UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period ended September 30, 2007
Commission File: 001-15849
SANTANDER BANCORP
(Exact name of Corporation as specified in its charter)
|
|
|
|
|
|
Commonwealth of Puerto Rico
|
|
66-0573723
|
|
|
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
|
|
207 Ponce de León Avenue, Hato Rey, Puerto Rico
|
|
00917
|
|
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
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,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
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:
|
|
|
Title of each class
|
|
Outstanding as of September 30, 2007
|
|
|
|
Common Stock, $2.50 par value
|
|
46,639,104
|
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 SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
137,799
|
|
|
$
|
125,077
|
|
Interest-bearing deposits
|
|
|
1,117
|
|
|
|
780
|
|
Federal funds sold and securities purchased under agreements to resell
|
|
|
130,195
|
|
|
|
73,407
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
269,111
|
|
|
|
199,264
|
|
|
|
|
|
|
|
|
Interest-Bearing Deposits
|
|
|
1,620
|
|
|
|
51,455
|
|
Trading Securities, at fair value:
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged
|
|
|
12,453
|
|
|
|
|
|
Other trading securities
|
|
|
45,648
|
|
|
|
50,792
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
58,101
|
|
|
|
50,792
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale,
at fair value:
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged
|
|
|
768,768
|
|
|
|
867,944
|
|
Other investment securities available for sale
|
|
|
644,215
|
|
|
|
541,845
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
1,412,983
|
|
|
|
1,409,789
|
|
|
|
|
|
|
|
|
Other Investment Securities,
at amortized cost
|
|
|
48,809
|
|
|
|
50,710
|
|
Loans Held for Sale,
net
|
|
|
175,307
|
|
|
|
196,277
|
|
Loans,
net
|
|
|
6,724,952
|
|
|
|
6,640,416
|
|
Accrued Interest Receivable
|
|
|
82,562
|
|
|
|
102,244
|
|
Premises and Equipment,
net
|
|
|
52,597
|
|
|
|
56,299
|
|
Goodwill
|
|
|
113,995
|
|
|
|
148,300
|
|
Intangible Assets
|
|
|
40,581
|
|
|
|
47,427
|
|
Other Assets
|
|
|
264,696
|
|
|
|
235,195
|
|
|
|
|
|
|
|
|
|
|
$
|
9,245,314
|
|
|
$
|
9,188,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non interest-bearing
|
|
$
|
643,680
|
|
|
$
|
746,089
|
|
Interest-bearing
|
|
|
5,429,056
|
|
|
|
4,567,885
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
6,072,736
|
|
|
|
5,313,974
|
|
|
|
|
|
|
|
|
Federal Funds Purchased and Other Borrowings
|
|
|
900,220
|
|
|
|
1,628,400
|
|
Securities Sold Under Agreements to Repurchase
|
|
|
733,306
|
|
|
|
830,569
|
|
Commercial Paper Issued
|
|
|
403,660
|
|
|
|
209,549
|
|
Term Notes
|
|
|
42,493
|
|
|
|
41,529
|
|
Subordinated Capital Notes
|
|
|
243,138
|
|
|
|
244,468
|
|
Accrued Interest Payable
|
|
|
77,952
|
|
|
|
91,245
|
|
Other Liabilities
|
|
|
241,819
|
|
|
|
249,214
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,715,324
|
|
|
|
8,608,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued;
46,639,104 shares outstanding
|
|
|
126,626
|
|
|
|
126,626
|
|
Capital paid in excess of par value
|
|
|
308,171
|
|
|
|
304,171
|
|
Treasury stock at cost, 4,011,260 shares
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
Accumulated other comprehensive loss, net of income taxes
|
|
|
(40,256
|
)
|
|
|
(44,213
|
)
|
Retained earnings:
|
|
|
|
|
|
|
|
|
Reserve fund
|
|
|
137,511
|
|
|
|
137,511
|
|
Undivided profits
|
|
|
65,490
|
|
|
|
122,677
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
529,990
|
|
|
|
579,220
|
|
|
|
|
|
|
|
|
|
|
$
|
9,245,314
|
|
|
$
|
9,188,168
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
1
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
448,859
|
|
|
$
|
390,280
|
|
|
$
|
150,670
|
|
|
$
|
141,049
|
|
Investment securities
|
|
|
50,846
|
|
|
|
55,599
|
|
|
|
17,196
|
|
|
|
18,547
|
|
Interest-bearing deposits
|
|
|
2,974
|
|
|
|
3,267
|
|
|
|
715
|
|
|
|
1,346
|
|
Federal funds sold and securities purchased under
agreements to resell
|
|
|
2,789
|
|
|
|
3,557
|
|
|
|
1,568
|
|
|
|
1,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
505,468
|
|
|
|
452,703
|
|
|
|
170,149
|
|
|
|
162,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
144,052
|
|
|
|
125,603
|
|
|
|
51,223
|
|
|
|
44,518
|
|
Securities sold under agreements to repurchase and other borrowings
|
|
|
115,897
|
|
|
|
101,272
|
|
|
|
38,890
|
|
|
|
38,759
|
|
Subordinated capital notes
|
|
|
11,882
|
|
|
|
10,478
|
|
|
|
3,997
|
|
|
|
4,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
271,831
|
|
|
|
237,353
|
|
|
|
94,110
|
|
|
|
87,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
233,637
|
|
|
|
215,350
|
|
|
|
76,039
|
|
|
|
74,708
|
|
PROVISION FOR LOAN LOSSES
|
|
|
100,224
|
|
|
|
43,913
|
|
|
|
47,350
|
|
|
|
20,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
133,413
|
|
|
|
171,437
|
|
|
|
28,689
|
|
|
|
54,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service charges, fees and other
|
|
|
34,162
|
|
|
|
35,243
|
|
|
|
9,711
|
|
|
|
11,881
|
|
Broker-dealer, asset management and insurance fees
|
|
|
49,086
|
|
|
|
43,078
|
|
|
|
16,717
|
|
|
|
13,601
|
|
Gain on sale of securities
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage servicing rights
|
|
|
206
|
|
|
|
69
|
|
|
|
38
|
|
|
|
51
|
|
Gain on sale of loans
|
|
|
5,121
|
|
|
|
184
|
|
|
|
782
|
|
|
|
188
|
|
Other income
|
|
|
7,645
|
|
|
|
4,517
|
|
|
|
3,245
|
|
|
|
5,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
96,458
|
|
|
|
83,091
|
|
|
|
30,493
|
|
|
|
30,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
97,249
|
|
|
|
91,430
|
|
|
|
31,347
|
|
|
|
35,316
|
|
Occupancy costs
|
|
|
17,686
|
|
|
|
16,713
|
|
|
|
6,198
|
|
|
|
5,979
|
|
Equipment expenses
|
|
|
3,379
|
|
|
|
3,607
|
|
|
|
1,139
|
|
|
|
1,274
|
|
EDP servicing, amortization and technical assistance
|
|
|
27,317
|
|
|
|
28,735
|
|
|
|
9,243
|
|
|
|
10,875
|
|
Communication expenses
|
|
|
8,157
|
|
|
|
7,767
|
|
|
|
2,706
|
|
|
|
2,782
|
|
Business promotion
|
|
|
12,338
|
|
|
|
8,540
|
|
|
|
4,338
|
|
|
|
2,797
|
|
Goodwill and other intangibles impairment charges
|
|
|
39,705
|
|
|
|
|
|
|
|
39,705
|
|
|
|
|
|
Other taxes
|
|
|
8,486
|
|
|
|
8,055
|
|
|
|
3,537
|
|
|
|
2,976
|
|
Other operating expenses
|
|
|
45,677
|
|
|
|
39,656
|
|
|
|
15,980
|
|
|
|
13,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
259,994
|
|
|
|
204,503
|
|
|
|
114,193
|
|
|
|
75,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before provision (benefit) for income tax
|
|
|
(30,123
|
)
|
|
|
50,025
|
|
|
|
(55,011
|
)
|
|
|
9,692
|
|
PROVISION (BENEFIT) FOR INCOME TAX
|
|
|
4,151
|
|
|
|
16,916
|
|
|
|
(4,912
|
)
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
|
$
|
(34,274
|
)
|
|
$
|
33,109
|
|
|
$
|
(50,099
|
)
|
|
$
|
8,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE
|
|
$
|
(0.73
|
)
|
|
$
|
0.71
|
|
|
$
|
(1.07
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND YEAR ENDED DECEMBER 31, 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended
|
|
|
Year Ended
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
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
|
|
|
304,171
|
|
|
|
304,171
|
|
Capital contribution
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
308,171
|
|
|
|
304,171
|
|
|
|
|
|
|
|
|
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 taxes:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(44,213
|
)
|
|
|
(41,591
|
)
|
Unrealized net gain (loss) on investment securities available
for sale, net of tax
|
|
|
4,396
|
|
|
|
(587
|
)
|
Unrealized net loss on cash flow hedges, net of tax
|
|
|
(439
|
)
|
|
|
(178
|
)
|
Minimum pension liability, net of tax
|
|
|
|
|
|
|
(1,750
|
)
|
Initial adoption of SFAS No. 158, net of tax
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(40,256
|
)
|
|
|
(44,213
|
)
|
|
|
|
|
|
|
|
Reserve Fund:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
137,511
|
|
|
|
133,759
|
|
Transfer from undivided profits
|
|
|
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
137,511
|
|
|
|
137,511
|
|
|
|
|
|
|
|
|
Undivided Profits:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
122,677
|
|
|
|
113,114
|
|
Net (loss) income
|
|
|
(34,274
|
)
|
|
|
43,169
|
|
Transfer to reseve fund
|
|
|
|
|
|
|
(3,752
|
)
|
Deferred tax benefit amortization
|
|
|
(2
|
)
|
|
|
(5
|
)
|
Common stock cash dividends
|
|
|
(22,387
|
)
|
|
|
(29,849
|
)
|
Cummulative effect of adoption of FIN No.48
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
65,490
|
|
|
|
122,677
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
529,990
|
|
|
$
|
579,220
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(34,274
|
)
|
|
$
|
33,109
|
|
|
$
|
(50,099
|
)
|
|
$
|
8,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (losses), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (losses) on investments securities
available for sale, net of tax
|
|
|
4,396
|
|
|
|
(2,713
|
)
|
|
|
12,676
|
|
|
|
19,391
|
|
Reclassification adjustment for gains and losses on investment
securities available for sale included in net income, net of tax
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (losses) on investment securities
available for sale, net of tax
|
|
|
4,396
|
|
|
|
(2,376
|
)
|
|
|
12,676
|
|
|
|
19,365
|
|
Unrealized net loss on cash flow hedges, net of tax
|
|
|
(439
|
)
|
|
|
(854
|
)
|
|
|
(970
|
)
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax
|
|
|
3,957
|
|
|
|
(3,230
|
)
|
|
|
11,706
|
|
|
|
18,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(30,317
|
)
|
|
$
|
29,879
|
|
|
$
|
(38,393
|
)
|
|
$
|
27,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(34,274
|
)
|
|
$
|
33,109
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
12,803
|
|
|
|
12,794
|
|
Deferred tax benefit
|
|
|
(13,407
|
)
|
|
|
(485
|
)
|
Provision for loan losses
|
|
|
100,224
|
|
|
|
43,913
|
|
Goodwill and other intangibles impairment charges
|
|
|
39,705
|
|
|
|
|
|
Gain on sale of securities
|
|
|
(238
|
)
|
|
|
|
|
Gain on sale of loans
|
|
|
(5,121
|
)
|
|
|
(184
|
)
|
Gain on sale of mortgage-servicing rights
|
|
|
(206
|
)
|
|
|
(69
|
)
|
Loss on derivatives
|
|
|
31
|
|
|
|
563
|
|
(Gain) loss on sale of trading securities
|
|
|
(1,766
|
)
|
|
|
108
|
|
Net discount accretion on securities
|
|
|
(4,532
|
)
|
|
|
(2,133
|
)
|
Net discount accretion on loans
|
|
|
(1,639
|
)
|
|
|
(2,452
|
)
|
Purchases and originations of loans held for sale
|
|
|
(455,524
|
)
|
|
|
(665,133
|
)
|
Proceeds from sales of loans held for sale
|
|
|
222,726
|
|
|
|
98,567
|
|
Repayments of loans held for sale
|
|
|
17,983
|
|
|
|
8,107
|
|
Proceeds from sales of trading securities
|
|
|
1,773,247
|
|
|
|
6,814,757
|
|
Purchases of trading securities
|
|
|
(1,786,744
|
)
|
|
|
(6,828,539
|
)
|
Net change in:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accrued interest receivable
|
|
|
19,682
|
|
|
|
(34,356
|
)
|
Increase in other assets
|
|
|
(19,577
|
)
|
|
|
(41,657
|
)
|
(Decrease) increase in accrued interest payable
|
|
|
(13,293
|
)
|
|
|
36,558
|
|
(Decrease) increase in other liabilities
|
|
|
(7,228
|
)
|
|
|
1,007
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(122,874
|
)
|
|
|
(558,634
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(157,148
|
)
|
|
|
(525,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease in interest-bearing deposits
|
|
|
49,835
|
|
|
|
49,905
|
|
Proceeds from sales of investment securities available for sale
|
|
|
20,301
|
|
|
|
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
26,353,520
|
|
|
|
21,587,808
|
|
Purchases of investment securities available for sale
|
|
|
(26,432,349
|
)
|
|
|
(21,603,840
|
)
|
Purchases of other investments
|
|
|
|
|
|
|
(973
|
)
|
Repayment of other investments
|
|
|
1,901
|
|
|
|
|
|
Repayment of securities and securities called
|
|
|
75,984
|
|
|
|
97,995
|
|
Net decrease in loans
|
|
|
57,784
|
|
|
|
467,459
|
|
Proceeds from sales of mortgage-servicing rights
|
|
|
206
|
|
|
|
69
|
|
Payment for the acquisition of net assets of consumer finance company, net of
cash and
cash equivalent acquired
|
|
|
|
|
|
|
(740,761
|
)
|
Payment for the acquisition of net assets of insurance company, net of cash and
cash equivalent acquired
|
|
|
|
|
|
|
(2,074
|
)
|
Purchases of premises and equipment
|
|
|
(2,480
|
)
|
|
|
(3,974
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
124,702
|
|
|
|
(148,386
|
)
|
|
|
|
|
|
|
|
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
5
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
$
|
751,007
|
|
|
$
|
109,438
|
|
Net (decrease) increase in federal funds purchased and other borrowings
|
|
|
(728,180
|
)
|
|
|
671,154
|
|
Net decrease in securities sold under agreements to repurchase
|
|
|
(97,263
|
)
|
|
|
(95,091
|
)
|
Net increase in commercial paper issued
|
|
|
194,111
|
|
|
|
34,872
|
|
Net increase in term notes
|
|
|
965
|
|
|
|
987
|
|
Issuance of subordinated capital notes
|
|
|
40
|
|
|
|
124,916
|
|
Capital contribution
|
|
|
4,000
|
|
|
|
|
|
Dividends paid
|
|
|
(22,387
|
)
|
|
|
(14,924
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
102,293
|
|
|
|
831,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
69,847
|
|
|
|
157,441
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
199,264
|
|
|
|
237,993
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
269,111
|
|
|
$
|
395,434
|
|
|
|
|
|
|
|
|
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
6
SANTANDER BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
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 Group) 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 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 three and
nine month periods ended September 30, 2007 and 2006 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 and
footnotes included in the Corporations Form 10-K for the year ended December 31, 2006. The
accounting policies used in preparing these condensed consolidated financial statements are the
same as those described in Note 1 to the 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
through its wholly owned banking subsidiary Banco Santander Puerto Rico and subsidiaries (the
Bank). The Corporation also engages in broker-dealer, asset management, mortgage banking,
consumer finance, international banking, insurance agency services and insurance products through
its subsidiaries, Santander Securities Corporation (SSC), Santander Asset Management (SAM),
Santander Mortgage Corporation (SMC), Santander Financial Services, Inc. (SFS), Santander
International Bank (SIB), Santander Insurance Agency (SIA) and Island Insurance Corporation
(IIC), 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 consolidated financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. 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, the valuation of foreclosed real
estate, deferred tax assets and financial instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation, the Bank and
the Banks wholly owned subsidiaries, Santander Mortgage Corporation and 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. Intercompany balances and transactions have been eliminated in consolidation.
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
consolidated balance sheets. The Corporation monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest, and requests
additional collateral where deemed appropriate.
7
The Corporation maintains effective control over assets sold under agreements to repurchase;
accordingly, such securities continue to be carried on the 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 results of operations. 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
consolidated statements of operations 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 taxes, 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 consolidated statements of operations.
|
|
|
|
|
Investments in debt, equity or other securities, that do not have readily determinable
fair values, are classified as other investment securities in the 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 consolidated statements of operations, 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).
In the case of a qualifying fair value hedge, changes in the value of the derivative
instruments that have been highly effective are recognized in current period results of operations
along with the change in value of the designated hedged item. If the hedge relationship is
terminated, hedge accounting is discontinued and any balance related to the derivative is
recognized in current operations, and the fair value adjustment to the hedged item continues to be
reported as part of the basis of the item and is amortized to earnings as a yield adjustment. 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 results of operations.
8
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 fair value computed on the aggregate
portfolio basis. The amount, by which cost exceeds fair value, if any, is accounted for as a
valuation allowance with changes included in the determination of results of operations for the
period in which the change occurs.
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 methods that approximate 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 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.
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 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.
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.
9
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 installments, credit cards, residential mortgage loans 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 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.
In April 2007, the Bank transferred its merchant business to a subsidiary, MBPR Services, Inc.
(MBPR). The Bank subsequently sold the stock of MBPR to an unrelated third party. For an interim
period that ended October 30, 2007, the Bank provided certain
processing and other services to the third party acquirer. The gain on the transaction of $12.3 million
was recognized in the fourth quarter of 2007. As part of the transaction, the Bank entered
into a long-term marketing alliance agreement with the third party and will serve as its sponsor
with the card associations and network organizations. The Bank expects to offer better products and services to its
merchant client base and to obtain certain cost efficiencies as a result of this transaction.
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 as of September 30, 2007
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
10
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 consolidated statement of operations.
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 indicates 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 consolidated statements of operations.
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.
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.
As
a result of the current unfavorable economic environment in Puerto
Rico, SFSs short-term financial performance and profitability have declined
significantly during 2007, caused by reduced lending activity and
increases in nonperforming assets and
charge-offs. The Corporation decided to perform the impairment test of the goodwill and other
intangibles of SFS as of July 1, 2007, a quarter in advance of the scheduled annual impairment
test. The Corporation completed the first step of the impairment test and determined that the
carrying amount of the goodwill and other intangibles assets of SFS exceeds its fair value, thereby requiring performance of the
second step of the impairment test to calculate the amount of the impairment. The Corporation, with
the assistance of an independent valuation firm, has begun the second step of the impairment test
and expects the resulting valuation report to be completed during the fourth quarter of 2007.
However, because an impairment loss is probable and can be reasonably estimated, the Corporation
has, in accordance with SFAS No. 142, recorded preliminary estimated non-cash impairment charges
of approximately $34.3 million and $5.4 million, which have been recorded as reductions to goodwill
and trade name, respectively. The estimated impairment charges were calculated based on market
and income approach valuation methodologies. The Corporation may change these estimates during the fourth quarter of 2007, as necessary,
upon the completion of the valuation report, which will include additional procedures for
determining the fair value of SFSs assets and liabilities.
