Sensitivity
|
|
$
|
89.4
|
|
|
$
|
65.6
|
|
|
$
|
37.0
|
|
|
|
|
|
|
$
|
(30.5
|
)
|
|
$
|
(58.1
|
)
|
|
$
|
(117.0
|
)
|
As of June 30, 2008 the Corporation had a liability sensitive profile as explained by the
negative gap, the NIM shock report and the MVE shock report. Any decision to reposition the balance
sheet is taken by the ALCO committee, and is subject to compliance with the established risk
limits. Some factors that could lead to shifts in policy could be, but are not limited to, changes
in views on interest rate markets, monetary policy, and macroeconomic factors as well as legal,
fiscal and other factors which could lead to shifts in the asset liability mix.
65
Liquidity Risk
Liquidity risk is the risk that not enough cash will be generated from either assets or
liabilities to meet deposit withdrawals or contractual loan funding. The Corporations general
policy is to maintain liquidity adequate to ensure its ability to honor withdrawals of deposits,
make repayments at maturity of other liabilities, extend loans and meet its own working capital
needs. The Corporations principal sources of liquidity are capital, core deposits from retail and
commercial clients, and wholesale deposits raised in the inter-bank and commercial markets. The
Corporation manages liquidity risk by maintaining diversified short-term and long-term sources
through the Federal funds market, commercial paper program, repurchase agreements and retail
certificate of deposit programs. As of June 30, 2008, the Corporation had $1.5 billion in
unsecured lines of credit ($727.7 million available) and $4.6 billion in collateralized lines of
credit with banks and financial entities ($2.9 billion available). All securities in portfolio are
highly rated and very liquid enabling the Corporation to treat them as a secondary source of
liquidity.
The Corporation does not have significant usage or limitations on the ability to upstream or
downstream funds as a method of liquidity. However, the Corporation faces certain tax constraints
when borrowing funds (excluding the placement of deposits) from Santander Group or affiliates
because Puerto Ricos tax code requires local corporations to withhold 29% of the interest income
paid to non-resident affiliates. The current intra-group credit line provided by Santander Group
and affiliates to the Corporation is $1.4 billion.
Liquidity is derived from the Corporations capital, reserves and securities portfolio. The
Corporation has established lines of credit with foreign and domestic banks, has access to U.S.
markets through its commercial paper program and also has broadened its relations in the federal
funds and repurchase agreement markets to increase the availability of other sources of funds and
to augment liquidity as necessary.
On March 25, 2008, Santander BanCorp (the Corporation) and Santander Financial Services,
Inc., a wholly owned subsidiary of the Corporation (Santander Financial), entered into a
fully-collateralized Loan Agreement (the Loan) with Banco Santander Puerto Rico (the Bank). The
proceeds of the Loan were used to refinance the outstanding indebtedness incurred under the
previously announced bridge facility agreement among the Corporation, Santander Financial and
National Australia Bank Limited, and for general corporate purposes. Under the Loan, the
Corporation and Santander Financial had available $186 million and $454 million, respectively, all
of which was drawn on March 25, 2008. The Loan is fully-collateralized by a certificate of deposit
in the amount of $640 million opened by Banco Santander, S.A., the parent of the Corporation, and
provided as security for the Loan pursuant to the terms of a Security Agreement, Pledge and
Assignment between the Bank and Banco Santander, S.A. The Corporation and Santander Financial have
agreed to pay a fee of 0.10% net of taxes, deduction and withholdings, on an annualized basis, to
Banco Santander, S.A. in connection with its agreement to collateralize the loan with the deposit.