In
conjunction with the impairment test mentioned in the previous paragraph, the Corporation also conducted an impairment
test of its intangible assets with definite lives associated with its consumer finance business 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 indicates
that the carrying amount of such assets may not be fully recoverable.
The determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of
the assets and their eventual disposition. The Corporation determined,
based on this test, that undiscounted future cash flows from the
use of the assets and their eventual disposition exceeded their
current carrying amount and, thus, an impairment was not required as
of September 30, 2007. Consequently, no impairment losses on intangible assets with definite lives were
recorded in operating expenses in the consolidated statement of operations as of September 30, 2007.
11
Upon
completion of the interim impairment test, the Corporation plans to conduct an update
of its annual impairment test as of September 30, 2007 for the consumer
finance business intangibles with the assistance of an independent valuation specialist.
The
Corporation will conduct a goodwill valuation for all other segments during the fourth quarter of 2007 and any impairment loss that may
result would be recognized as of December 31, 2007.
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 results of operations. In order
to evaluate its MSRs the Corporation stratifies the related mortgage loans on the basis of their
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 recognized through a valuation
allowance and is determined by estimating the fair value of each stratum and comparing it to its carrying value. No
impairment loss was recognized for the nine months ended September 30, 2007. An impairment loss of
$51,000 was recognized for the year ended December 31, 2006.
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
balances.
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 consolidated balance sheets) and the loans based on their relative fair values.
Further, mortgage-servicing rights are periodically 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.
Trust Services
In connection with its trust activities, the Corporation administers and is custodian of
assets amounting to approximately $1,191,000,000 and $3,718,000,000 at September 30, 2007 and
December 31, 2006, respectively. Due to the nature of trust activities, these assets are not
included in the Corporations consolidated balance sheets. In December 2006, the Corporation sold
to an unaffiliated third party the servicing rights with respect to the following trust accounts:
personal trust, customer employee benefit plans, guardianship accounts, insurance trust, escrow
accounts and securities custody accounts. No gain or loss was recognized on this transaction on
December 2006. For the third quarter of 2007, a gain of $382,000 was recognized as a result of the
transfer of trust accounts. For a period not to exceed ten months after the closing date of the
sale, the Corporation will transfer to the purchaser the trust accounts (amounting to approximately
$156 million at September 30, 2007), subject to the customers consent and related servicing in a
timely and orderly manner. Fees collected during the transfer period shall be allocated between
both entities on a pro rata basis. Since December 31, 2006, the Corporations Trust Division is focusing its
efforts on transfer and paying agent and IRA account services.
While the assets and operations of the Trust Division of the Corporation meet the definition
of discontinued operations, as defined in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Corporation has not segregated the Divisions assets and
results of operation, as the amounts are immaterial. Results of operations (net of
12
taxes) were
approximately $461,000 for the nine months ended September 30, 2007 and $908,000 for the year ended
December 31, 2006.
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 to the Corporations customers. 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.
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.
Earnings Per Common Share
Basic and diluted earnings per common share are computed by dividing net income available to
common shareholders, 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 September 30, 2007 and 2006,
respectively. Basic and diluted earnings per common share are the same since no stock options or
other potentially dilutive common shares were outstanding during the quarters ended September 30,
2007 and 2006.
Recent Accounting Pronouncements that Affect the Corporation
The adoption of the following accounting pronouncements did not have a material impact on the
Corporations results of operations and financial condition:
|
|
|
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). In
July 2006, the FASB issued FIN 48,
Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109
, which clarifies the accounting for uncertainty
in tax positions. This Interpretation requires that the Corporation recognize in the
financial statements, the impact of a tax position, if that position is more likely than
not of being sustained on audit, based on the technical merits of the position. In
evaluating the more-likely-than-not recognition threshold, a Corporation should presume the
tax position will be subject to examination by a taxing authority with full knowledge of
all relevant information. The provisions of FIN 48 were effective on January 1, 2007 and
resulted in a reduction of retained earnings of $524,000.
|
The Corporation is evaluating the impact that the following recently issued accounting
pronouncements may have on its financial condition and results of operations.
|
|
|
SFAS No. 157, Fair Value Measurements.
In September 2006, the FASB issued SFAS No.
157, Fair Value Measurements, which provides enhanced guidance for using fair value to
measure assets and liabilities. SFAS No. 157 establishes a common definition of fair value,
provides a framework for measuring fair value under U.S. GAAP
|
13
|
|
|
and expands disclosure
requirements about fair value measurements. SFAS No. 157 is effective for financial
statements issued in fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Corporation is currently evaluating the impact, if any, the
adoption of SFAS No. 157 will have on the Corporations financial reporting and
disclosures.
|
|
|
|
SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities- an
amendment of FASB Statements No. 115.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and
Financial Liabilities, which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. This statement is effective as of the beginning
of an entitys first fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No. 157,
Fair
Value Measurements.
The Corporation is currently evaluating the impact, if any, the adoption
of SFAS No. 159 will have on the Corporations financial reporting and disclosures.
|
14
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
353,843
|
|
|
$
|
75
|
|
|
$
|
435
|
|
|
$
|
353,483
|
|
|
|
4.16
|
%
|
After one year to five years
|
|
|
457,780
|
|
|
|
|
|
|
|
6,669
|
|
|
|
451,111
|
|
|
|
3.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
811,623
|
|
|
|
75
|
|
|
|
7,104
|
|
|
|
804,594
|
|
|
|
4.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico
and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
1,380
|
|
|
|
|
|
|
|
4
|
|
|
|
1,376
|
|
|
|
3.99
|
%
|
After one year to five years
|
|
|
20,248
|
|
|
|
|
|
|
|
541
|
|
|
|
19,707
|
|
|
|
4.44
|
%
|
After five years to ten years
|
|
|
19,364
|
|
|
|
|
|
|
|
272
|
|
|
|
19,092
|
|
|
|
5.41
|
%
|
Over ten years
|
|
|
14,068
|
|
|
|
50
|
|
|
|
195
|
|
|
|
13,923
|
|
|
|
5.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,060
|
|
|
|
50
|
|
|
|
1,012
|
|
|
|
54,098
|
|
|
|
5.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over ten years
|
|
|
576,525
|
|
|
|
|
|
|
|
22,284
|
|
|
|
554,241
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year to five years
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,443,258
|
|
|
$
|
125
|
|
|
$
|
30,400
|
|
|
$
|
1,412,983
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
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
|
|
$
|
252,497
|
|
|
$
|
29
|
|
|
$
|
28
|
|
|
$
|
252,498
|
|
|
|
4.90
|
%
|
After one year to five years
|
|
|
485,258
|
|
|
|
|
|
|
|
15,421
|
|
|
|
469,837
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737,755
|
|
|
|
29
|
|
|
|
15,449
|
|
|
|
722,335
|
|
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its
subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
950
|
|
|
|
|
|
|
|
2
|
|
|
|
948
|
|
|
|
3.85
|
%
|
After one year to five years
|
|
|
16,005
|
|
|
|
|
|
|
|
523
|
|
|
|
15,482
|
|
|
|
4.26
|
%
|
After five years to ten years
|
|
|
24,966
|
|
|
|
6
|
|
|
|
407
|
|
|
|
24,565
|
|
|
|
5.28
|
%
|
Over ten years
|
|
|
14,781
|
|
|
|
166
|
|
|
|
|
|
|
|
14,947
|
|
|
|
5.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,702
|
|
|
|
172
|
|
|
|
932
|
|
|
|
55,942
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over ten years
|
|
|
653,521
|
|
|
|
|
|
|
|
22,084
|
|
|
|
631,437
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
7.50
|
%
|
After one year to five years
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
5.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,448,053
|
|
|
$
|
201
|
|
|
$
|
38,465
|
|
|
$
|
1,409,789
|
|
|
|
4.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The duration of long-term (over one year) investment securities in the available portfolio is
approximately 2.8 years at September 30, 2007, comprised of approximately 1.5 years for treasuries
and agencies of the United States Government, 4.7 years for instruments from the Commonwealth of
Puerto Rico and its subdivisions, 4.5 years for mortgage backed securities and 1.4 years for all
other securities.
15
The number of positions, fair value and unrealized losses at September 30, 2007, 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
|
|
|
3
|
|
|
$
|
158,893
|
|
|
$
|
83
|
|
|
|
10
|
|
|
$
|
475,773
|
|
|
$
|
7,021
|
|
|
|
13
|
|
|
$
|
634,666
|
|
|
$
|
7,104
|
|
Commonwealth of Puerto
Rico and its subdivisions
|
|
|
9
|
|
|
|
17,069
|
|
|
|
223
|
|
|
|
19
|
|
|
|
34,418
|
|
|
|
789
|
|
|
|
28
|
|
|
|
51,487
|
|
|
|
1,012
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
554,241
|
|
|
|
22,284
|
|
|
|
31
|
|
|
|
554,241
|
|
|
|
22,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
$
|
175,962
|
|
|
$
|
306
|
|
|
|
60
|
|
|
$
|
1,064,432
|
|
|
$
|
30,094
|
|
|
|
72
|
|
|
$
|
1,240,394
|
|
|
$
|
30,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 September 30, 2007, 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 of these securities are rated the equivalent of AAA 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 amortized cost 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 September 30, 2007. 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 not be
settled at a price 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 September 30, 2007.
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.
16
3. Loans:
The Corporations loan portfolio consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
(in thousands)
|
|
Commercial and industrial
|
|
$
|
2,443,187
|
|
|
$
|
2,489,959
|
|
Consumer
|
|
|
669,074
|
|
|
|
604,619
|
|
Consumer Finance
|
|
|
918,525
|
|
|
|
849,036
|
|
Leasing
|
|
|
109,804
|
|
|
|
143,836
|
|
Construction
|
|
|
495,383
|
|
|
|
438,573
|
|
Mortgage
|
|
|
2,548,611
|
|
|
|
2,453,429
|
|
|
|
|
|
|
|
|
|
|
|
7,184,584
|
|
|
|
6,979,452
|
|
Unearned income and deferred fees/costs
|
|
|
|
|
|
|
|
|
Commercial Banking
|
|
|
(4,187
|
)
|
|
|
(8,404
|
)
|
Consumer Finance
|
|
|
(310,901
|
)
|
|
|
(223,769
|
)
|
Allowance for loan losses
|
|
|
(144,544
|
)
|
|
|
(106,863
|
)
|
|
|
|
|
|
|
|
|
|
$
|
6,724,952
|
|
|
$
|
6,640,416
|
|
|
|
|
|
|
|
|
4. Allowance for Loan Losses:
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
$
|
127,916
|
|
|
$
|
87,695
|
|
Allowance acquired (Island
Finance)
|
|
|
|
|
|
|
17,830
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
100,224
|
|
|
|
43,913
|
|
|
|
47,350
|
|
|
|
20,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,087
|
|
|
|
128,585
|
|
|
|
175,266
|
|
|
|
108,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
7,217
|
|
|
|
8,539
|
|
|
|
3,733
|
|
|
|
1,316
|
|
Construction
|
|
|
2,632
|
|
|
|
|
|
|
|
2,632
|
|
|
|
|
|
Mortage
|
|
|
1,768
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
Consumer
|
|
|
19,351
|
|
|
|
11,413
|
|
|
|
7,634
|
|
|
|
4,051
|
|
Consumer Finance
|
|
|
32,080
|
|
|
|
17,171
|
|
|
|
15,890
|
|
|
|
9,552
|
|
Leasing
|
|
|
2,349
|
|
|
|
1,592
|
|
|
|
864
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,397
|
|
|
|
38,715
|
|
|
|
31,371
|
|
|
|
15,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,050
|
|
|
|
1,725
|
|
|
|
251
|
|
|
|
505
|
|
Consumer
|
|
|
612
|
|
|
|
1,284
|
|
|
|
183
|
|
|
|
318
|
|
Consumer Finance
|
|
|
852
|
|
|
|
723
|
|
|
|
129
|
|
|
|
653
|
|
Leasing
|
|
|
340
|
|
|
|
555
|
|
|
|
86
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,854
|
|
|
|
4,287
|
|
|
|
649
|
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
62,543
|
|
|
|
34,428
|
|
|
|
30,722
|
|
|
|
13,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
144,544
|
|
|
$
|
94,157
|
|
|
$
|
144,544
|
|
|
$
|
94,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
5. Goodwill and Other Intangible Assets:
Goodwill
Goodwill and intangible assets with an indefinite life are tested for impairment at least
annually using a two step process at each reporting unit.
The first step of the goodwill impairment test is used to identify potential impairment by
comparing the fair value of the reporting unit with its carrying amount, including goodwill. If
the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting
unit is not considered impaired and the second step of the impairment test is not performed. If
the carrying value of the reporting unit exceeds its fair value, the second step in the impairment
test consists of comparing the implied fair value of the reporting unit goodwill with the carrying
amount of that goodwill. The Corporation uses the market multiple, the discounted cash flows and
comparable transaction approaches to determine the fair value of each reporting unit.
The Corporation has assigned goodwill to reporting units at the time of acquisition. Goodwill
is allocated to the Commercial Banking segment, the Wealth Management segment and the Consumer
Finance segment as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
(Dollars in thousands)
|
|
Commercial Banking
|
|
$
|
10,537
|
|
|
$
|
10,537
|
|
Wealth Management
|
|
|
24,254
|
|
|
|
24,254
|
|
Consumer Finance
|
|
|
79,204
|
|
|
|
113,509
|
|
|
|
|
|
|
|
|
|
|
$
|
113,995
|
|
|
$
|
148,300
|
|
|
|
|
|
|
|
|
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. Based on managements assessment of the value of the
Corporations goodwill which includes an independent valuation, among others, management determined
that the Corporations goodwill and other intangibles assets
related to the consumer finance segment was impaired for the nine
month period ended September 30, 2007.
As
a result of the current unfavorable economic environment in Puerto
Rico, SFSs short-term financial performance and profitability have declined
significantly during 2007, caused by reduced lending activity and
increases in nonperforming assets and
charge-offs. The Corporation decided to perform the impairment test of the goodwill and other
intangibles of SFS as of July 1, 2007, a quarter in advance of the scheduled annual impairment
test. The Corporation completed the first step of the impairment test and determined that the
carrying amount of the goodwill and other intangibles assets of SFS exceeds its fair value, thereby requiring performance of the
second step of the impairment test to calculate the amount of the impairment. The Corporation, with
the assistance of an independent valuation firm, has begun the second step of the impairment test
and expects the resulting valuation report to be completed during the fourth quarter of 2007.
However, because an impairment loss is probable and can be reasonably estimated, the Corporation
has, in accordance with SFAS No. 142, recorded preliminary estimated non-cash impairment charges
of approximately $34.3 million and $5.4 million, which have been recorded as reductions to goodwill
and trade name, respectively. The estimated impairment charges were calculated based on market
and income approach valuation methodologies. The Corporation may change these estimates during the fourth quarter of 2007, as necessary,
upon the completion of the valuation report, which will include additional procedures for
determining the fair value of SFSs assets and liabilities.
Upon
completion of the interim impairment test, the Corporation plans to conduct an update
of its annual impairment test as of September 30, 2007 for its consumer
finance business intangibles with the
18
assistance of an independent valuation specialist.
The Corporation will conduct a goodwill valuation for all other segments
during the fourth quarter of 2007 and any impairment loss that may
result would be recognized as of December 31, 2007.
Other Intangible Assets
Other intangible assets at September 30, 2007 and December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
(Dollars in thousands)
|
|
Mortgage-servicing rights
|
|
$
|
9,208
|
|
|
$
|
8,433
|
|
Advisory-servicing rights
|
|
|
1,648
|
|
|
|
1,750
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
18,300
|
|
|
|
23,700
|
|
Customer relationships
|
|
|
8,922
|
|
|
|
9,717
|
|
Non-compete agreements
|
|
|
2,503
|
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
$
|
40,581
|
|
|
$
|
47,427
|
|
|
|
|
|
|
|
|
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. Customer relationships and non-compete agreements are intangible
assets related to the acquisition of Island Finance and are being amortized over their estimated
useful lives of 10 years and 3 years, respectively. These intangible assets are also tested for
impairment on an interim basis. If the Corporation determines the fair value of the other
identifiable intangible asset is less than the carrying value, an impairment loss is recognized in
an amount equal to the differences.
As previously mentioned, the Corporation conducted an impairment test as of July 1, 2007 of
SFSs intangible assets with indefinite lives in accordance with the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets and recorded and
impairment charge on its trade name asset of $5.4 million as of
September 30, 2007. In addition, the Corporation
reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances
change which indicates that the carrying amount of such assets may not be fully recoverable.
The determination of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the assets and their eventual disposition. The
Corporation determined, based on this test, that undiscounted future
cash flows from the use of the assets and their eventual disposition
exceeded their current carrying amount and, thus, an impairment was not required as of September 30,
2007. Consequently, no impairment losses on intangible assets with definite lives were recorded in
operating expenses in the consolidated statement of operations as of September 30, 2007.
Upon
completion of the interim impairment test, the Corporation plans to
conduct an update of its annual impairment test as of September 30,
2007 for its consumer finance business with the assistance of an independent valuation specialist.
19
6
. Other Assets:
Other assets at September 30, 2007 and December 31, 2006 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets, net
|
|
$
|
33,782
|
|
|
$
|
23,796
|
|
Accounts receivable
|
|
|
116,426
|
|
|
|
109,877
|
|
Securities sold not delivered, net
|
|
|
|
|
|
|
2,945
|
|
Repossesed assets
|
|
|
13,739
|
|
|
|
6,173
|
|
Software, net
|
|
|
7,771
|
|
|
|
9,214
|
|
Prepaid expenses
|
|
|
21,763
|
|
|
|
17,437
|
|
Customers liabilities on acceptances
|
|
|
720
|
|
|
|
3,938
|
|
Derivative assets
|
|
|
67,837
|
|
|
|
59,260
|
|
Other
|
|
|
2,658
|
|
|
|
2,555
|
|
|
|
|
|
|
|
|
|
|
$
|
264,696
|
|
|
$
|
235,195
|
|
|
|
|
|
|
|
|
7. Other Borrowings:
Following are summaries of borrowings as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
(Dollars in thousands)
|
|
Amount outstanding at period-end
|
|
$
|
900,220
|
|
|
$
|
733,306
|
|
|
$
|
403,660
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the period
|
|
$
|
1,575,526
|
|
|
$
|
774,958
|
|
|
$
|
407,617
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the period
|
|
$
|
1,649,271
|
|
|
$
|
851,578
|
|
|
$
|
676,957
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the period
|
|
|
5.60
|
%
|
|
|
5.54
|
%
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at period-end
|
|
|
5.35
|
%
|
|
|
5.55
|
%
|
|
|
6.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
(Dollars in thousands)
|
|
Amount outstanding at period-end
|
|
$
|
1,628,400
|
|
|
$
|
830,569
|
|
|
$
|
209,549
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the period
|
|
$
|
1,317,477
|
|
|
$
|
919,899
|
|
|
$
|
373,855
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the period
|
|
$
|
1,828,400
|
|
|
$
|
986,759
|
|
|
$
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the period
|
|
|
5.36
|
%
|
|
|
5.31
|
%
|
|
|
5.09
|
%
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at period-end
|
|
|
5.41
|
%
|
|
|
5.45
|
%
|
|
|
5.33
|
%
|
|
|
|
|
|
|
|
|
|
|
20
Federal funds purchased and other borrowings, securities sold under agreements to repurchase
and commercial paper issued mature as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
(In thousands)
|
|
Federal funds purchased and other borrowings:
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
70,000
|
|
|
$
|
|
|
Over ninety days
|
|
|
830,220
|
|
|
|
1,628,400
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
900,220
|
|
|
$
|
1,628,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
108,300
|
|
|
$
|
480,563
|
|
Over ninety days
|
|
|
625,006
|
|
|
|
350,006
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
733,306
|
|
|
$
|
830,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issued:
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
274,451
|
|
|
$
|
209,549
|
|
After thirty to ninety days
|
|
|
129,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
403,660
|
|
|
$
|
209,549
|
|
|
|
|
|
|
|
|
As of September 30, 2007 and December 31, 2006 the weighted average maturity of Federal funds
purchased and other borrowings over ninety days was 8.59 months and 10.63 months, respectively.
As of September 30, 2007, 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
|
|
$
|
375,000
|
|
|
$
|
393,874
|
|
|
|
26.07
|
|
Morgan Stanley
|
|
|
39,275
|
|
|
|
39,829
|
|
|
|
0.30
|
|
Barclays
|
|
|
59,200
|
|
|
|
59,987
|
|
|
|
0.13
|
|
Lehman Brothers
|
|
|
250,006
|
|
|
|
275,078
|
|
|
|
53.21
|
|
PR Daily Liquidity Fund
|
|
|
9,825
|
|
|
|
12,453
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
733,306
|
|
|
$
|
781,221
|
|
|
|
31.50
|
|
|
|
|
|
|
|
|
|
|
|
The following investment securities were sold under agreements to repurchase:
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Obligations of U.S. Government agencies and corporations
|
|
$
|
374,893
|
|
|
$
|
348,481
|
|
|
$
|
374,893
|
|
|
|
4.82
|
%
|
Mortgage-backed securities
|
|
|
406,328
|
|
|
|
384,825
|
|
|
|
406,328
|
|
|
|
5.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
781,221
|
|
|
$
|
733,306
|
|
|
$
|
781,221
|
|
|
|
5.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Obligations of U.S. Government agencies and corporations
|
|
$
|
309,367
|
|
|
$
|
287,569
|
|
|
$
|
309,367
|
|
|
|
5.66
|
%
|
Mortgage-backed securities
|
|
|
558,577
|
|
|
|
543,000
|
|
|
|
558,577
|
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
867,944
|
|
|
$
|
830,569
|
|
|
$
|
867,944
|
|
|
|
5.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Income Tax:
The Corporation adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million to the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits.
As of the date of adoption and after the impact of recognizing the increase in the liability noted
above, the Corporations liability for unrecognized tax benefits totaled $12.7 million, which
included $1.8 million of interest and penalties. A reconciliation of beginning and ending amount of
the accrual for uncertain income tax positions is as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2006
|
|
$
|
12,676
|
|
Current additions on new tax positions
|
|
|
2,667
|
|
Current additions on interest and penalties
|
|
|
798
|
|
Releases of contingencies
|
|
|
(1,573
|
)
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
14,568
|
|
|
|
|
|
The Corporation recognizes interest and penalties related to uncertain tax positions in income
tax expense. For the nine months ended September 30, 2007, the Corporation recognized $798,000 of
interest and penalties for uncertain tax positions recognized during 2006 and $ 2.7 million on a
new tax positions recognized during 2007. At September 30, 2007, the Corporation had $14.6 million
of unrecognized tax benefits which, if recognized, would decrease the effective income tax rate in
future periods.
The Corporation recognized a tax benefit of $1.6 million as a result of the expiration of the
statute of limitations related to the uncertain tax positions.
The Corporations principal tax jurisdiction is Puerto Rico. Several subsidiaries are also
subject to United States income tax. Tax years 2003-2006 remain open to examination by the major
tax jurisdiction to which the Corporation is subject.
For the quarter and nine-month period ended September, 30, 2007 the Corporation recorded a non-cash charge
of $20.0 million related to establishing a valuation allowance against its deferred tax assets
originating from its consumer finance business. In accordance with SFAS No. 109 Accounting for
Income Taxes (SFAS No. 109), management evaluates its deferred income taxes,
on a quarterly basis to determine if valuation allowances are required. SFAS No. 109 prescribes that an entity
conduct an assessment to determine whether valuation whether
valuation allowances should be established based on the consideration of all available evidence using a
22
more likely than not criteria. In reaching
such determination, significant weighting is given to data and evidence that can be objectively
verified. The Corporation currently has substantial net operating loss carryforwards from its
consumer finance business. The Corporation has recorded a 100% valuation allowance against its
deferred tax assets from its consumer finance business due to the uncertainty of their ultimate
realization.
9. Derivative Financial Instruments:
As of September 30, 2007, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
the nine months
|
|
|
Income (Loss)* for
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
the nine months ended
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2007
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
650,000
|
|
|
$
|
(1,071
|
)
|
|
$
|
|
|
|
$
|
(439
|
)
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
1,034,640
|
|
|
|
(16,269
|
)
|
|
|
(589
|
)
|
|
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
155,340
|
|
|
|
28,542
|
|
|
|
1,077
|
|
|
|
|
|
Embedded options on stock-indexed deposits
|
|
|
155,340
|
|
|
|
(28,542
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
Interest rate caps
|
|
|
14,198
|
|
|
|
25
|
|
|
|
(41
|
)
|
|
|
|
|
Customer interest rate caps
|
|
|
14,198
|
|
|
|
(25
|
)
|
|
|
40
|
|
|
|
|
|
Customer interest rate swaps
|
|
|
1,538,006
|
|
|
|
18,738
|
|
|
|
18,790
|
|
|
|
|
|
Interest rate swaps
|
|
|
1,549,589
|
|
|
|
(18,180
|
)
|
|
|
(18,659
|
)
|
|
|
|
|
Interest rate swaps
|
|
|
242,000
|
|
|
|
(533
|
)
|
|
|
315
|
|
|
|
|
|
Loan commitments
|
|
|
3,870
|
|
|
|
121
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(31
|
)
|
|
$
|
(439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
the year
|
|
|
Income (Loss)* for the
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
year ended
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Dec. 31, 2006
|
|
|
Dec. 31, 2006
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
825,000
|
|
|
$
|
(351
|
)
|
|
$
|
|
|
|
$
|
(214
|
)
|
Foreign currency swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
1,189,740
|
|
|
|
(22,065
|
)
|
|
|
64
|
|
|
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
153,528
|
|
|
|
33,512
|
|
|
|
7,057
|
|
|
|
|
|
Embedded options on stock-indexed deposits
|
|
|
153,528
|
|
|
|
(33,512
|
)
|
|
|
(7,057
|
)
|
|
|
|
|
Interest rate caps
|
|
|
36,889
|
|
|
|
68
|
|
|
|
12
|
|
|
|
|
|
Customer interest rate caps
|
|
|
34,095
|
|
|
|
(65
|
)
|
|
|
(10
|
)
|
|
|
|
|
Customer interest rate swaps
|
|
|
1,619,554
|
|
|
|
(52
|
)
|
|
|
3,021
|
|
|
|
|
|
Interest rate swaps
|
|
|
1,621,555
|
|
|
|
479
|
|
|
|
(3,216
|
)
|
|
|
|
|
Interest rate swaps
|
|
|
387,000
|
|
|
|
(849
|
)
|
|
|
(397
|
)
|
|
|
|
|
Loan commitments
|
|
|
1,988
|
|
|
|
9
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(477
|
)
|
|
$
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
23
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 September 30, 2007,
the Corporation had outstanding $650 million of interest rate swaps designed as cash flows. As of
September 30, 2007 and December 31, 2006 the total amount, net of tax, included in accumulated
other comprehensive income was an unrealized loss of $0.4 million and $0.2 million, respectively,
of which the Corporation expects to reclassify approximately $205,000 into earnings during the next
quarter.
As of September 30, 2007, the Corporation also had outstanding interest rate swap agreements,
with a notional amount of approximately $1.0 billion, maturing through the year 2032. The weighted
average rate paid and received on these contracts is 5.47% and 5.10%, respectively. As of
September 30, 2007, the Corporation had retail fixed rate certificates of deposit amounting to
approximately $873 million and a subordinated note amounting to approximately $125 million swapped
to create a floating rate source of funds. For the nine month period ended September 30, 2007, the
Corporation recognized a loss of
approximately $589,000 on fair value hedges due to hedge ineffectiveness, which is included in
other income in the consolidated statements of operations.
As of December 31, 2006, the Corporation also had outstanding interest rate swap agreements,
with a notional amount of approximately $1.2 billion, maturing through the year 2032. The weighted
average rate paid and received on these contracts is 5.37% and 4.84%, respectively. As of December
31, 2006, the Corporation had retail fixed rate certificates of deposit amounting to approximately
$1.0 billion and a subordinated note amounting to approximately $125 million swapped to create a
floating rate source of funds. For the year ended December 31, 2006, the Corporation recognized a
gain of approximately $64,000 on fair value hedges due to hedge ineffectiveness, which is included
in other income in the consolidated statements of operations.
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 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 gains and losses
in the consolidated statements of operations. For the nine months ended September 30, 2007, a loss
of approximately $1.1 million was recorded on embedded options on stock-indexed deposits and notes
and a gain of approximately $1.1 million was recorded on the option contracts. For the year ended
December 31, 2006, a loss of approximately $7.1 million was recorded on embedded options on
stock-indexed deposits and notes and a gain of approximately $7.1 million was recorded on the
option contracts.
The Corporation enters into certain derivative transactions to provide derivative products to
customers, which includes interest rate cap, 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
consolidated balance sheets or the forecasted transaction 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 nine months ended September 30,
2007 and the year ended December 31, 2006, the Corporation recognized a gain on these transactions
of $130,000 and a loss of $193,000, respectively, on these transactions.
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 consolidated balance sheets or to the forecasted transaction 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 in earnings. For the nine months ended
September 30, 2007 and the year ended December 31, 2006, the Corporation recognized a gain of
$315,000 and a loss of $397,000, 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 133. As of September 30, 2007, the Corporation had loan commitments outstanding for
approximately $3.9 million and recognized a gain of $113,000 on these commitments. At December 31,
2006, the Corporation had loan commitments outstanding for approximately $2.0 million and
recognized a gain of $49,000 on these commitments.
24
10. Contingencies and Commitments:
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, consolidated
financial position or consolidated cash flows of the Corporation.
11. Pension Plans:
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 cost for the Plan for the six and three month periods
ended September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Service cost
|
|
$
|
|
|
|
$
|
1,329
|
|
|
$
|
|
|
|
$
|
443
|
|
Interest cost on projected benefit obligation
|
|
|
1,677
|
|
|
|
1,698
|
|
|
|
559
|
|
|
|
566
|
|
Expected return on assets
|
|
|
(2,049
|
)
|
|
|
(1,674
|
)
|
|
|
(683
|
)
|
|
|
(558
|
)
|
Net amortization
|
|
|
282
|
|
|
|
507
|
|
|
|
94
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
(90
|
)
|
|
$
|
1,860
|
|
|
$
|
(30
|
)
|
|
$
|
620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the Plan for 2007 is $5,742,680.
The components of net periodic benefit cost for the Central Hispano Plan for the nine and
three month periods ended September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Interest cost on projected benefit obligation
|
|
|
1,368
|
|
|
|
1,455
|
|
|
|
456
|
|
|
|
485
|
|
Expected return on assets
|
|
|
(1,623
|
)
|
|
|
(1,629
|
)
|
|
|
(541
|
)
|
|
|
(543
|
)
|
Net amortization
|
|
|
411
|
|
|
|
363
|
|
|
|
137
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
156
|
|
|
$
|
189
|
|
|
$
|
52
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the Central Hispano Plan for 2007 is $1,947,605.
25
12. 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 $1,542,000 at September 30, 2007, 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 September 30, 2007 had terms ranging from one month to seven years. The aggregate
contract amount of the standby letters of credit of approximately $143,152,000 at September 30,
2007, 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.
13. 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. However, no separate disclosures are being provided for these operations,
since they did not meet the quantitative thresholds for disclosure of segment information.
Insurance commissions derived from the Commercial Banking and Consumer Finance segments are
reported as part of the Insurance operations included in the Other column below.
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 nine
months ended September 30, 2007 and 2006. General corporate expenses and income taxes have not been
added or deducted in the determination of operating segment profits. The Other column includes
the items necessary to 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
(Dollars in thousands)
|
Total external revenue
|
|
$
|
251,528
|
|
|
$
|
140,270
|
|
|
$
|
108,314
|
|
|
$
|
56,510
|
|
|
$
|
45,531
|
|
|
$
|
36,248
|
|
|
$
|
(36,475
|
)
|
|
$
|
601,926
|
|
Intersegment revenue
|
|
|
6,960
|
|
|
|
8,443
|
|
|
|
|
|
|
|
|
|
|
|
1,706
|
|
|
|
19,366
|
|
|
|
(36,475
|
)
|
|
|
|
|
Interest income
|
|
|
223,732
|
|
|
|
125,701
|
|
|
|
105,947
|
|
|
|
54,173
|
|
|
|
2,021
|
|
|
|
18,547
|
|
|
|
(24,653
|
)
|
|
|
505,468
|
|
Interest expense
|
|
|
71,673
|
|
|
|
76,105
|
|
|
|
28,112
|
|
|
|
90,161
|
|
|
|
2,811
|
|
|
|
22,810
|
|
|
|
(19,841
|
)
|
|
|
271,831
|
|
Depreciation and
amortization
|
|
|
3,084
|
|
|
|
1,638
|
|
|
|
3,415
|
|
|
|
570
|
|
|
|
905
|
|
|
|
3,191
|
|
|
|
|
|
|
|
12,803
|
|
Segment (loss) income
before income tax
|
|
|
62,193
|
|
|
|
38,344
|
|
|
|
(49,895
|
)
|
|
|
(38,075
|
)
|
|
|
11,196
|
|
|
|
(48,247
|
)
|
|
|
(5,639
|
)
|
|
|
(30,123
|
)
|
Segment assets
|
|
|
3,862,242
|
|
|
|
2,791,709
|
|
|
|
668,981
|
|
|
|
1,666,353
|
|
|
|
122,773
|
|
|
|
610,628
|
|
|
|
(477,372
|
)
|
|
|
9,245,314
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Banking
|
|
Finance*
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
(Dollars in thousands)
|
Total external revenue
|
|
$
|
223,583
|
|
|
$
|
129,594
|
|
|
$
|
83,351
|
|
|
$
|
60,643
|
|
|
$
|
36,801
|
|
|
$
|
49,367
|
|
|
$
|
(47,545
|
)
|
|
$
|
535,794
|
|
Intersegment revenue
|
|
|
8,910
|
|
|
|
5,535
|
|
|
|
|
|
|
|
|
|
|
|
799
|
|
|
|
32,301
|
|
|
|
(47,545
|
)
|
|
|
|
|
Interest income
|
|
|
191,928
|
|
|
|
121,966
|
|
|
|
83,149
|
|
|
|
60,418
|
|
|
|
1,727
|
|
|
|
33,222
|
|
|
|
(39,707
|
)
|
|
|
452,703
|
|
Interest expense
|
|
|
59,715
|
|
|
|
65,816
|
|
|
|
24,456
|
|
|
|
85,142
|
|
|
|
2,260
|
|
|
|
34,630
|
|
|
|
(34,666
|
)
|
|
|
237,353
|
|
Depreciation and
amortization
|
|
|
4,094
|
|
|
|
1,378
|
|
|
|
2,503
|
|
|
|
586
|
|
|
|
765
|
|
|
|
3,468
|
|
|
|
|
|
|
|
12,794
|
|
Segment income (loss)
before income tax
|
|
|
67,239
|
|
|
|
46,696
|
|
|
|
(413
|
)
|
|
|
(28,085
|
)
|
|
|
10,150
|
|
|
|
(40,034
|
)
|
|
|
(5,528
|
)
|
|
|
50,025
|
|
Segment assets
|
|
|
3,623,185
|
|
|
|
2,608,981
|
|
|
|
772,375
|
|
|
|
1,938,746
|
|
|
|
106,918
|
|
|
|
1,066,155
|
|
|
|
(938,235
|
)
|
|
|
9,178,125
|
|
|
|
|
*
|
|
Includes 7 months of operations
|
Reconciliation of Segment Information to Consolidated Amounts
Information for the Corporations reportable segments in relation to the consolidated totals
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
(Dollars in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
$
|
602,153
|
|
|
$
|
533,972
|
|
Other revenues
|
|
|
36,248
|
|
|
|
49,367
|
|
Elimination of intersegment revenues
|
|
|
(36,475
|
)
|
|
|
(47,545
|
)
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
601,926
|
|
|
$
|
535,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before tax of reportable segments
|
|
$
|
23,763
|
|
|
$
|
95,587
|
|
Loss before tax of other segments
|
|
|
(48,247
|
)
|
|
|
(40,034
|
)
|
Elimination of intersegment profits
|
|
|
(5,639
|
)
|
|
|
(5,528
|
)
|
|
|
|
|
|
|
|
Consolidated (loss) income before tax
|
|
$
|
(30,123
|
)
|
|
$
|
50,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
9,111,958
|
|
|
$
|
9,050,205
|
|
Assets not attributed to segments
|
|
|
610,728
|
|
|
|
1,066,155
|
|
Elimination of intersegment assets
|
|
|
(477,372
|
)
|
|
|
(938,235
|
)
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
9,245,314
|
|
|
$
|
9,178,125
|
|
|
|
|
|
|
|
|
14. Subsequent events:
On
October 3, 2007, the Corporation and SFS entered into a Bridge Facility Agreement (the Facility) with
National Australia Bank Limited, through its offshore banking unit (the Lender). The proceeds of
the Facility were used to refinance the outstanding indebtedness incurred under the previously
announced agreement among the Corporation, SFS and Banco Santander Puerto Rico, and for general
corporate purposes. Under the Facility, the Corporation and SFS had available $235 million and $465 million,
respectively, all of which was drawn on October 3, 2007.
The amounts drawn
under the Facility (the Loan) bear interest at an annual rate equal to the applicable LIBOR rate
plus 0.265% per annum, commencing on the date of the initial drawdown. Interest under the Loan is payable
in monthly interest periods due on the 24
th
day of each month, with the first monthly interest payment
due on November 24, 2007. The Corporation and SFS did not pay any facility fee or commission to the
Lender in connection with the Loan. The entire principal balance of the Loan is due and payable on March
24, 2008.
Upon the
occurrence and during the continuance of an Event of Default (as defined in the Facility) under
the Facility, the Lender shall have the right to declare the outstanding balance of the Loan,
together with accrued interest and any other amount owing to the Lender, 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 Facility are several and not joint. However,
the Corporation and SFS are jointly and severally responsible for all other amounts payable under the Facility.
All amounts payable by the Corporation and SFS
under the Facility shall be made without set-off or counter-claim, and free and clear of any withholding
or deduction in respect of taxes, levies, imposts, deductions, charges, withholdings or duties of any
nature imposed or levied on such payments. The Loan is guaranteed by Santander Group.
The Corporation and SFS will each pay Santander Group a guarantee fee equal to 10
basis points (0.1%) of the principal amount of the Loan.