The amounts drawn under the Loan bear interest at an annual rate equal to the applicable
LIBOR rate plus 0.465% per annum. Interest under the Loan is payable at maturity. The Corporation
and Santander Financial did not pay any facility fee or commission to the Bank in connection with
the Loan. The entire principal balance of the Loan is due and payable on September 25, 2008. Upon
the occurrence and during the continuance of an Event of Default (as defined in the Loan) under the
Loan, the Bank shall have the right to declare the outstanding balance of the Loan, together with
accrued interest and any other amount owing to the Bank, due and payable on demand or immediately
due for payment. In addition, the Corporation and Santander Financial will be required to pay
interest on any overdue amounts at a default rate that is equal to the then applicable interest
rate payable on the Loan plus 2% per annum. The Corporations and Santander Financials obligations
to pay interest and principal under the Loan are several and not joint. However, the Corporation
and Santander Financial are jointly and severally responsible for all other amounts payable under
the Loan.
In October 2006, the Corporation also completed the private placement of $125 million Trust
Preferred Securities (Preferred Securities) and issued Junior Subordinated Debentures in the
aggregate principal amount of $129 million in connection with the issuance of the Preferred
Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent
described in the guarantee agreement between the Corporation and the guarantee trustee, for the
benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust
Preferred Securities were acquired by an affiliate of the Corporation. In connection with the
issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of
$129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037 to the Trust.
Management monitors liquidity levels each month. The focus is on the liquidity ratio, which
compares net liquid assets (all liquid assets not subject to collateral or repurchase agreements)
against total liabilities plus contingent liabilities. As of June 30, 2008, the Corporation had a
liquidity ratio of 7.94%. At June 30, 2008, the Corporation had total available liquid assets of
$1.2 billion. The Corporation believes it has sufficient liquidity to meet current obligations.
66
The Corporation does not contemplate material uncertainties in the rolling over of deposits,
both retail and wholesale, and is not engaged in capital expenditures that would materially affect
the capital and liquidity positions. Should any deficiency arise for seasonal or more critical
reasons, the Bank would make recourse to alternative sources of funding such as the commercial
paper program, its lines of credit with domestic and national banks, unused collateralized lines
with Federal Home Loan Banks and others.
67
PART I. ITEM 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporations
management, including the Chief Executive Officer, the Chief Operating Officer and the Chief
Accounting Officer (as the Corporations principal financial officer), conducted an evaluation of
the effectiveness of the design and operation of the Corporations disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer, the Chief Operating Officer and
the Chief Accounting Officer (as the Corporations principal financial officer) concluded that the
design and operation of these disclosure controls and procedures were effective.
The adoption of Financial Accounting Standards Board Statements No. 157 Fair Value
Measurements (SFAS 157) and No. 159 Fair Value Option (SFAS 159) effective January 1, 2008
is a significant event to the Corporation and could represent a material change in financial
reporting. Changes to certain processes, valuation models and methodologies and information systems
and other components of internal control over financial reporting (as defined in Rule 13-159(e) and
15d-15(e) under the Securities Exchange Act of 1934) resulting from the adoption of SFAS 157 and
SFAS 159 may occur and are in the process of being evaluated by management as certain processes,
activities and controls are implemented. Management intends to complete its assessment of the
effectiveness of internal control over financial reporting for the 2008 annual management report on
internal control over financial reporting.
Changes in Internal Controls
With the exception of the adoption of SFAS 157 and 159, there have been no changes in the
Corporations internal controls over financial reporting during the three-month and six-month
periods covered by this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, the Corporations internal controls over financial
reporting.
68
PART II OTHER INFORMATION
ITEM I LEGAL PROCEEDINGS
The Corporation is involved as plaintiff or defendant in a variety of routine litigation
incidental to the normal course of business. Management believes, based on the opinion of legal
counsel, that it has adequate defense with respect to such litigation and that any losses therefrom
would not have a material adverse effect on the consolidated results of operations or consolidated
financial condition of the Corporation. For discussion of certain other legal proceedings involving
the Corporation, please, refer to the Corporations Annual Report on Form 10K for the year ended
December 31, 2007.