27
PART I ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Santander BanCorp
Selected Financial Data
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
Septembet 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
CONDENSED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
505,468
|
|
|
$
|
452,703
|
|
|
$
|
170,149
|
|
|
$
|
162,086
|
|
Interest expense
|
|
|
271,831
|
|
|
|
237,353
|
|
|
|
94,110
|
|
|
|
87,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
233,637
|
|
|
|
215,350
|
|
|
|
76,039
|
|
|
|
74,708
|
|
Gain on sale of securities
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker-deaker, asset management and insurance fees
|
|
|
49,086
|
|
|
|
43,078
|
|
|
|
16,717
|
|
|
|
13,601
|
|
Other income
|
|
|
47,134
|
|
|
|
40,013
|
|
|
|
13,776
|
|
|
|
17,389
|
|
Operating expenses
|
|
|
220,289
|
|
|
|
204,503
|
|
|
|
74,488
|
|
|
|
75,606
|
|
Goodwill and
other intangibles impairment charges
|
|
|
39,705
|
|
|
|
|
|
|
|
39,705
|
|
|
|
|
|
Provision for loan losses
|
|
|
100,224
|
|
|
|
43,913
|
|
|
|
47,350
|
|
|
|
20,400
|
|
Income tax
provision (benefit)
|
|
|
4,151
|
|
|
|
16,916
|
|
|
|
(4,912
|
)
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(34,274
|
)
|
|
$
|
33,109
|
|
|
$
|
(50,099
|
)
|
|
$
|
8,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE DATA*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.73
|
)
|
|
$
|
0.71
|
|
|
$
|
(1.07
|
)
|
|
$
|
0.19
|
|
Book value
|
|
$
|
11.36
|
|
|
$
|
12.35
|
|
|
$
|
11.36
|
|
|
$
|
12.35
|
|
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
|
|
$
|
0.48
|
|
|
$
|
0.48
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
AVERAGE BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance
for loans losses
|
|
$
|
6,897,835
|
|
|
$
|
6,357,917
|
|
|
$
|
6,916,691
|
|
|
$
|
6,519,678
|
|
Allowance for loan losses
|
|
|
119,059
|
|
|
|
84,113
|
|
|
|
131,938
|
|
|
|
89,238
|
|
Earning assets
|
|
|
8,531,286
|
|
|
|
8,202,568
|
|
|
|
8,656,943
|
|
|
|
8,302,847
|
|
Total assets
|
|
|
9,173,901
|
|
|
|
8,738,768
|
|
|
|
9,291,722
|
|
|
|
8,949,021
|
|
Deposits
|
|
|
5,232,073
|
|
|
|
4,994,872
|
|
|
|
5,394,209
|
|
|
|
5,014,014
|
|
Borrowings
|
|
|
3,043,964
|
|
|
|
2,849,409
|
|
|
|
3,006,182
|
|
|
|
3,036,824
|
|
Common equity
|
|
|
583,809
|
|
|
|
557,495
|
|
|
|
574,776
|
|
|
|
569,259
|
|
PERIOD END BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance
for loans losses
|
|
$
|
6,900,259
|
|
|
$
|
6,595,346
|
|
|
$
|
6,900,259
|
|
|
$
|
6,595,346
|
|
Allowance for loan losses
|
|
|
144,544
|
|
|
|
94,157
|
|
|
|
144,544
|
|
|
|
94,157
|
|
Earning assets
|
|
|
8,690,883
|
|
|
|
8,615,126
|
|
|
|
8,690,883
|
|
|
|
8,615,126
|
|
Total assets
|
|
|
9,245,314
|
|
|
|
9,178,125
|
|
|
|
9,245,314
|
|
|
|
9,178,125
|
|
Deposits
|
|
|
6,072,736
|
|
|
|
5,331,678
|
|
|
|
6,072,736
|
|
|
|
5,331,678
|
|
Borrowings
|
|
|
2,322,817
|
|
|
|
2,947,745
|
|
|
|
2,322,817
|
|
|
|
2,947,745
|
|
Common equity
|
|
|
529,990
|
|
|
|
576,016
|
|
|
|
529,990
|
|
|
|
576,016
|
|
Continued
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
SELECTED RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on a tax-equivalent basis (on an annualized basis)
|
|
|
3.76
|
%
|
|
|
3.61
|
%
|
|
|
3.56
|
%
|
|
|
3.66
|
%
|
Efficiency ratio (1)
|
|
|
65.59
|
%
|
|
|
67.25
|
%
|
|
|
68.81
|
%
|
|
|
70.56
|
%
|
Return on average total assets (on an annualized basis)
|
|
|
-0.50
|
%
|
|
|
0.51
|
%
|
|
|
-2.14
|
%
|
|
|
0.39
|
%
|
Return on average common equity (on an annualized basis)
|
|
|
-7.85
|
%
|
|
|
7.94
|
%
|
|
|
-34.58
|
%
|
|
|
6.08
|
%
|
Dividend payout
|
|
|
-65.75
|
%
|
|
|
67.61
|
%
|
|
|
-14.95
|
%
|
|
|
84.21
|
%
|
Average net loans/average total deposits
|
|
|
131.84
|
%
|
|
|
127.29
|
%
|
|
|
128.22
|
%
|
|
|
130.03
|
%
|
Average earning assets/average total assets
|
|
|
93.00
|
%
|
|
|
93.86
|
%
|
|
|
93.17
|
%
|
|
|
92.78
|
%
|
Average stockholders equity/average assets
|
|
|
6.36
|
%
|
|
|
6.38
|
%
|
|
|
6.19
|
%
|
|
|
6.36
|
%
|
Fee income to average assets (annualized)
|
|
|
1.21
|
%
|
|
|
1.20
|
%
|
|
|
1.13
|
%
|
|
|
1.13
|
%
|
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-adjusted assets
|
|
|
7.61
|
%
|
|
|
8.14
|
%
|
|
|
7.61
|
%
|
|
|
8.14
|
%
|
Total capital to risk-adjusted assets
|
|
|
10.69
|
%
|
|
|
11.19
|
%
|
|
|
10.69
|
%
|
|
|
11.19
|
%
|
Leverage Ratio
|
|
|
5.44
|
%
|
|
|
5.96
|
%
|
|
|
5.44
|
%
|
|
|
5.96
|
%
|
Asset quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
2.80
|
%
|
|
|
1.63
|
%
|
|
|
2.80
|
%
|
|
|
1.63
|
%
|
Annualized net charge-offs to average loans
|
|
|
1.19
|
%
|
|
|
0.71
|
%
|
|
|
1.73
|
%
|
|
|
0.84
|
%
|
Allowance for loan losses to period-end loans
|
|
|
2.05
|
%
|
|
|
1.41
|
%
|
|
|
2.05
|
%
|
|
|
1.41
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
73.33
|
%
|
|
|
86.53
|
%
|
|
|
73.33
|
%
|
|
|
86.53
|
%
|
Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more
|
|
|
70.77
|
%
|
|
|
73.91
|
%
|
|
|
70.77
|
%
|
|
|
73.91
|
%
|
Non-performing assets to total assets
|
|
|
2.28
|
%
|
|
|
1.23
|
%
|
|
|
2.28
|
%
|
|
|
1.23
|
%
|
Recoveries to charge-offs
|
|
|
4.36
|
%
|
|
|
11.07
|
%
|
|
|
2.07
|
%
|
|
|
10.22
|
%
|
EARNINGS
(2) TO FIXED CHARGES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
1.07
|
x
|
|
|
1.44
|
x
|
|
|
0.65
|
x
|
|
|
1.22
|
x
|
Including interest on deposits
|
|
|
1.03
|
x
|
|
|
1.21
|
x
|
|
|
0.84
|
x
|
|
|
1.11
|
x
|
OTHER DATA AT END OF PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer financial assets under management
|
|
$
|
14,244,000
|
|
|
$
|
12,969,000
|
|
|
$
|
14,244,000
|
|
|
$
|
12,969,000
|
|
Bank branches
|
|
|
61
|
|
|
|
63
|
|
|
|
61
|
|
|
|
63
|
|
Consumer Finance branches
|
|
|
69
|
|
|
|
70
|
|
|
|
69
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branches
|
|
|
130
|
|
|
|
133
|
|
|
|
130
|
|
|
|
133
|
|
ATMs
|
|
|
142
|
|
|
|
148
|
|
|
|
142
|
|
|
|
148
|
|
(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 securities gains and losses.
|
|
(2)
|
|
Earnings excludes goodwill and other intangibles
impairment charges.
|
29
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.
The
Puerto Rican economy is in the midst of an economic recession that has deepened in recent months according to the Coincident
Index of Economic Activity published by Puerto Rico Planning Board. The index declined from -1.0% in the first quarter
of 2007 to -2.7% in the second quarter, evidencing a weakness in the economy. As of August 2007, the labor market remained
fragile with nonfarm employment declining 1.6%, compared to the same period in 2006, yet the unemployment rate declined by
0.8% as a result of a reduction in the labor force participation rate. Construction activity continues to be adversely
affected with the value of construction permits and cement sales each falling by approximately 12.0% during the second
quarter of 2007. In addition, retail sales adjusted for inflation remained weak with total sales declining 2.0% as of
July 2007 and the sale of new automobile units dropping 17% as of August 2007. The downward trend in retail sales reflects
weakness in the consumer confidence and erosion in purchasing power.
As
a result of the current unfavorable economic environment in Puerto
Rico, SFSs short-term financial performance and profitability have declined
significantly during 2007, caused by reduced lending activity and
increases in nonperforming assets and
charge-offs. The Corporation decided to perform the impairment test of the goodwill and other
intangibles of SFS as of July 1, 2007, a quarter in advance of the scheduled annual impairment
test. The Corporation completed the first step of the impairment test and determined that the
carrying amount of the goodwill and other intangibles assets of SFS exceeds its fair value, thereby requiring performance of the
second step of the impairment test to calculate the amount of the impairment. The Corporation, with
the assistance of an independent valuation firm, has begun the second step of the impairment test
and expects the resulting valuation report to be completed during the fourth quarter of 2007.
However, because an impairment loss is probable and can be reasonably estimated, the Corporation
has, in accordance with SFAS No. 142, recorded preliminary estimated non-cash impairment charges
of approximately $34.3 million and $5.4 million, which have been recorded as reductions to goodwill
and trade name, respectively. The estimated impairment charges were calculated based on market
and income approach valuation methodologies. The Corporation will change these estimates, as necessary, upon the
completion of the valuation report, which will include additional procedures for determining the
fair value of SFSs assets and liabilities. These impairment charges did not result in cash expenditures and will not result in future
cash expenditures.
In
conjunction with the impairment test mentioned in the previous paragraph,
the Corporation also conducted an impairment test of
its intangible assets with definite lives associated with its consumer
finance business in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. In addition, the Corporation reviews finite-lived intangible assets for
impairment whenever an event occurs or circumstances change which indicates that the carrying
amount of such assets may not be fully recoverable. The determination
of recoverability is based on
an estimate of undiscounted future cash flows resulting from the use
of the assets and their eventual disposition. The Corporation
determined, based on this test, that undiscounted future cash flows from
the use of the assets and their eventual disposition exceeded their
current carrying amount and, thus,
an impairment was not required as of September 30, 2007.
Consequently, no impairment losses on intangible assets
with definite lives were recorded in operating expenses in the consolidated statement of operations
as of September 30, 2007.
30
Upon completion of the interim impairment analysis, the Corporation plans to conduct an update
of its annual impairment assessments as of the end of
September 30, 2007 for its consumer
finance business intangibles with the assistance of an independent valuation specialist.
The Corporation will conduct a goodwill valuation for all other segments
during the fourth quarter of 2007 and any impairment loss
that may result would be recognized as of December 31, 2007.
The
Corporation has taken and continues to proactively take significant measures to face the on-going challenges
presented by the Puerto Rico economy:
|
|
|
Banco Santander Puerto Rico (BSPR) sold its merchant business to an unrelated third party
resulting in a pre-tax gain of $12.3 million that will be recognized in the fourth quarter of 2007. This transaction
eliminates the need for additional capital investment to support system enhancements required by the business and
results in cost efficiencies in processing and personnel expenses. Through a marketing alliance with the unrelated
third party, BSPR expects to offers better merchant products and services to its client base and to promote growth
in demand deposit accounts, an attractive source of funding.
|
|
|
|
|
BSPR sold to an unaffiliated third party the servicing rights with respect to the less profitable
and more labor and system intensive lines of its trust business. For the third quarter of 2007, a gain of $382,000
was recognized as a result of the transferred accounts to the third party. BSPR will continue to offer trust
services related to transfer and paying agent and IRA accounts. This transaction avoided additional capital
investment in the trust business and reduced a significant portion of the labor force dedicated to the business.
|
|
|
|
|
The Corporation maintains an on-going strict control on operating expenses and an efficiency plan driven
to lower its current efficiency ratio. The operating expenses, excluding goodwill and other intangible
assets impairment charges and stock incentive compensation expense sponsored by Santander Group, experienced a decrease
of $2.9 million or 3.9% for the third quarter of 2007, when compared to the same period in 2006.
|
|
|
|
|
The Corporation expects to merge as of December 31, 2007 its mortgage banking subsidiary with Banco Santander
Puerto Rico to obtain cost efficiencies and broaden the array of products that current mortgage specialists
are offering.
|
|
|
|
|
The Corporation will continue to monitor non-performing assets and to deploy significant resources
to manage the non-performing loan portfolio. Management expects to improve its collection efforts by devoting more
full time employees and outside resources. Concurrently, management will continue with its stringent underwriting
and lending criteria.
|
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, 2006. 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, 2006.
Overview of Results of Operations for the Nine-Month and Three-Month Periods Ended September 30,
2007
Santander BanCorp is the financial holding company for Banco Santander Puerto Rico and
subsidiaries (the Bank), Santander Securities Corporation and subsidiary, Santander Financial
Services, Inc., Santander Insurance Agency, Inc. and Island Insurance Corporation.
For
the nine-month period and quarter ended September 30, 2007 and
2006, net income and other selected
financial information, as reported are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
($ in millions, except earnings per share)
|
|
30-Sep-07
|
|
30-Sep-06
|
|
30-Sep-07
|
|
30-Sep-06
|
Net (Loss) Income
|
|
$
|
(34.3
|
)
|
|
$
|
33.1
|
|
|
$
|
(50.1
|
)
|
|
$
|
8.7
|
|
EPS
|
|
$
|
(0.73
|
)
|
|
$
|
0.71
|
|
|
$
|
(1.07
|
)
|
|
$
|
0.19
|
|
ROA
|
|
|
-0.50
|
%
|
|
|
0.51
|
%
|
|
|
-2.14
|
%
|
|
|
0.39
|
%
|
ROE
|
|
|
-7.85
|
%
|
|
|
7.94
|
%
|
|
|
-34.58
|
%
|
|
|
6.08
|
%
|
Efficiency Ratio (*)
|
|
|
65.59
|
%
|
|
|
67.25
|
%
|
|
|
68.81
|
%
|
|
|
70.56
|
%
|
|
|
|
(*)
|
|
Operating expenses, excluding goodwill and trade name
impairment charges, divided by net interest income on a tax
equivalent basis, plus other income, excluding gain on sale of securities.
|
Use of Non-GAAP Financial Measures
The presentation of non-GAAP financial measures is beneficial to investors for purpose of
comparing the operating results of the nine-month period and quarter ended September 30, 2007
with the results of the same period for 2006. Non-GAAP financial
measures for the nine-month period and
quarter ended September 30, 2007 excludes the goodwill and trade
name impairment charges and the
after-tax compensation expense associated with certain incentive plans sponsored and reimbursable
by Banco Santander, S.A. (Santander Group), Santander BanCorps parent company.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
($ in millions, except earnings per share)
|
|
30-Sep-07
|
|
|
30-Sep-06
|
|
|
30-Sep-07
|
|
|
30-Sep-06
|
|
Goodwill and trade name impairment charges
|
|
$
|
39.7
|
|
|
$
|
|
|
|
$
|
39.7
|
|
|
$
|
|
|
Compensation expense sponsored by Santander Group (net of tax)
|
|
$
|
6.2
|
|
|
$
|
|
|
|
$
|
1.1
|
|
|
$
|
|
|
|
|
|
|
|
Excluding goodwill and trade name impairment charges and compensation expense sponsored by Santander
Group, the non-GAAP selected financial data would have been:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
|
30-Sep-07
|
|
30-Sep-06
|
|
30-Sep-07
|
|
30-Sep-06
|
Net Income (Loss)
|
|
$
|
11.6
|
|
|
$
|
33.1
|
|
|
$
|
(9.3
|
)
|
|
$
|
8.7
|
|
EPS
|
|
$
|
0.25
|
|
|
$
|
0.71
|
|
|
$
|
(0.20
|
)
|
|
$
|
0.19
|
|
ROA
|
|
|
0.17
|
%
|
|
|
0.51
|
%
|
|
|
-0.40
|
%
|
|
|
0.39
|
%
|
ROE
|
|
|
2.66
|
%
|
|
|
7.94
|
%
|
|
|
-6.41
|
%
|
|
|
6.08
|
%
|
Efficiency Ratio (*)
|
|
|
62.58
|
%
|
|
|
67.25
|
%
|
|
|
67.13
|
%
|
|
|
70.56
|
%
|
|
|
|
(*)
|
|
Operating expenses, excluding goodwill and trade name
impairment charges, divided by net interest income on a tax
equivalent basis, plus other income, excluding gain on sale of securities.
|
Results
of Operations for the Nine-Month and Three-Month Period ended
September 30, 2007 and September 30, 2006
The
Corporation reported a net loss of $34.3 million for the nine-month
period ended September 30, 2007, compared with net income of $33.1 million for the same period in
2006. Earnings (loss) per common share (EPS) for the nine-month periods ended September 30, 2007
and 2006 were $(0.73) and $0.71, respectively, based on 46,639,104 average common shares for each
period. The Corporations net loss for the third quarter and the nine-month period ended September
30, 2007 included the goodwill and trade name impairment charges, described above, and an after-tax
compensation expense associated with certain incentive plans
sponsored and reimbursable by Santander Group, the Corporations parent company. Santander
Group sponsored two reimbursable incentive programs to which employees of the Corporation are
eligible to participate: (i) one related to a long term incentive plan upon reaching certain global
corporate goals in 2006 and (ii) another related to the grant of 100 shares of Santander Group
stock to all employees of Santander Groups operating entities as part of this years celebration
of Santander Group 150th Anniversary, distributed during the second quarter.
(i)
|
|
The long term incentive plan resulted in an after-tax compensation expense of $1.1 million
and $3.5 million, respectively, for the quarter and nine-month period ended September 30,
2007. The incentive becomes exercisable by plan participants in January 2008, at which time,
the compensation expense associated with the plan will be reimbursed to the Corporation by
Santander Group and recorded as a capital contribution.
|
|
(ii)
|
|
The grant of 100 common shares of Santander Group to the Corporations employees resulted in
an after-tax compensation expense of $2.6 million for the nine-month period ended September
30, 2007. The settlement of this grant was effective in August of 2007 and was reimbursed to
the Corporation by an affiliate and recognized as a capital contribution.
|
Return on average total assets (ROA) on an annualized basis and return on average common
equity (ROE) on an annualized basis for the nine-month period ended September 30, 2007 were (0.50)%
and (7.85)%, respectively, compared with 0.51% and 7.94% reported during the same nine-month period
of 2006. The Efficiency Ratio, on a tax equivalent basis, for the nine months ended September 30,
2007, reached 65.59% compared to 67.25% for the nine months ended September 30, 2006. This
improvement was mainly due to higher net interest income.
For the third quarter of 2007, the
Corporation reported a net loss of $50.1 million, compared
with a net income of $8.7 million for the same quarter in 2006. Earnings (loss) per common share
(EPS) for the quarters ended September 30, 2007 and 2006 were $(1.07) and $0.19, respectively,
based on 46,639,104 average common shares for each period. The
32
Corporations net loss for the
third quarter included goodwill and trade name impairment charges of $39.7 million and
after-tax compensation expense of $1.1 million associated with the long-term incentive plan.
The
Corporations financial results for the nine-month and three-month periods ended
September 30, 2007 were impacted by the following:
|
|
|
The Corporation recognized an impairment charges of $34.3 million for goodwill
and $5.4 million for trade name during the third
quarter of 2007 as an operating expense. These impairment charges did not result in cash expenditures and will not result
in future cash expenditures.
|
|
|
|
|
The provision for loan losses increased $27.0 million or 132.1% for the quarter ended
September 30, 2007 compared to the same period in 2006 and $56.3 million or 128.2% for the
nine-month period ended September 30, 2007 compared to 2006. The
provision for loan losses represented 154.1% and 160.2% of the net
charge-off for the quarter and nine months ended September 30, 2007,
respectively.
|
|
|
|
|
The Corporation experienced a reduction of 10 basis points on net interest margin, on a
tax equivalent basis, to 3.56% for the quarter ended September 30, 2007 versus the same period in
2006 and an expansion of 15 basis points to 3.76% for the nine-month period ended September
30, 2007 versus the same period in the prior year.
|
|
|
|
|
For the quarter and the nine-month period ended September 30, 2007, other income
decreased $0.5 million or 1.6% and increased $13.4 million or 16.1%, respectively. The
increment for the nine-month period ended September 30, 2007 as compared to the same period
in 2006 is basically attributed to fees related to an early cancellation of certain client
structured certificates of deposit, an increase in gain on sale of residential mortgage
loans, gain on sale of previously charged off loans, increases in broker-dealer, asset
management and insurance fees, trading gains and mortgage servicing rights recognized, and
decreases in loss on valuation of mortgage loans held for sale.
|
|
|
|
|
The operating expenses, excluding goodwill and other
intangibles impairment charges and stock incentive compensation
expense sponsored and reimbursable by Santander Group, experienced a decrease of
$2.9 million or 3.9% and an increase of
$5.7 million or 2.8% in operating expenses, for the quarter and the nine months ended
September 30, 2007, respectively, when compared to the same periods in 2006. The
increase for the nine month ended September 30, 2007 was primarily
related to the SFS operation (seven months of operations in 2006).
|
|
|
|
|
The Corporations income tax expense decreased $5.9 million and $12.8 million,
respectively, for the three and nine-month periods ended September 30, 2007 when compared
to the same periods in 2006. This decrease was due to lower net income before tax and the elimination of the temporary surtaxes imposed by the
Commonwealth of Puerto Rico for fiscal years 2005 and 2006. For the quarter and nine
months ended September 30, 2007, the effective income tax rate
was a benefit of (8.9)% and (13.8)%, respectively, versus 10.0% and 33.8% for the same period in 2006, respectively.
|
|
|
|
|
The Corporation grew its net loan portfolio by 4.2% year over year.
|
Net Interest Income
The
Corporations net interest income for the nine months ended September 30, 2007 was $233.6
million, an increase of $18.3 million, or 8.5%, compared with $215.4 million for the nine months
ended September 30, 2006. This improvement
was due to an increase in interest income of $52.8 million that was partially offset by an increase
in interest expense of $34.5 million. The improvement in net interest income was due to an increase of
$58.6 million or 15.0% in interest on loans for a total of $448.9 million for the nine months ended
in September 30, 2007 from $390.3 million for the same period in 2006.
33
The increase in interest
expense was due to increases of $18.5 million in interest on deposits and $14.6 million in interest
on securities sold under agreements to repurchase and other borrowings.
The Corporations net interest income for the three months ended September 30, 2007 reached
$76.0 million compared with $74.7 million for the same period in 2006, reflecting an increase of
$1.3 million. There was an increase in interest income of $8.1 million, or 5.0% that was partially
offset by an increase in interest expense of $6.7 million or
7.7%. The improvement in net interest income was principally due to an increase of $9.6 million or
6.8%, in interest on loans, which was partially
offset by increases in interest expense on deposits of $6.7 million.
The table on pages 37 and 38, 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, respectively, presents average balance sheets, net interest income
on a tax equivalent basis and average interest rates for the nine-month periods and quarters ended
September 30, 2007 and 2006. The table on Interest Variance Analysis Tax Equivalent Basis on
page 36, allocates changes in the Corporations interest income (on a tax-equivalent basis) and
interest expense between changes in the average volume of interest earning assets and interest
bearing liabilities and changes in their respective interest rates for the nine months and the
quarter ended September 30, 2007 compared with the same periods of 2006.
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 $6.0 million and $6.1 million for
the nine months ended September 30, 2007 and 2006, respectively. For the quarters ended September
30, 2007 and 2006 the tax equivalent adjustments were $1.7 million and $2.0 million, respectively.
The following table sets forth the principal components of the Corporations net interest
income for the nine and three month periods ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
|
(Dollars in thousands)
|
|
Interest income tax equivalent basis
|
|
$
|
511,462
|
|
|
$
|
458,839
|
|
|
$
|
171,862
|
|
|
$
|
164,037
|
|
Interest expense
|
|
|
271,831
|
|
|
|
237,353
|
|
|
|
94,110
|
|
|
|
87,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income tax equivalent basis
|
|
$
|
239,631
|
|
|
$
|
221,486
|
|
|
$
|
77,752
|
|
|
$
|
76,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin tax equivalent
basis (1)
|
|
|
3.76
|
%
|
|
|
3.61
|
%
|
|
|
3.56
|
%
|
|
|
3.66
|
%
|
|
|
|
(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 nine-month period ended September 30, 2007, net interest margin, on a tax equivalent
basis, was 3.76% compared to net interest margin, on a tax equivalent basis, of 3.61% for the same
period in 2006. This increase of 15 basis points in net interest margin, on a tax equivalent basis,
was mainly due to an increase of 54 basis points in the yield on average interest earning assets
together with an increase in average interest earning assets of $328.7 million. These increases
were partially offset by an increase in the cost of interest bearing liabilities of 45 basis points
and an increase in average interest bearing liabilities of $278.7 million. Interest income, on a
tax equivalent basis, increased $52.6 million or 11.5% during the nine months ended September 30,
2007 compared to 2006, while interest expense increased $34.5 million or 14.5% over the same
period.
For the nine months ended September 30, 2007 average interest earning assets increased $328.7
million or 4.0% and average interest bearing liabilities increased $278.7 million or 3.8% compared
to the same period in 2006. The increment in average interest earning assets compared to the nine
months ended September 30, 2006 was driven by an increase in average net loans of $539.9 million,
which was partially offset by decreases in average investment securities and in average interest
bearing deposits of $192.1 million and $19.1 million, respectively. The increase in average net
loans was due to an increase of $333.0 million or 14.1% in average mortgage loans. There was also
an increase of $201.1 million or 19.0% in the average consumer loan portfolio as a result of an
increase in the average consumer finance portfolio of $121.8 million as well as increases in
average credit cards and personal installment loans of $43.1 million and $36.4 million,
respectively. The commercial loan portfolio experienced an increase of $40.7 million or 1.4% due
primarily to increases in average
construction loans of $211.2 million and average retail commercial banking loans of $79.4 million.
These increases were
34
partially
offset by decreases in average corporate loans of $233.3 million due
to the settlement with an unrelated financial institution of $608.2 million of commercial loans
secured by mortgages during the second quarter of 2006. Excluding the loans settled with an
unrelated financial institution in 2006, the average commercial loan portfolio grew $351.7 million
or 13.0%.
The increase in average interest bearing liabilities of $278.7 million for the nine-month
period ended September 30, 2007, was driven by an increase in average borrowings of $167.5 million
compared to the nine months ended September 30, 2006. This increase was due to increases in average
other borrowings of $108.1 million incurred in connection with the operations of Island Finance and
the refinancing of other existing debt of the Corporation, in average federal funds purchased of
$16.0 million, in average FHLB Advances of $189.4 million and in average commercial paper of $12.9
million, partially offset by a reduction in average repurchase agreements of $158.9 million. There
was also an increase in average subordinated notes of $25.7 million. The average interest bearing
deposits reflected increases of $84.1 million which comprised increases in brokered deposits and
other time deposits of $143.5 million and $118.6 million, respectively, offset by a decrease in
savings and NOW accounts of $178.0 million.
Net interest margin, on a tax equivalent basis, for the third quarter of 2007 was 3.56%
compared to 3.66% for the third quarter of 2006. The change in net interest margin, on a tax
equivalent basis, was mainly due to an increase of 14 basis points in the average cost
of interest bearing liabilities and an increase in average interest bearing liabilities of $347.5
million. This was partially offset by an increase in average interest earning assets of $354.2
million and an increase in the yield on average interest earning assets of 4 basis points. Interest
income, on a tax equivalent basis, increased $7.8 million or 4.8% during the third quarter of 2007,
compared to the same period in 2006, while interest expense increased $6.7 million or 7.7%.
For the third quarter of 2007, average interest earning assets increased $354.1 million or
4.3% and average interest bearing liabilities increased $347.5 million or 4.7% compared to the same
period in 2006. The increase in average interest earning assets compared to the third quarter of
2006 was driven by increases in average net loans of $397.0 million and average interest bearing
deposits of $ 55.3 million, which was partially offset by a decrease in average investments of
$98.2 million. The increase in average net loans was due to an increase of $172.5 million or 6.8%
in average mortgage loans. There was also an increase of
$72.1 million or 6.0% in the average
consumer loan portfolio primarily in the credit cards and personal installment loan portfolios,
which increased $53.1 million and $44.7 million,
respectively, offset by $25.8 million decrease in consumer finance
portfolio. There was an increase of $195.0 million
or 6.8% in the average commercial loan portfolio due primarily to increases in average construction
loans of $181.9 million and average corporate loans of $68.5 million partially offset by a decrease
in average retail commercial banking loans of $24.0 million and average leasing portfolio of $31.4
million.
The increase in average interest bearing liabilities of $347.5 million for the quarter ended
September 30, 2007, was driven by an increase in average interest bearing deposits of $378.2
million which comprised increases in brokered deposits and other time deposits of $269.8 million
and $227.5 million, respectively, offset by a decrease in savings and NOW accounts of $119.2
million. The increase in average interest bearing deposits was offset by a decrease in average
borrowings of $34.5 million compared to the quarter ended September 30, 2006. This decrease was due
to a decrease in average other borrowings of $114.5 million incurred in connection with the
operations of Island Finance and the refinancing of other existing debt of the Corporation, an
increase in average federal funds purchased of $24.6 million and a increases in average FHLB
Advances of $213.4 million and in average commercial paper of $33.9 million partially offset by a
reduction in average repurchase agreements of $191.9 million.
The following table allocates changes in the Corporations interest income, on a
tax-equivalent basis, and interest expense for the nine months and the quarter ended September 30,
2007, compared to the nine months and the quarter ended September 30, 2006, between 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.
35
INTEREST VARIANCE ANALYSIS
on a Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended Sept. 30, 2007
|
|
|
Three Months Ended Sept. 30, 2007
|
|
|
|
Compared to the Nine Months
|
|
|
Compared to the Three Months Ended
|
|
|
|
Ended Sept. 30, 2006
|
|
|
Sept. 30, 2006
|
|
|
|
Increase (Decrease) Due to Change in:
|
|
|
Increase (Decrease) Due to Change in:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Interest income, on a tax equivalent basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased
under agreements to resell
|
|
$
|
(1,019
|
)
|
|
$
|
251
|
|
|
$
|
(768
|
)
|
|
$
|
397
|
|
|
$
|
27
|
|
|
$
|
424
|
|
Time deposits with other banks
|
|
|
243
|
|
|
|
(536
|
)
|
|
|
(293
|
)
|
|
|
265
|
|
|
|
(896
|
)
|
|
|
(631
|
)
|
Investment securities
|
|
|
(7,042
|
)
|
|
|
631
|
|
|
|
(6,411
|
)
|
|
|
(1,203
|
)
|
|
|
(862
|
)
|
|
|
(2,065
|
)
|
Loans
|
|
|
34,495
|
|
|
|
25,600
|
|
|
|
60,095
|
|
|
|
8,694
|
|
|
|
1,403
|
|
|
|
10,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, on a tax equivalent
basis
|
|
|
26,677
|
|
|
|
25,946
|
|
|
|
52,623
|
|
|
|
8,153
|
|
|
|
(328
|
)
|
|
|
7,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
|
(3,644
|
)
|
|
|
5,495
|
|
|
|
1,851
|
|
|
|
(844
|
)
|
|
|
787
|
|
|
|
(57
|
)
|
Other time deposits
|
|
|
9,449
|
|
|
|
7,149
|
|
|
|
16,598
|
|
|
|
6,299
|
|
|
|
463
|
|
|
|
6,762
|
|
Borrowings
|
|
|
6,708
|
|
|
|
7,914
|
|
|
|
14,622
|
|
|
|
(484
|
)
|
|
|
585
|
|
|
|
101
|
|
Long-term borrowings
|
|
|
1,220
|
|
|
|
187
|
|
|
|
1,407
|
|
|
|
60
|
|
|
|
(134
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
13,733
|
|
|
|
20,745
|
|
|
|
34,478
|
|
|
|
5,031
|
|
|
|
1,701
|
|
|
|
6,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
$
|
12,944
|
|
|
$
|
5,201
|
|
|
$
|
18,145
|
|
|
$
|
3,122
|
|
|
$
|
(2,029
|
)
|
|
$
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 quarters and nine months ended September 30, 2007 and 2006.
36
SANTANDER BANCORP
YEAR TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
101,400
|
|
|
$
|
2,974
|
|
|
|
3.92
|
%
|
|
$
|
94,026
|
|
|
$
|
3,267
|
|
|
|
4.65
|
%
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
71,475
|
|
|
|
2,789
|
|
|
|
5.22
|
%
|
|
|
97,987
|
|
|
|
3,557
|
|
|
|
4.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
172,875
|
|
|
|
5,763
|
|
|
|
4.46
|
%
|
|
|
192,013
|
|
|
|
6,824
|
|
|
|
4.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Treasury securities
|
|
|
89,412
|
|
|
|
3,119
|
|
|
|
4.66
|
%
|
|
|
56,394
|
|
|
|
1,953
|
|
|
|
4.63
|
%
|
Obligations of other U.S.government
agencies and corporations
|
|
|
616,577
|
|
|
|
22,000
|
|
|
|
4.77
|
%
|
|
|
749,045
|
|
|
|
27,242
|
|
|
|
4.86
|
%
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
98,296
|
|
|
|
3,861
|
|
|
|
5.25
|
%
|
|
|
93,623
|
|
|
|
3,862
|
|
|
|
5.52
|
%
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
597,413
|
|
|
|
21,734
|
|
|
|
4.86
|
%
|
|
|
705,039
|
|
|
|
25,189
|
|
|
|
4.78
|
%
|
Other
|
|
|
58,878
|
|
|
|
2,888
|
|
|
|
6.56
|
%
|
|
|
48,537
|
|
|
|
1,767
|
|
|
|
4.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,460,576
|
|
|
|
53,602
|
|
|
|
4.91
|
%
|
|
|
1,652,638
|
|
|
|
60,013
|
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,462,449
|
|
|
|
129,005
|
|
|
|
7.00
|
%
|
|
|
2,616,377
|
|
|
|
131,581
|
|
|
|
6.72
|
%
|
Construction
|
|
|
484,704
|
|
|
|
30,120
|
|
|
|
8.31
|
%
|
|
|
273,478
|
|
|
|
17,644
|
|
|
|
8.63
|
%
|
Consumer
|
|
|
652,832
|
|
|
|
58,301
|
|
|
|
11.94
|
%
|
|
|
573,477
|
|
|
|
46,566
|
|
|
|
10.86
|
%
|
Consumer Finance
|
|
|
609,716
|
|
|
|
104,476
|
|
|
|
22.91
|
%
|
|
|
487,927
|
|
|
|
83,149
|
|
|
|
22.78
|
%
|
Mortgage
|
|
|
2,689,971
|
|
|
|
124,188
|
|
|
|
6.16
|
%
|
|
|
2,356,987
|
|
|
|
106,390
|
|
|
|
6.02
|
%
|
Lease financing
|
|
|
117,222
|
|
|
|
6,007
|
|
|
|
6.85
|
%
|
|
|
133,784
|
|
|
|
6,672
|
|
|
|
6.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
7,016,894
|
|
|
|
452,097
|
|
|
|
8.61
|
%
|
|
|
6,442,030
|
|
|
|
392,002
|
|
|
|
8.14
|
%
|
Allowance for loan losses
|
|
|
(119,059
|
)
|
|
|
|
|
|
|
|
|
|
|
(84,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,897,835
|
|
|
|
452,097
|
|
|
|
8.76
|
%
|
|
|
6,357,917
|
|
|
|
392,002
|
|
|
|
8.24
|
%
|
Total interest earning assets/ interest
income (on a tax equivalent basis)
|
|
|
8,531,286
|
|
|
|
511,462
|
|
|
|
8.02
|
%
|
|
|
8,202,568
|
|
|
|
458,839
|
|
|
|
7.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assests
|
|
|
642,615
|
|
|
|
|
|
|
|
|
|
|
|
536,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,173,901
|
|
|
|
|
|
|
|
|
|
|
$
|
8,738,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,717,838
|
|
|
$
|
38,487
|
|
|
|
3.00
|
%
|
|
$
|
1,895,871
|
|
|
$
|
36,636
|
|
|
|
2.58
|
%
|
Other time deposits
|
|
|
1,444,422
|
|
|
|
50,470
|
|
|
|
4.67
|
%
|
|
|
1,325,794
|
|
|
|
41,401
|
|
|
|
4.18
|
%
|
Brokered deposits
|
|
|
1,394,147
|
|
|
|
55,095
|
|
|
|
5.28
|
%
|
|
|
1,250,630
|
|
|
|
47,566
|
|
|
|
5.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
4,556,407
|
|
|
|
144,052
|
|
|
|
4.23
|
%
|
|
|
4,472,295
|
|
|
|
125,603
|
|
|
|
3.75
|
%
|
Borrowings
|
|
|
2,758,100
|
|
|
|
114,845
|
|
|
|
5.57
|
%
|
|
|
2,590,572
|
|
|
|
100,223
|
|
|
|
5.17
|
%
|
Term Notes
|
|
|
42,017
|
|
|
|
1,052
|
|
|
|
3.35
|
%
|
|
|
40,717
|
|
|
|
1,049
|
|
|
|
3.44
|
%
|
Subordinated Notes
|
|
|
243,847
|
|
|
|
11,882
|
|
|
|
6.51
|
%
|
|
|
218,120
|
|
|
|
10,478
|
|
|
|
6.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
7,600,371
|
|
|
|
271,831
|
|
|
|
4.78
|
%
|
|
|
7,321,704
|
|
|
|
237,353
|
|
|
|
4.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
989,721
|
|
|
|
|
|
|
|
|
|
|
|
859,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,590,092
|
|
|
|
|
|
|
|
|
|
|
|
8,181,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
583,809
|
|
|
|
|
|
|
|
|
|
|
|
557,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
9,173,901
|
|
|
|
|
|
|
|
|
|
|
$
|
8,738,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
239,631
|
|
|
|
|
|
|
|
|
|
|
$
|
221,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.15
|
%
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
|
|
3.61
|
%
|
37
SANTANDER BANCORP
QUARTER TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
125,919
|
|
|
$
|
715
|
|
|
|
2.25
|
%
|
|
$
|
101,876
|
|
|
$
|
1,346
|
|
|
|
5.24
|
%
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
123,162
|
|
|
|
1,568
|
|
|
|
5.05
|
%
|
|
|
91,924
|
|
|
|
1,144
|
|
|
|
4.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
249,081
|
|
|
|
2,283
|
|
|
|
3.64
|
%
|
|
|
193,800
|
|
|
|
2,490
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Treasury securities
|
|
|
138,777
|
|
|
|
1,514
|
|
|
|
4.33
|
%
|
|
|
61,497
|
|
|
|
769
|
|
|
|
4.96
|
%
|
Obligations of other U.S.government
agencies and corporations
|
|
|
619,884
|
|
|
|
7,139
|
|
|
|
4.57
|
%
|
|
|
710,306
|
|
|
|
9,149
|
|
|
|
5.11
|
%
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
114,386
|
|
|
|
1,425
|
|
|
|
4.94
|
%
|
|
|
87,618
|
|
|
|
1,238
|
|
|
|
5.61
|
%
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
562,985
|
|
|
|
6,868
|
|
|
|
4.84
|
%
|
|
|
677,187
|
|
|
|
8,144
|
|
|
|
4.77
|
%
|
Other
|
|
|
55,139
|
|
|
|
980
|
|
|
|
7.05
|
%
|
|
|
52,761
|
|
|
|
691
|
|
|
|
5.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,491,171
|
|
|
|
17,926
|
|
|
|
4.77
|
%
|
|
|
1,589,369
|
|
|
|
19,991
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,445,763
|
|
|
|
43,214
|
|
|
|
7.01
|
%
|
|
|
2,401,240
|
|
|
|
41,837
|
|
|
|
6.91
|
%
|
Construction
|
|
|
503,855
|
|
|
|
9,597
|
|
|
|
7.56
|
%
|
|
|
321,962
|
|
|
|
7,071
|
|
|
|
8.71
|
%
|
Consumer
|
|
|
675,253
|
|
|
|
20,832
|
|
|
|
12.24
|
%
|
|
|
577,371
|
|
|
|
16,575
|
|
|
|
11.39
|
%
|
Consumer Finance
|
|
|
606,317
|
|
|
|
34,483
|
|
|
|
22.56
|
%
|
|
|
632,068
|
|
|
|
35,078
|
|
|
|
22.02
|
%
|
Mortgage
|
|
|
2,710,404
|
|
|
|
41,713
|
|
|
|
6.16
|
%
|
|
|
2,537,857
|
|
|
|
38,737
|
|
|
|
6.11
|
%
|
Lease financing
|
|
|
107,037
|
|
|
|
1,814
|
|
|
|
6.72
|
%
|
|
|
138,418
|
|
|
|
2,258
|
|
|
|
6.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
7,048,629
|
|
|
|
151,653
|
|
|
|
8.54
|
%
|
|
|
6,608,916
|
|
|
|
141,556
|
|
|
|
8.50
|
%
|
Allowance for loan losses
|
|
|
(131,938
|
)
|
|
|
|
|
|
|
|
|
|
|
(89,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,916,691
|
|
|
|
151,653
|
|
|
|
8.70
|
%
|
|
|
6,519,678
|
|
|
|
141,556
|
|
|
|
8.61
|
%
|
Total interest earning assets/ interest
income (on a tax equivalent basis)
|
|
|
8,656,943
|
|
|
|
171,862
|
|
|
|
7.88
|
%
|
|
|
8,302,847
|
|
|
|
164,037
|
|
|
|
7.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assests
|
|
|
634,779
|
|
|
|
|
|
|
|
|
|
|
|
646,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,291,722
|
|
|
|
|
|
|
|
|
|
|
$
|
8,949,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,695,628
|
|
|
$
|
12,387
|
|
|
|
2.90
|
%
|
|
$
|
1,814,747
|
|
|
$
|
12,444
|
|
|
|
2.72
|
%
|
Other time deposits
|
|
|
1,578,677
|
|
|
|
19,058
|
|
|
|
4.79
|
%
|
|
|
1,351,169
|
|
|
|
15,148
|
|
|
|
4.45
|
%
|
Brokered deposits
|
|
|
1,484,377
|
|
|
|
19,778
|
|
|
|
5.29
|
%
|
|
|
1,214,599
|
|
|
|
16,926
|
|
|
|
5.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
4,758,682
|
|
|
|
51,223
|
|
|
|
4.27
|
%
|
|
|
4,380,515
|
|
|
|
44,518
|
|
|
|
4.03
|
%
|
Borrowings
|
|
|
2,721,377
|
|
|
|
38,525
|
|
|
|
5.62
|
%
|
|
|
2,755,860
|
|
|
|
38,424
|
|
|
|
5.53
|
%
|
Term Notes
|
|
|
42,329
|
|
|
|
366
|
|
|
|
3.43
|
%
|
|
|
41,048
|
|
|
|
335
|
|
|
|
3.24
|
%
|
Subordinated Notes
|
|
|
242,476
|
|
|
|
3,996
|
|
|
|
6.54
|
%
|
|
|
239,916
|
|
|
|
4,101
|
|
|
|
6.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
7,764,864
|
|
|
|
94,110
|
|
|
|
4.81
|
%
|
|
|
7,417,339
|
|
|
|
87,378
|
|
|
|
4.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
952,082
|
|
|
|
|
|
|
|
|
|
|
|
962,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,716,946
|
|
|
|
|
|
|
|
|
|
|
|
8,379,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
574,776
|
|
|
|
|
|
|
|
|
|
|
|
569,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
9,291,722
|
|
|
|
|
|
|
|
|
|
|
$
|
8,949,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
77,752
|
|
|
|
|
|
|
|
|
|
|
$
|
76,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
|
|
|
3.17
|
%
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
4.31
|
%
|
|
|
|
|
|
|
|
|
|
|
4.18
|
%
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
3.66
|
%
|
38
Provision for Loan Losses
The Corporations provision for loan losses increased $56.3 million or 128.3% from $43.9
million for the nine months ended September 30, 2006 to $100.2 million for the same period in 2007.