ITEM 1A. RISK FACTORS
There have no material changes in risk factors as previously disclosed under Item 1A of the
Corporations Form 10-K for the year ended December 31, 2007.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Santander BanCorps Annual Meeting of Stockholders was held on April 24, 2008. A quorum was
obtained with 43,827,760 shares represented in person or by proxy, which represents 93.97%
of all votes eligible to be cast at the meeting. The following results were obtained for
the proposals voted at the meeting:
The following three directors were elected for a three-year term, ending in April
2011:
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For
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Withheld
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Jose R. González
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43,251,734
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576,026
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Carlos M. García
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42,820,747
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1,007,013
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Roberto Valentín
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43,691,830
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135,930
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A resolution to ratify the appointment of Deloitte & Touche LLP as the Corporations
independent accountants for fiscal year 2008 was
approved with the following results:
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For
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43,981,946
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Against
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15,346
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Abstained
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468
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ITEM 5 OTHER INFORMATION
None
69
ITEM 6 EXHIBITS
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Exhibit No.
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Description
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Reference
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(2.0)
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Agreement and Plan of Merger-Banco Santander Puerto Rico and
Santander BanCorp
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Exhibit 3.3 8-A12B
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(2.1)
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Stock Purchase Agreement Santander BanCorp and Banco Santander
Central Hispano, S.A.
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Exhibit 2.1 10K-12/31/00
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(2.2)
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Stock Purchase Agreement dated as of November 28, 2003 by and among
Santander BanCorp, Administración de Bancos Latinoamericanos
Santander, S.L. and Santander Securities Corporation
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Exhibit 2.2 10Q-06/30/04
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(2.3)
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Settlement Agreement between Santander BanCorp and Administración
de Bancos Latinoamericanos Santander, S.L.
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Exhibit 2.3 10Q-06/30/04
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(3.1)
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Articles of Incorporation
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Exhibit 3.1 8-A12B
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(3.2)
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Bylaws
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Exhibit 3.1 8-A12B
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(4.1)
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Authoring and Enabling Resolutions 7% Noncumulative Perpetual
Monthly Income Preferred Stock, Series A
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Exhibit 4.1 10Q-06/30/04
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(4.2)
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Offering Circular for $30,000,000 Banco Santander PR Stock Market Growth
Notes Linked to the S&P 500 Index
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Exhibit 4.6 10Q-03/31/04
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(4.3)
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Private Placement Memorandum Santander BanCorp $75,000,000 6.30%
Subordinated Notes
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Exhibit 4.3 10KA-12/31/04
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(4.4)
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Private Placement Memorandum Santander BanCorp $50,000,000 6.10%
Subordinated Notes
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Exhibit 4.4 10K-12/31/05
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(4.5)
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Indenture dated as of February 28, 2006, between the Santander BanCorp and
Banco Popular de Puerto Rico
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Exhibit 4.6 10Q-03/31/06
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(4.6)
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First Supplemental Indenture, dated as of February 28, 2006, between Santander
Bancorp and Banco Popular de Puerto Rico
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Exhibit 4.7 10Q-03/31/06
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(4.7)
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Amended and Restated Declaration of Trust and Trust Agreement, dated as of
February 28, 2006, among Santander BanCorp, Banco Popular de Puerto Rico
Wilmington Trust Company, the Administrative Trustees named therein and
the holders from time to time, of the undivided beneficial ownership interest in
The Assets of the Trust.
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Exhibit 4.8 10-Q-03/31/06
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(4.8)
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Guarantee Agreement, dated as of February 28, 2006 between Santander
BanCorp and Banco Popular de Puerto Rico
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Exhibit 4.9 10-Q-03/31/06
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(4.9)
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Global Capital Securities Certificate
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Exhibit 4.10 10Q-03/31/06
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(4.10)
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Certificate of Junior Subordinated Debenture
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Exhibit 4.11 10Q-03/31/06
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(10.1)
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Contract for Systems Maintenance
between ALTEC & Banco
Santander Puerto Rico
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Exhibit 10A 10K-12/31/02
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(10.2)
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Employment Contract-José Ramón González
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Exhibit 10.1 8K-01/04/07
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(10.3)
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Employment Contract-Carlos M. García
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Exhibit 10.2 8K-01/04/07
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(10.4)
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Deferred Compensation Contract-María Calero
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Exhibit 10C 10K-12/31/02
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(10.5)
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Information Processing Services Agreement between America Latina
Tecnología de Mexico, SA and Banco Santander Puerto Rico, Santander
International Bank of Puerto Rico and Santander Investment International
Bank, Inc.