For the three months ended September 30, 2007, the provision for loan losses reached $47.4 million,
an increase of $27.0 million or 132.1%, from $20.4 million for the same period in 2006. The
increase in the provision for loan losses was due primarily to increases in non-performing loans
due to the challenging economic conditions in Puerto Rico, requiring the Corporation to increase
the level of its reserve for loan losses. There was an increase in past-due loans (non-performing
loans and accruing loans past-due 90 days or more) which reached $204.3 million as of September 30,
2007, from $127.4 million as of September 30, 2006, and $127.8 million as of December 31, 2006.
Non-performing loans were $197.1 million as of September 30, 2007, an increase of $88.3 million or
81.2%, compared to non-performing loans as of September 30, 2006. The Island Finance operation
registered an increase in the provision for loan losses of $23.9 million for the nine months ended
September 30, 2007 when compared to the same period in 2006. The Island Finance portfolio reflected
non-performing loans of $37.0 million as of September 30, 2007, with a provision for loan losses of
$51.4 million recognized in the nine-month period ended September 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 nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Bank service fees on deposit accounts
|
|
$
|
9,983
|
|
|
$
|
10,047
|
|
|
$
|
3,444
|
|
|
$
|
3,414
|
|
Other service fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card and payment processing fees
|
|
|
8,656
|
|
|
|
11,981
|
|
|
|
2,118
|
|
|
|
4,075
|
|
Mortgage servicing fees
|
|
|
2,182
|
|
|
|
1,929
|
|
|
|
742
|
|
|
|
578
|
|
Trust fees
|
|
|
1,504
|
|
|
|
2,196
|
|
|
|
515
|
|
|
|
792
|
|
Other fees
|
|
|
11,837
|
|
|
|
9,090
|
|
|
|
2,892
|
|
|
|
3,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
34,162
|
|
|
|
35,243
|
|
|
|
9,711
|
|
|
|
11,881
|
|
Broker/dealer, asset management, and insurance fees
|
|
|
49,086
|
|
|
|
43,078
|
|
|
|
16,717
|
|
|
|
13,601
|
|
Gain on sale of securities, net
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of loans
|
|
|
5,121
|
|
|
|
184
|
|
|
|
782
|
|
|
|
188
|
|
Gain on sale of mortgage servicing rights
|
|
|
206
|
|
|
|
69
|
|
|
|
38
|
|
|
|
51
|
|
Trading gains (losses)
|
|
|
1,766
|
|
|
|
(148
|
)
|
|
|
525
|
|
|
|
223
|
|
(Loss) gain on derivatives
|
|
|
(31
|
)
|
|
|
(563
|
)
|
|
|
727
|
|
|
|
747
|
|
Other gains, net
|
|
|
3,505
|
|
|
|
929
|
|
|
|
1,401
|
|
|
|
2,772
|
|
Other
|
|
|
2,405
|
|
|
|
4,299
|
|
|
|
592
|
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,458
|
|
|
$
|
83,091
|
|
|
$
|
30,493
|
|
|
$
|
30,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
The
table below details the breakdown of fees from broker-dealer, asset
management and insurance agency operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
|
(In thousands)
|
|
Broker-dealer
|
|
$
|
21,865
|
|
|
$
|
19,358
|
|
|
$
|
8,341
|
|
|
$
|
4,960
|
|
Asset management
|
|
|
17,764
|
|
|
|
15,025
|
|
|
|
5,968
|
|
|
|
5,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Santander Securities
|
|
|
39,629
|
|
|
|
34,383
|
|
|
|
14,309
|
|
|
|
10,273
|
|
Insurance
|
|
|
9,457
|
|
|
|
8,695
|
|
|
|
2,408
|
|
|
|
3,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,086
|
|
|
$
|
43,078
|
|
|
$
|
16,717
|
|
|
$
|
13,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007, other income reached $96.5 million, a $13.4
million or 16.1% increase when compared to $83.1 million for the same period in 2006. This increase
was due to a higher gain on sale of loans of $5.1 million composed mainly of a gain on sale on
previously charged-off loans of $3.8 million and a $1.3 million gain on sale of mortgage loans.
There were increases in other fees due to a penalty of $1.9 million on the cancellation of certain
structured certificates of deposit, in other gains due to losses on valuation of mortgage loans
available for sale during 2006 of $1.2 million, recognized mortgage servicing rights of $1.0
million and trading gains of $1.9 million. Also, broker-dealer, asset management and insurance fees
reflected an increase of $ 6.0 million, due to increases in broker-dealer and asset management fees
of $5.2 million for the nine-month period ended September 30, 2007 when compared to the same
periods in 2006 and an increase of $0.8 million in insurance fees generated from credit life
commissions related to the SFS operation. These increases were partially offset by a
decrease of $3.3 million in credit card fees due to a reduction in merchant fees at point-of-sale
(POS) terminals due to the sale of the Corporations merchant business to an unrelated third party
during the first quarter of 2007. In April 2007, the Corporation transferred its merchant business
to a subsidiary, MBPR Services, Inc. (MBPR) and subsequently sold the stock of MBPR to an
unrelated third party. For an interim period that ended October 30,
2007, the Corporation provided certain processing and other services to the third party
acquirer. As part of the transaction, the Corporation entered into a long-term marketing alliance
agreement with the third party and will serve as its sponsor with the card associations and network
organizations. The Corporation expects to offer better products and services to its merchant client
base and to obtain certain cost efficiencies as a result of this transaction. The gain on the
transaction of $12.3 million was recognized in the fourth
quarter of 2007.
For the quarter ended September 30, 2007, other income reached $30.5 million, a $0.5 million
or 1.6% decrease when compared to $31.0 million reported for the same period in 2006. This decrease
in other income was due to a decrease of $2.0 million in credit card fees due to a reduction in
merchant fees due to the sale of the Corporations merchant business to an unrelated to the third
party during the first quarter of 2007 and a favorable change in the valuation of mortgage loans
available for sale of $1.2 million for the third quarter of 2006. Also, there were decreases in
rental income on imprinters of $0.2 million due to the sale of merchant business during the first
quarter of 2007 and reduction in swap income of $0.3 million. These reductions were partially
offset by $3.1 million increment in broker-dealer, asset management and insurance fees for the
three months ended September 30, 2007 when compared to the same period in 2006, due to an increase
in commission from broker-dealer and asset management of $4.0 million and a decrease in insurance
fees of $0.9 million due primarily to higher provision for cancellations recorded.
Broker-dealer, asset management and insurance fees increased $6.0 million or 14.0% and $3.1
million or 22.9% for the nine months and three months ended September 30, 2007, respectively, when
compared with the same figures reported in 2006. Santander Securities business includes securities
underwriting and distribution, sales, trading, financial planning, investment advisory services and
securities brokerage services. In addition, Santander Securities provides portfolio management
services through its wholly owned subsidiary, Santander Asset Management Corporation. The
broker-dealer, asset management and insurance operations contributed 51.0% to the Corporations
other income for the nine months ended September 30, 2007 and 51.8% for the same period in 2006 and
54.8% for the quarter ended September 30, 2007 and 43.9% for the same period in 2006.
40
Operating Expenses
The following table presents the detail of other operating expenses for the periods indicated:
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Salaries
|
|
$
|
54,125
|
|
|
$
|
51,971
|
|
|
$
|
18,242
|
|
|
$
|
17,645
|
|
Personnel reduction cost
|
|
|
|
|
|
|
9,608
|
|
|
|
|
|
|
|
7,836
|
|
Stock incentive plans
|
|
|
10,113
|
|
|
|
|
|
|
|
1,825
|
|
|
|
|
|
Pension and other benefits
|
|
|
41,983
|
|
|
|
38,878
|
|
|
|
13,963
|
|
|
|
13,114
|
|
Expenses deferred as loan origination costs
|
|
|
(8,972
|
)
|
|
|
(9,027
|
)
|
|
|
(2,683
|
)
|
|
|
(3,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personnel costs
|
|
|
97,249
|
|
|
|
91,430
|
|
|
|
31,347
|
|
|
|
35,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy costs
|
|
|
17,686
|
|
|
|
16,713
|
|
|
|
6,198
|
|
|
|
5,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment expenses
|
|
|
3,379
|
|
|
|
3,607
|
|
|
|
1,139
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDP servicing expense, amortization and technical services
|
|
|
27,317
|
|
|
|
28,735
|
|
|
|
9,243
|
|
|
|
10,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
8,157
|
|
|
|
7,767
|
|
|
|
2,706
|
|
|
|
2,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business promotion
|
|
|
12,338
|
|
|
|
8,540
|
|
|
|
4,338
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
39,705
|
|
|
|
|
|
|
|
39,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes
|
|
|
8,486
|
|
|
|
8,055
|
|
|
|
3,537
|
|
|
|
2,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
9,824
|
|
|
|
9,858
|
|
|
|
3,441
|
|
|
|
3,436
|
|
Amortization of intangibles
|
|
|
3,675
|
|
|
|
2,928
|
|
|
|
1,247
|
|
|
|
1,077
|
|
Printing and supplies
|
|
|
1,537
|
|
|
|
1,435
|
|
|
|
479
|
|
|
|
444
|
|
Credit card expenses
|
|
|
5,119
|
|
|
|
7,744
|
|
|
|
1,016
|
|
|
|
2,695
|
|
Insurance
|
|
|
3,005
|
|
|
|
1,746
|
|
|
|
1,100
|
|
|
|
607
|
|
Examinations and FDIC assessment
|
|
|
1,455
|
|
|
|
1,451
|
|
|
|
497
|
|
|
|
478
|
|
Transportation and travel
|
|
|
2,208
|
|
|
|
2,007
|
|
|
|
682
|
|
|
|
649
|
|
Repossessed assets provision and expenses
|
|
|
5,705
|
|
|
|
953
|
|
|
|
3,178
|
|
|
|
371
|
|
Collections and related legal costs
|
|
|
906
|
|
|
|
1,199
|
|
|
|
253
|
|
|
|
453
|
|
All other
|
|
|
12,243
|
|
|
|
10,335
|
|
|
|
4,087
|
|
|
|
3,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
45,677
|
|
|
|
39,656
|
|
|
|
15,980
|
|
|
|
13,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-personnel expenses
|
|
|
162,745
|
|
|
|
113,073
|
|
|
|
82,846
|
|
|
|
40,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating expenses
|
|
$
|
259,994
|
|
|
$
|
204,503
|
|
|
$
|
114,193
|
|
|
$
|
75,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Efficiency Ratio, on a tax equivalent basis, for the nine months ended September 30, 2007
and 2006 was 65.59% and 67.25%, respectively, reflecting an improvement of 166 basis points. This
improvement was mainly the result of higher net interest income. As
previously discussed, the Corporation recorded an estimated impairment charge of $34.3 million for goodwill and $5.4 million for trade name. These impairment charges did not result in cash
expenditures and will not result in future cash expenditures. During the nine months ended
September 30, 2007 the Corporation recognized compensation expense of $5.8 million pursuant to a
Long Term Incentive Plan to certain employees. In addition, the Corporation recognized a
compensation expense of $4.3 million related to the grant by Santander Group of 100 shares to each
employee of the Corporation. Excluding the effect of these incentive plans the Efficiency Ratio, on
a tax equivalent basis, would have been 62.58% a 467 basis point
improvement over the same period in
2006.
For the nine-month period ended September 30, 2007, compared to the same period in 2006,
operating expenses increased $55.5 million or 27.1%, of which $39.7 million relate to goodwill and
trade name impairment charges, $5.8 million relate to other
operating expenses of SFS and $10.1 million expenses relate to the stock incentive plans
41
recognized during the year
of 2007 which was partially offset by a personnel reduction program during 2006 of 9.6 million.
There were also increases in business promotion, repossessed assets provision and expenses and
salaries and other benefits of $4.7 million, $4.7 million and $2.6 million, respectively. These
increases were partially offset by a decrease in credit card expenses of $2.5 million due to the
sale of the Corporations merchant business to an unrelated third party during the first quarter of
2007. Excluding stock incentive plans expense recognized, expenses
related to a personnel reduction program in 2006 and impairment
charges recognized during the third quarter of 2007, operating
expenses for the nine months ended September 30, 2007 reflected
an increase of $15.3 million of 7.8% compared to the same period
in 2006.
The Efficiency Ratio, on a tax equivalent basis, for the quarters ended September 30, 2007 and
2006 was 68.81% and 70.56%, respectively, reflecting an improvement of 175 basis points. This
improvement was mainly the result of lower operating expenses and higher net interest income.
During the third quarter of 2007 the Corporation recognized
$39.7 million related to goodwill and
trade name impairment charges and compensation expense of $1.8 million pursuant to a Long Term
Incentive Plan to certain employees. Excluding the effect of this incentive plan, the Efficiency
Ratio, on a tax equivalent basis, would have been 67.13%, a 343 basis point improvement over the
same quarter of 2006.
Operating expenses increased $38.6 million or 51.0% from $75.6 million for the quarter ended
September 30, 2006 to $114.2 million for the quarter ended September 30, 2007. This increase was
primarily due to a goodwill and trade name estimated impairment
charges of $39.7 million and compensation expense recognized during the third quarter of 2007 of $1.8 million pursuant to
the stock incentive plans sponsored by Santander Group described above, partially offset by expenses related to a
personnel reduction program during the third quarter of 2006 of $7.8 million. These changes were
partially offset by increases in repossessed assets provision and expenses of $2.8 million, in
business promotion of $1.5 million and salaries and other benefits of $2.1 million and a decrease
in credit card expenses of $1.7 million. Excluding stock
incentive plans expense recognized for the
third quarter of 2007, expenses related to a personnel reduction program for the same quarter in
2006 and impairment charges recognized during the third quarter of
2007, operating expenses for the quarter ended September 30, 2007 reflected an increase of $4.9
million or 7.2% compared to the same period in 2006.
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%. However, 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. A temporary two-year surtax of 2.5% applicable to taxable years
beginning after December, 31, 2004, increased the maximum marginal corporate income tax rate from
39% to 41.5% for 2005 and 2006. An additional 2% surtax was imposed
on the Corporation for a period of one year commencing on January 1, 2006 as a result of the Puerto
Rico Government deficit. These surtaxes increased the maximum marginal corporate income tax rate to
43.5% for the year ended December 31, 2006. These surtaxes are no longer in effect.
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 a
dividend 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 after December 31, 2003 exceeds 40% of the banks net income in the taxable
year commenced on July 1, 2003, 30% of the banks net income in the taxable year commencing on July
1, 2004, and 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.
The Corporation adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect of
applying this interpretation has been recorded as a decrease of $0.5 million to Retained Earnings
with a corresponding increase in the liability for unrecognized tax benefits. Penalties and tax
related interest expense are reported as a component of income tax expense. As of the date of
adoption and after the impact of recognizing the increase in liability noted above, the
Corporations unrecognized tax benefits totaled $12.7 million, which included $1.8 million of
interest and penalties. For the nine months ended September 30, 2007, the Corporation recognized
$798,000 of interest and penalties for uncertain tax positions recognized during 2006 and $ 2.7
million on new tax positions recognized during 2007. At September 30, 2007, the Corporation had
$14.6 million of unrecognized tax benefits which, if recognized, would decrease the effective
income tax
42
rate in future periods. The Corporation recognized a tax benefit of $1.6 million as a result of the
expiration of the statute of limitations related to the tax position.
The provision for income tax amounted to $4.2 million, or (13.8)% of pretax earnings, for the
nine months ended September 30, 2007 compared to $16.9 million, or 33.8% of pretax earnings, for
the same period in 2006. For the quarters ended September 30, 2007 and 2006, the Corporation had an
income tax benefit of $4.9 million or (8.9)% of pretax earnings and income tax provision of $1.0
million or 10.0% of pretax earnings, respectively. The decrease in the provision for income tax
during the nine-month period ended September 30, 2007 was due in primarily to lower taxable income
in 2007 compared to the same period in 2006 and the elimination of the temporary surtaxes imposed
by the Commonwealth of Puerto Rico for fiscal years 2005 and 2006.
For the quarter and nine-month period ended September, 30, 2007 the Corporation recorded a
non-cash charge of $20.0 million related to establishing a valuation allowance against its
deferred tax assets from its consumer finance business primarily
related to the goodwill and trade name impairment charges. In accordance with SFAS No. 109 Accounting
for Income Taxes (SFAS No. 109), management evaluates its deferred income taxes on a quarterly basis to
determine if valuation allowances are required. SFAS No. 109 prescribes that an entity conduct an
assessment to determine whether valuation allowances should be established based on the
consideration of all available evidence using a more likely than not criteria. In reaching such
determination, significant weighting is given to data and evidence that can be objectively
verified. The Corporation currently has substantial net operating loss carryforwards from its
consumer finance business. The Corporation has recorded a 100% valuation allowance against the
deferred tax assets from its consumer finance business due to the uncertainty of their ultimate
realization.
43
Santander
Financial Services
The table below presents condensed results of operations and selected financial information of
Santander
Financial Services (Island Finance) for the quarters and nine months ended September 30, 2007 and 2006 including certain
supplemental information, such as insurance commissions related to the Island Finance loan
portfolio and interest expense mark-up charged by the Corporation. The results of Island Finance
are included within the results of the Corporations Consumer Finance business segment. Please
refer to Note 13 Segment Information to the unaudited consolidated financial statements in this
Quarterly Report on Form 10Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Nine-Month Period Ended
|
|
Santander Financial Services
|
|
Sep-07
|
|
|
Sep-06
|
|
|
Sep-07
|
|
|
Sep-06*
|
|
Condensed Statements of Operations
|
|
($ in thousands)
|
|
|
($ in thousands)
|
|
Interest income
|
|
$
|
34,590
|
|
|
$
|
35,078
|
|
|
$
|
105,947
|
|
|
$
|
83,149
|
|
Interest expense
|
|
|
(8,904
|
)
|
|
|
(10,538
|
)
|
|
|
(28,112
|
)
|
|
|
(24,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
25,686
|
|
|
|
24,540
|
|
|
|
77,835
|
|
|
|
58,693
|
|
Provision for loan losses
|
|
|
(17,300
|
)
|
|
|
(14,400
|
)
|
|
|
(51,374
|
)
|
|
|
(27,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
8,386
|
|
|
|
10,140
|
|
|
|
26,461
|
|
|
|
31,180
|
|
Other income
|
|
|
298
|
|
|
|
175
|
|
|
|
2,367
|
|
|
|
202
|
|
Goodwill and
other intangibles impairment charges
|
|
|
(39,705
|
)
|
|
|
|
|
|
|
(39,705
|
)
|
|
|
|
|
Operating expenses
|
|
|
(12,798
|
)
|
|
|
(13,036
|
)
|
|
|
(39,018
|
)
|
|
|
(31,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before tax
|
|
|
(43,999
|
)
|
|
|
(2,721
|
)
|
|
|
(49,895
|
)
|
|
|
(414
|
)
|
Income tax
(expense) benefit
|
|
|
(2,778
|
)
|
|
|
1,108
|
|
|
|
(487
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(46,777
|
)
|
|
$
|
(1,613
|
)
|
|
$
|
(50,382
|
)
|
|
$
|
(264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
information of Santander
Financial Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit insurance commissions, net of income tax
|
|
$
|
737
|
|
|
$
|
1,040
|
|
|
$
|
2,431
|
|
|
$
|
2,126
|
|
Interest expense mark-up, net of income tax
|
|
$
|
191
|
|
|
$
|
773
|
|
|
$
|
572
|
|
|
$
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Nine-Month Period Ended
|
Other Selected Information
|
|
Sep-07
|
|
Sep-06
|
|
Sep-07
|
|
Sep-06*
|
Total Assets
|
|
$
|
668,981
|
|
|
$
|
772,375
|
|
|
$
|
668,981
|
|
|
$
|
772,375
|
|
Gross loans, net of unearned income
|
|
|
607,624
|
|
|
|
638,246
|
|
|
|
607,624
|
|
|
|
638,246
|
|
Net loans
|
|
|
546,197
|
|
|
|
609,350
|
|
|
|
546,197
|
|
|
|
609,350
|
|
Allowance for loan losses
|
|
|
61,427
|
|
|
|
28,896
|
|
|
|
61,427
|
|
|
|
28,896
|
|
Non performing loans
|
|
|
37,039
|
|
|
|
27,052
|
|
|
|
37,039
|
|
|
|
27,052
|
|
Accruing loans past due 90 days or more
|
|
|
1,822
|
|
|
|
11,050
|
|
|
|
1,822
|
|
|
|
11,050
|
|
Net interest margin
|
|
|
18.39
|
%
|
|
|
16.03
|
%
|
|
|
17.50
|
%
|
|
|
16.70
|
%
|
|
|
|
(*)
|
|
includes seven months of operations
|
As
a result of the current unfavorable economic environment in Puerto
Rico, SFSs short-term financial performance and profitability have declined
significantly during 2007, caused by reduced lending activity and
increases in nonperforming assets and
charge-offs. The Corporation decided to perform the impairment test of the goodwill and other
intangibles of SFS as of July 1, 2007, a quarter in advance of the scheduled annual impairment
test. The Corporation completed the first step of the impairment test and determined that the
carrying amount of the goodwill and other intangibles assets of SFS
exceeds their fair value, thereby requiring performance of the
second step of the impairment test to calculate the amount of the impairment. The Corporation, with
the assistance of an independent valuation firm, has begun the second step of the impairment test
and expects the resulting valuation report to be completed during the fourth quarter of 2007.
However, because an impairment loss is probable and can be reasonably estimated, the Corporation
has, in accordance with SFAS No. 142, recorded preliminary estimated non-cash impairment charges
of approximately $34.3 million and $5.4 million, which have been recorded as reductions to goodwill
and trade name, respectively. The estimated impairment charges were calculated based on market
and income approach valuation methodologies. The Corporation may
change these estimates during the fourth quarter of 2007, as necessary, upon the
completion of the valuation report, which will include additional procedures for determining the
fair value of SFSs assets and liabilities.
44
These impairment charges did not result in cash expenditures and will not
result in future cash expenditures.
In
conjunction with the impairment test mentioned in the previous paragraph the
Corporation also conducted an impairment test of its intangible assets
with definite lives associated with its consumer finance business 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 indicates that the
carrying amount of such assets may not be fully recoverable. The determination of recoverability was based on an estimate of
undiscounted future cash flows resulting from the use of the assets
and their eventual disposition. The result of this determination
disclosed that undiscounted future cash flows from the use of the
assets and their eventual disposition exceeded its current carrying
amount and, thus, impairment was not required as
of September 30, 2007.
Upon
completion of the interim impairment test, the Corporation plans to conduct an update
of its annual impairment test as of September 30, 2007 for its consumer
finance business intangibles with the assistance of an independent valuation specialist.
The Corporation will conduct a goodwill valuation for all other segments
during the fourth quarter of 2007 and any impairment loss will be recognized as of December
31, 2007.
Financial Position September 30, 2007
Assets
The Corporations assets reached $9.2 billion as of September 30, 2007, a 0.6% or $57.1
million increase when compared to total assets of $9.2 billion at December 31, 2006 and a 0.7% or
$67.2 million increase when compared to total assets of $9.2 billion at September 30, 2006. As of
September 30, 2007 there were increases of $63.6 million in net loans, including loans held for
sale, and $10.5 million in investment securities when compared to December 31, 2006. There was an
increase in net loans of $304.9 million partially offset by decreases in cash and cash equivalents
and investment securities of $127.5 million and $59.3 million, respectively when compared with
figures reported at September 30, 2006.
The composition of the loan portfolio, including loans held for sale, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Dec. 31,
|
|
|
Sep. 07/Dec.06
|
|
|
September 30,
|
|
|
Sep.07/Sep.06
|
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
2006
|
|
|
Variance
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,442,827
|
|
|
$
|
2,489,699
|
|
|
$
|
(46,872
|
)
|
|
$
|
2,421,725
|
|
|
$
|
21,102
|
|
Construction
|
|
|
492,970
|
|
|
|
435,182
|
|
|
|
57,788
|
|
|
|
353,404
|
|
|
|
139,566
|
|
Mortgage
|
|
|
2,728,306
|
|
|
|
2,654,540
|
|
|
|
73,766
|
|
|
|
2,554,720
|
|
|
|
173,586
|
|
Consumer
|
|
|
670,460
|
|
|
|
606,214
|
|
|
|
64,246
|
|
|
|
581,515
|
|
|
|
88,945
|
|
Consumer Finance
|
|
|
607,943
|
|
|
|
625,266
|
|
|
|
(17,323
|
)
|
|
|
638,246
|
|
|
|
(30,303
|
)
|
Leasing
|
|
|
102,297
|
|
|
|
132,655
|
|
|
|
(30,358
|
)
|
|
|
139,893
|
|
|
|
(37,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
7,044,803
|
|
|
|
6,943,556
|
|
|
|
101,247
|
|
|
|
6,689,503
|
|
|
|
355,300
|
|
Allowance for loan losses
|
|
|
(144,544
|
)
|
|
|
(106,863
|
)
|
|
|
(37,681
|
)
|
|
|
(94,157
|
)
|
|
|
(50,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
6,900,259
|
|
|
$
|
6,836,693
|
|
|
$
|
63,566
|
|
|
$
|
6,595,346
|
|
|
$
|
304,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation experienced net loan growth of 4.6% year over year. This growth was primarily
due to mortgage and construction loans reflecting growth of $173.6 million or 6.8% and $139.6
million or 39.5%, respectively. Credit cards and personal installment loans at Banco Santander
Puerto Rico also reflected growth of $88.9 million or 15.3%. Residential mortgage loan origination
for the third quarter of 2007 was $125.2 million or 47.3% less than the $237.7 million originated
during the same quarter last year. For the nine months ended September 30, 2007 residential
mortgage loan origination was $467.5 million or 29.9% less than the $667.2 million originated
during the same period in 2006. The total of mortgage loans sold during the third quarter of 2007
was $50.5 million. For the nine months ended September 30, 2007, mortgage loans sold were $201.4
million versus $94.4 million during the nine months ended September 30, 2006.
Commercial banking provides financial services and products primarily to middle-market
companies. These products and services are sold through a group of relationship managers and
officers distributed among six regions throughout the island. The Corporation has established the
so-called Business Focus Meetings between credit and relationship officers at the middle-market
and corporate segments in order to facilitate and expedite business transactions. The
Corporate/Institutional divisions coordinate all banking and credit related services to customers
through a group of corporate relationship officers. The corporate group provides financial
services and products basically to corporations with annual revenues over $75 million. The Consumer
Lending division provides financing solutions to individuals in the form of unsecured personal
loans, credit cards and overdraft lines. These products are offered through our
retail
45
branch network, sales representatives, telephone banking, and internet. Growth in the consumer
loan portfolio mainly results from the acquisition of Island Finance. Island Finance has a network
of 69 branches throughout Puerto Rico offering consumer finance products. Due to more effective
marketing strategies, streamlining of the loan application and approval process with continued
stringent credit policies, and innovative products and massive consumer and credit card campaigns,
and the increased branch network, the Corporation has been able to continue growing its loan
portfolio.
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.
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.
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 allowance for loan
losses section for further information.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
$
|
127,916
|
|
|
$
|
87,695
|
|
Allowance acquired (Island Finance)
|
|
|
|
|
|
|
17,830
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
100,224
|
|
|
|
43,913
|
|
|
|
47,350
|
|
|
|
20,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,087
|
|
|
|
128,585
|
|
|
|
175,266
|
|
|
|
108,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
7,217
|
|
|
|
8,539
|
|
|
|
3,733
|
|
|
|
1,316
|
|
Construction
|
|
|
2,632
|
|
|
|
|
|
|
|
2,632
|
|
|
|
|
|
Mortgage
|
|
|
1,768
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
Consumer
|
|
|
19,351
|
|
|
|
11,413
|
|
|
|
7,634
|
|
|
|
4,051
|
|
Consumer Finance
|
|
|
32,080
|
|
|
|
17,171
|
|
|
|
15,890
|
|
|
|
9,552
|
|
Leasing
|
|
|
2,349
|
|
|
|
1,592
|
|
|
|
864
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,397
|
|
|
|
38,715
|
|
|
|
31,371
|
|
|
|
15,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,050
|
|
|
|
1,725
|
|
|
|
251
|
|
|
|
505
|
|
Consumer
|
|
|
612
|
|
|
|
1,284
|
|
|
|
183
|
|
|
|
318
|
|
Consumer Finance
|
|
|
852
|
|
|
|
723
|
|
|
|
129
|
|
|
|
653
|
|
Leasing
|
|
|
340
|
|
|
|
555
|
|
|
|
86
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,854
|
|
|
|
4,287
|
|
|
|
649
|
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
62,543
|
|
|
|
34,428
|
|
|
|
30,722
|
|
|
|
13,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
144,544
|
|
|
$
|
94,157
|
|
|
$
|
144,544
|
|
|
$
|
94,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
2.05
|
%
|
|
|
1.41
|
%
|
|
|
2.05
|
%
|
|
|
1.41
|
%
|
Recoveries to charge-offs
|
|
|
4.36
|
%
|
|
|
11.07
|
%
|
|
|
2.07
|
%
|
|
|
10.22
|
%
|
Annualized net charge-offs to average loans
|
|
|
1.19
|
%
|
|
|
0.71
|
%
|
|
|
1.73
|
%
|
|
|
0.84
|
%
|
The Corporations allowance for loan losses was $144.5 million or 2.05% of period-end loans at
September 30, 2007 a 64 basis point increase compared to $94.2 million, or 1.41% of period-end
loans at September 30, 2006. The $144.5 million in the allowance for loan losses is comprised of
$61.4 million related to the consumer finance operations with a provision for loan losses of $51.4
million for the nine months ended September 30, 2007 and $83.1 million for commercial banking with
a provision for loan losses of $48.8 million for the same period.
The increment in the allowance for loan losses to period-end loan was partially due to
increases in non-performing loans and loans past due 90 days or more of $76.9 million or 60.3%,
from $127.4 million at September 30, 2006 to $204.3 million at September 30, 2007.
The ratio of allowance for loan losses to non-performing loans and accruing loans past due 90
days or more was 70.77% and 73.91% at September 30, 2007 and September 30, 2006, respectively,
decreasing 314 basis points. Compared to December 31, 2006, this ratio decreased by 12.85
percentage points from 83.62% at September 30, 2007. Excluding non-performing mortgage loans (for
which the Corporation has historically had a minimal loss experience) this ratio is 120.62% at
September 30, 2007 compared to 147.10% as of September 30, 2006 and 161.30% as of December 31,
2006.
The annualized ratio of net charge-offs to average loans for the nine-month period ended
September 30, 2007 increased 48 basis points to 1.19% from 0.71% for the same period in 2006. This
change was due to an increment in net charge offs during 2007 when compared with figures reported
for the same period in 2006.
At September 30, 2007, impaired loans (loans evaluated individually for impairment) with
related allowance amounted to approximately $110.1 million and $11.9 million, respectively. At
December 31, 2006 impaired loans with related allowance amounted to $57.2 million and $4.4 million,
respectively.
47
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 September 30, 2007, the Corporations total non-performing loans (excluding other real
estate owned) reached $197.1 million or 2.80% of total loans from $106.9 million or 1.54% of total
loans as of December 31, 2006 and from $108.8 million or 1.63% of total loans as of September 30,
2006. The Corporations non-performing loans (excluding Island Finance non-performing loans of
$37.0 million) reflected an increase of $78.3 million or 95.8% compared to non-performing loans as
of September 30, 2006 (excluding Island Finance non-performing loans of $27.1 million) and $78.0
million compared to non-performing loans as of December 31, 2006 (excluding Island Finance
non-performing loans of $24.7 million). The increase of non-performing loans (excluding Island
Finance non-performing loans) is principally due to non-performing commercial loans (including
construction and leasing) which increased $55.3 million, residential mortgages, which increased
$21.1 million and consumer loans which increased $4.1 million when compared to September 30, 2006.
Compared to December 31, 2006, non-performing loans (excluding Island Finance non-performing loans)
reflected an increase of $78.0 million or 94.9%. This increase was composed of increases in
non-performing commercial loans (including construction and leasing), residential mortgages and
consumer loans of $53.6 million, $22.0 million and $2.6 million, respectively.
The
increase of non-performing consumer loans of $9.8 million or
36.92% and $12.3 million or 49.7% compared to non-performing
consumer loans as of September 30, 2006 and December 31,
2006, respectively, result from the weakness in the Puerto Rico
economy. Non-performing loans
and accruing loans past due 90 days or more of the Island Finance portfolio were $38.9 million at
September 30, 2007, reflecting an increase of $4.5 million compared to December 31, 2006 and an
increase of $0.8 million compared to September 30, 2006.
The Corporation continuously monitors non-performing assets and has deployed significant
resources to manage the non-performing loan portfolio. Management
expects to improve its collection efforts by devoting more full time
employees and outside resources. Concurrently, management will
continue with its stringent underwriting and lending criteria.