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Exhibit 10A 10Q-06/30/03
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(10.6)
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Employment Contract-Roberto Córdova
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Exhibit 10.3 10Q-03/31/05
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(10.7)
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Employment Contract-Bartolomé Vélez
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Exhibit 10.7 10K-12/31/06
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(10.8)
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Employment Contract-Lillian Díaz
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Exhibit 10.5 10Q-03/31/05
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(10.9)
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Technology Assignment Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
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Exhibit 10.12 10KA-12/31/04
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(10.10)
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Altair System License Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
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Exhibit 10.13 10KA-12/31/04
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(10.11)
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2005 Employee Stock Option Plan
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Exhibit B Def14-03/26/05
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(10.12)
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Asset Purchase Agreement by and among Wells Fargo & Company, Island
Finance Puerto Rico, Inc., Island Finance Sales Finance Corporation and
Santander BanCorp and Santander Financial Services, Inc. for the purpose
and sale of certain assets of Island Finance Puerto Rico, Inc. and Island
Finance Sales Corporation dated as of January 22, 2006.
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Exhibit 10.1 8K-01/25/06
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70
EXHIBIT INDEX Cont
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Exhibit No.
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Exhibit Description
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Reference
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(10.13)
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Employment Contract-Tomás Torres
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Exhibit 10.16 10Q-09/30/06
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(10.14)
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Employment Contract-Eric Delgado
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Exhibit 10.17 10Q-09/30/06
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(10.15)
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Agreement of Benefits Coverage Agreed with Officers of Grupo Santander
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Exhibit 10.18 10K-12/31/06
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(10.16)
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Employment Contract-Justo Muñoz
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Exhibit 10.18 10Q-06/30/07
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(10.17)
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Sales and Leaseback Agreement with Corporación Hato Rey Uno
and Corporación Hato Rey Dos for the Banks two principal properties and
certain parking spaces
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Exhibit 10.18 10K-12/31/07
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(10.18)
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Option Agreement among Crefisa, Inc., D&D Investment Group, S.E.,
and Quisqueya 12, Inc.
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Exhibit 10.19 10K-12/31/07
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(10.19)
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Merge Agreement among Banco Santander Puerto Rico and Santander
Mortgage Corporation
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Exhibit 10.20 10K-12/31/07
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(10.20)
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Regulations for the first and second cycle of The Share Plan (Long Term
Incentive Plan) among Santander BanCorp and Santander Spain
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Exhibit 10.21 10K-12/31/07
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(10.21)
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Loan Agreement Agreement between Santander BanCorp, Santander Financial
Services, Inc. and Banco Santander Puerto Rico
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Exhibit 10.1 8K-03/31/08
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(12)
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Computation of Ratio of Earnings to Fixed Charges
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Exhibit 12
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(14)
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Code of Ethics
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Exhibit 14 10-KA-12/31/04
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(22)
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Registrants Proxy Statement for the April 30, 2007 Annual
Meeting of Stockholders
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Def14A-03/24/08
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(31.1)
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Certification from the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.1
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(31.2)
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Certification from the Chief Operating Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.2
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(31.3)
|
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Certification from the Chief Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.3
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(32.1)
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Certification from the Chief Executive Officer, Chief Operating Officer and
Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Exhibit 32.1
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71
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
SANTANDER BANCORP
Name of Registrant
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Dated: August 8, 2008
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By:
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/s/ José Ramón González
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President and Chief Executive Officer
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Dated: August 8, 2008
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By:
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/s/ Carlos M. García
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Senior Executive Vice President and
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Chief Operating Officer
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Dated: August 8, 2008
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By:
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/s/ María Calero
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Executive Vice President and
|
|
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Chief Accounting Officer
|
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72
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