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing Assets and Past Due Loans
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Commercial and Industrial
|
|
$
|
23,681
|
|
|
$
|
15,549
|
|
|
$
|
14,295
|
|
Construction
|
|
|
50,431
|
|
|
|
3,966
|
|
|
|
3,966
|
|
Mortgage
|
|
|
73,321
|
|
|
|
51,341
|
|
|
|
52,230
|
|
Consumer
|
|
|
10,194
|
|
|
|
7,590
|
|
|
|
6,131
|
|
Consumer Finance
|
|
|
37,039
|
|
|
|
24,731
|
|
|
|
27,052
|
|
Leasing
|
|
|
1,762
|
|
|
|
2,783
|
|
|
|
2,352
|
|
Restructured Loans
|
|
|
694
|
|
|
|
892
|
|
|
|
2,792
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
197,122
|
|
|
|
106,852
|
|
|
|
108,818
|
|
Repossessed Assets
|
|
|
13,738
|
|
|
|
6,173
|
|
|
|
3,988
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
210,860
|
|
|
$
|
113,025
|
|
|
$
|
112,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past-due 90 days or more
|
|
$
|
7,134
|
|
|
$
|
20,938
|
|
|
$
|
18,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing loans to total loans
|
|
|
2.80
|
%
|
|
|
1.54
|
%
|
|
|
1.63
|
%
|
Non-Performing loans plus accruing loans
past due 90 days or more to total loans
|
|
|
2.90
|
%
|
|
|
1.84
|
%
|
|
|
1.90
|
%
|
Non-Performing assets to total assets
|
|
|
2.27
|
%
|
|
|
1.23
|
%
|
|
|
1.23
|
%
|
48
Liabilities
As
of September 30, 2007, total liabilities reached $8.7 billion, an increase of $106.3
million compared to the December 31, 2006 balance. This increase in total liabilities was
principally due to an increase in total deposits of $758.8 million at September 30, 2007 from $5.3
billion at December 31, 2006. This increase was partially offset by a decrease in total borrowings
(comprised of federal funds purchased and other borrowings, securities sold under agreements to
repurchase, commercial paper issued, and term and capital notes) of $631.7 million or 21.4% to $2.3
billion as of September 30, 2007.
Total deposits of $6.1 billion as of September 30, 2007 were composed of $1.6 billion in
brokered deposits and $4.5 billion of customer deposits. Compared to December 31, 2006, brokered
deposits and customer deposits reflected increases of $211.4 million, or 15.7% and $547.3 million
or 13.8%, respectively, as of September 30, 2007. The increase in customer deposits was due to a
certificate of deposit for the amount of $680 million opened by Banco Santander, S.A. in Banco
Santander Puerto Rico, described below.
Total borrowings at September 30, 2007 (comprised of federal funds purchased and other
borrowings, securities sold under agreements to repurchase, commercial paper issued, and term and
capital notes) decreased $631.7 million or 21.4% and $624.9 million or 21.2%, compared to
borrowings at December 31, 2006 and September 30, 2006, respectively.
The $631.7 million decrease for the nine months ended September 30, 2007 when compared with
December 31, 2006 includes a decrease in fed funds purchased and other borrowings of $728.2 million
due to the refinance of the outstanding indebtedness incurred under bridge facility agreement among
the Corporation, Santander Financial and National Australia Bank Limited. Also, there were a
decreases in securities sold under agreements to repurchase of $97.3 million and subordinated
capital notes of $1.3 million. These decreases were partially offset by an increase in commercial
paper issued of $194.1 million as of September 30, 2007.
On September 21, 2007, the Corporation and SFS, entered into a
fully-collateralized Bridge Facility Agreement (the Facility) with Banco Santander Puerto Rico.
The proceeds of the Facility were used to refinance the outstanding indebtedness incurred under the
bridge facility agreement among the Corporation, SFS and National Australia Bank
Limited, and for general corporate purposes. Under the Facility, the Corporation and SFS had available $235 million and $445 million, respectively. The Facility is
fully-collateralized by a certificate of deposit in the amount of $680 million opened by Santander Group, and provided as security for the Facility pursuant
to the terms of a Security Agreement, Pledge and Assignment between
the Bank and Santander Group. The Corporation and SFS each have agreed to pay a fee of 0.10%, on an annualized
basis, to Santander Group in connection with its agreement to collateralize the loan with the
deposit. The amounts drawn under the Facility (the Loan) bear interest at an annual rate equal to
the applicable LIBOR rate plus 0.10% 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 October 3,
2007.
On
October 3, 2007, the Corporation and SFS entered into a Bridge Facility Agreement (the Facility) with National
Australia Bank Limited, through its offshore banking unit (the Lender). The proceeds of the Facility were
used to refinance the outstanding indebtedness incurred under the previously announced agreement among
the Corporation, SFS and Banco Santander Puerto Rico, and for general corporate purposes. Under the
Facility, the Corporation and SFS had available $235 million and $465 million, respectively, all of which
was drawn on October 3, 2007.
The
amounts drawn under the Facility (the Loan) bear interest at an annual rate equal to the applicable LIBOR rate plus 0.265% per annum, commencing on the date of the initial drawdown. Interest
under the Loan is payable in monthly interest periods due on the
24
th
day of each month, with the first
monthly interest payment due on November 24, 2007. The Corporation and SFS did not pay any facility fee
or commission to the Lender in connection with the Loan. The entire principal balance of the Loan is due
and payable on March 24, 2008.
Upon the occurrence and during the continuance of an Event of Default (as defined in the Facility)
under the Facility, the Lender shall have the right to declare the outstanding balance of the Loan, together
with accrued interest and any other amount owing to the Lender, 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 Corporation's and SFS's obligations to pay interest and principal under the Facility are
several and not joint. However, the Corporation and SFS are jointly and severally responsible for all other
amounts payable under the Facility.
All amounts payable by the Corporation and SFS under the Facility shall be made without set-off
or counter-claim, and free and clear of any withholding or deduction in respect of taxes, levies, imposts,
deductions, charges, withholdings or duties of any nature imposed or levied on such payments. The Loan is
guaranteed by Santander Group. The Corporation and SFS will each pay
Santander Group a guarantee fee equal to 10 basis points (0.1%) of the principal amount of the Loan.
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.
49
Capital and Dividends
The Corporation expects no favorable or unfavorable trends that could materially affect its
capital resources.
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 $530.0 million, or 5.7% of total assets at September 30, 2007,
compared to $579.2 million or 6.3% of total assets at December 31, 2006. The $49.2 million decrease
in stockholders equity was composed of net loss of $34.3 million, dividends declared of $22.4
million and cumulative effect of adoption of FIN 48 of $0.5 million. This decrease was partially
offset by a decrease in accumulated other comprehensive loss of $4.0 million and a stock incentive
plan expense recognized as capital contribution of $4.0 million during 2007.
The Corporation declared a cash dividend of $0.48 per common share during the nine-month
period ended September 30, 2007 to all stockholders and expects to continue to pay quarterly
dividends. The current annualized dividend yield is 5.0%.
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 plans 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 nine months ended September 30, 2007 and 2006, the Corporation did not repurchase
any shares of common stock. As of September 30, 2007, 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 September 30, 2007, the Corporations common stock price per share was $12.84, resulting
in a market capitalization of $0.6 billion, including affiliated holdings.
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 September 30, 2007, the Corporation was well capitalized under the regulatory framework
for prompt corrective action. At September 30, 2007 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 September 30, 2007 were 7.61% and 10.69%,
respectively, and the leverage ratio was 5.44%.
50
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 each month. 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
and 9 to the accompanying consolidated financial statements for additional details of the
Corporations derivative transactions as of September 30, 2007 and December 31, 2006.
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 as of September
30, 2007 and December 31, 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
(In thousands)
|
|
Amounts
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)*
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
650,000
|
|
|
$
|
(1,071
|
)
|
|
$
|
|
|
|
$
|
(439
|
)
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
1,034,640
|
|
|
|
(16,269
|
)
|
|
|
(589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,684,640
|
|
|
$
|
(17,340
|
)
|
|
$
|
(589
|
)
|
|
$
|
(439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
(In thousands)
|
|
Amounts
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)*
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
825,000
|
|
|
$
|
(351
|
)
|
|
$
|
|
|
|
$
|
(214
|
)
|
Foreign Currency Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
1,189,740
|
|
|
|
(22,065
|
)
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,014,740
|
|
|
$
|
(22,416
|
)
|
|
$
|
64
|
|
|
$
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
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 the income
statement.
As of September 30, 2007, 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 of $439,000. As of December 31, 2006, the total amount, net of tax, included in
accumulated other comprehensive income pertaining to the cash flow hedges was an unrealized loss of
$214,000.
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 the income statement.
The fair value hedges have maturities through the year 2032 as of September 30, 2007 and
December 31, 2006. The weighted-average rate paid and received on these contracts is 5.47% and
5.10% as of September 30, 2007, and 5.37% and 4.84%, as of December 31, 2006.
The $1.0 billion and $1.2 billion fair value hedges are associated to the swapping of fixed
rate debt as of September 30, 2007 and December 31, 2006, respectively. 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,
payments 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, an
independent division 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 September 30, 2007
and December 31, 2006, respectively:
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,329,595
|
|
|
$
|
25
|
|
|
$
|
446
|
|
Interest Rate Caps
|
|
|
28,396
|
|
|
|
|
|
|
|
(1
|
)
|
Other
|
|
|
3,870
|
|
|
|
121
|
|
|
|
113
|
|
Equity Derivatives
|
|
|
310,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,672,541
|
|
|
$
|
146
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,628,109
|
|
|
$
|
(422
|
)
|
|
$
|
(592
|
)
|
Interest Rate Caps
|
|
|
70,984
|
|
|
|
3
|
|
|
|
2
|
|
Other
|
|
|
1,988
|
|
|
|
9
|
|
|
|
49
|
|
Equity Derivatives
|
|
|
307,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
4,008,137
|
|
|
$
|
(410
|
)
|
|
$
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The notional amount represents the gross sum of long and short.
|
53
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 September 30, 2007, was negative $2.6
billion or -29.0% 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 September 30, 2007 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.
54
SANTANDER BANCORP
MATURING GAP ANALYSIS
As of September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
334,169
|
|
|
$
|
28,649
|
|
|
$
|
252,045
|
|
|
$
|
686,645
|
|
|
$
|
109,779
|
|
|
$
|
|
|
|
$
|
108,606
|
|
|
$
|
1,519,893
|
|
Deposits in Other Banks
|
|
|
132,827
|
|
|
|
|
|
|
|
|
|
|
|
5,397
|
|
|
|
|
|
|
|
|
|
|
|
132,507
|
|
|
|
270,731
|
|
Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,278,231
|
|
|
|
273,508
|
|
|
|
378,990
|
|
|
|
231,696
|
|
|
|
193,485
|
|
|
|
85,759
|
|
|
|
103,455
|
|
|
|
2,545,124
|
|
Construction
|
|
|
462,422
|
|
|
|
2,851
|
|
|
|
12,212
|
|
|
|
8,539
|
|
|
|
3,050
|
|
|
|
1,748
|
|
|
|
2,148
|
|
|
|
492,970
|
|
Consumer
|
|
|
358,769
|
|
|
|
221,092
|
|
|
|
460,175
|
|
|
|
202,803
|
|
|
|
40,110
|
|
|
|
|
|
|
|
(4,546
|
)
|
|
|
1,278,403
|
|
Mortgage
|
|
|
81,368
|
|
|
|
246,852
|
|
|
|
659,851
|
|
|
|
583,354
|
|
|
|
1,030,412
|
|
|
|
111,761
|
|
|
|
14,708
|
|
|
|
2,728,306
|
|
Fixed and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409,887
|
|
|
|
409,887
|
|
|
|
|
Total Assets
|
|
$
|
2,647,786
|
|
|
$
|
772,952
|
|
|
$
|
1,763,273
|
|
|
$
|
1,718,434
|
|
|
$
|
1,376,836
|
|
|
$
|
199,268
|
|
|
$
|
766,765
|
|
|
$
|
9,245,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Funds Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
$
|
403,660
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
403,660
|
|
Repurchase Agreements
|
|
|
108,300
|
|
|
|
125,006
|
|
|
|
300,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
733,306
|
|
Federal FundsPurchased and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
900,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900,220
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
1,860,658
|
|
|
|
982,276
|
|
|
|
566,410
|
|
|
|
276,903
|
|
|
|
41,007
|
|
|
|
18,510
|
|
|
|
(19,733
|
)
|
|
|
3,726,031
|
|
Demand Deposits and Savings
Accounts
|
|
|
140,894
|
|
|
|
|
|
|
|
158,255
|
|
|
|
339,802
|
|
|
|
|
|
|
|
|
|
|
|
4,729
|
|
|
|
643,680
|
|
Transactional Accounts
|
|
|
405,202
|
|
|
|
222,426
|
|
|
|
533,924
|
|
|
|
541,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,703,025
|
|
Term and Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
26,677
|
|
|
|
15,531
|
|
|
|
243,342
|
|
|
|
|
|
|
|
81
|
|
|
|
285,631
|
|
Other Liabilities and Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849,761
|
|
|
|
849,761
|
|
|
|
|
Total Liabilities and Capital
|
|
$
|
3,818,934
|
|
|
$
|
1,329,708
|
|
|
$
|
1,585,266
|
|
|
$
|
1,373,709
|
|
|
$
|
284,349
|
|
|
$
|
18,510
|
|
|
$
|
834,838
|
|
|
$
|
9,245,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Financial
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (Assets)
|
|
$
|
2,263,775
|
|
|
$
|
423,931
|
|
|
$
|
1,818,552
|
|
|
$
|
277,688
|
|
|
$
|
224,289
|
|
|
$
|
6,000
|
|
|
$
|
|
|
|
$
|
5,014,235
|
|
Interest Rate Swaps
(Liabilities)
|
|
|
2,874,830
|
|
|
|
648,636
|
|
|
|
1,345,052
|
|
|
|
67,840
|
|
|
|
71,877
|
|
|
|
6,000
|
|
|
|
|
|
|
|
5,014,235
|
|
Caps
|
|
|
20,515
|
|
|
|
6,268
|
|
|
|
681
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,396
|
|
Caps Final Maturity
|
|
|
20,515
|
|
|
|
6,268
|
|
|
|
681
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,396
|
|
|
|
|
GAP
|
|
$
|
(1,782,203
|
)
|
|
$
|
(781,461
|
)
|
|
$
|
651,507
|
|
|
$
|
554,573
|
|
|
$
|
1,244,899
|
|
|
$
|
180,758
|
|
|
$
|
(68,073
|
)
|
|
$
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(1,782,203
|
)
|
|
$
|
(2,563,664
|
)
|
|
$
|
(1,912,157
|
)
|
|
$
|
(1,357,584
|
)
|
|
$
|
(112,685
|
)
|
|
$
|
68,073
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
Cumulative interest rate gap to
earning assets
|
|
|
-20.17
|
%
|
|
|
-29.02
|
%
|
|
|
-21.64
|
%
|
|
|
-15.37
|
%
|
|
|
-1.28
|
%
|
|
|
0.77
|
%
|
|
|
|
|
|
|
|
|
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.
55
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 has decided to maintain its negative interest rate gap in the current yield curve
environment. However it is not yet prepared to increase the duration of its investment portfolio
with new acquisitions of securities until some steepening in the yield curve is observed. Any
increase in the duration of its equity will only be achieved by an increase in the commercial
activity of the Bank.
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 $40 million of maximum NIM loss for
a 1% parallel shock and $150 million maximum MVE loss for a 1% parallel shock.
As of September 30, 2007, 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 $24.0
million if market rates were to increase 100 basis points immediately parallel across the yield
curve, less than the $40.0 million limit. For purposes of the Market Value Shock Report it was
determined that the Corporation had a potential loss of approximately $98.4 million if market rates
were to increase 100 basis points immediately parallel across the yield curve, less than the $150.0
million limit. The tables below present a summary of the Corporations net interest margin and
market value shock reports, considering several scenarios as of September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST MARGIN SHOCK REPORT
|
|
|
September 30, 2007
|
(In millions)
|
|
-200 BPs
|
|
-100 BPs
|
|
-50 BPs
|
|
Base Case
|
|
+50 BPs
|
|
+100 BPs
|
|
+200 BPs
|
Gross Interest Margin
|
|
$
|
376.3
|
|
|
$
|
354.6
|
|
|
$
|
343.5
|
|
|
$
|
332.0
|
|
|
$
|
320.1
|
|
|
$
|
308.0
|
|
|
$
|
285.5
|
|
Sensitivity
|
|
$
|
44.3
|
|
|
$
|
22.6
|
|
|
$
|
11.5
|
|
|
|
|
|
|
$
|
(11.9
|
)
|
|
$
|
(24.0
|
)
|
|
$
|
(46.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARKET VALUE SHOCK REPORT
|
|
|
September 30, 2007
|
(In millions)
|
|
-200 BPs
|
|
-100 BPs
|
|
-50 BPs
|
|
Base Case
|
|
+50 BPs
|
|
+100 BPs
|
|
+200 BPs
|
Market Value of Equity
|
|
$
|
730.2
|
|
|
$
|
693.9
|
|
|
$
|
654.4
|
|
|
$
|
609.7
|
|
|
$
|
558.6
|
|
|
$
|
511.3
|
|
|
$
|
419.7
|
|
Sensitivity
|
|
$
|
120.5
|
|
|
$
|
84.2
|
|
|
$
|
44.7
|
|
|
|
|
|
|
$
|
(51.1
|
)
|
|
$
|
(98.4
|
)
|
|
$
|
(190.0
|
)
|
As of September 30, 2007 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.
56
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 September 30, 2007, the Corporation had $2.2 billion in
unsecured lines of credit ($1.8 billion available) and $11.9 billion in collateralized lines of
credit with banks and financial entities ($8.2 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 $2.1 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
September 21, 2007, the Corporation and SFS entered into a
fully-collateralized Bridge Facility Agreement (the Facility) with Banco Santander Puerto Rico.
The proceeds of the Facility were used to refinance the outstanding indebtedness incurred under the
bridge facility agreement among the Corporation, SFS and National Australia Bank
Limited, and for general corporate purposes. Under the Facility, the
Corporation and SFS had available $235 million and $445 million, respectively. The Facility is
fully-collateralized by a certificate of deposit in the amount of
$680 million opened by Santander Group and provided as security for the Facility pursuant
to the terms of a Security Agreement, Pledge and Assignment between
the Bank and Santander Group. The Corporation and SFS each have agreed to pay a fee of 0.10%, on an annualized
basis, to Santander Group in connection with its agreement to collateralize the loan with the
deposit. The amounts drawn under the Facility (the Loan) bear interest at an annual rate equal to
the applicable LIBOR rate plus 0.10% 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 October 3,
2007.
On
October 3, 2007, the Corporation and SFS entered into a Bridge Facility Agreement (the Facility) with National
Australia Bank Limited, through its offshore banking unit (the Lender). The proceeds of the Facility were
used to refinance the outstanding indebtedness incurred under the previously announced agreement among
the Corporation, SFS and Banco Santander Puerto Rico, and for general corporate purposes. Under the
Facility, the Corporation and SFS had available $235 million and $465 million, respectively, all of which
was drawn on October 3, 2007.
The
amounts drawn under the Facility (the Loan) bear interest at an annual rate equal to the applicable LIBOR rate plus 0.265% per annum, commencing on the date of the initial drawdown. Interest
under the Loan is payable in monthly interest periods due on the
24
th
day of each month, with the first
monthly interest payment due on November 24, 2007. The Corporation and SFS did not pay any facility fee
or commission to the Lender in connection with the Loan. The entire principal balance of the Loan is due
and payable on March 24, 2008.
Upon the occurrence and during the continuance of an Event of Default (as defined in the Facility)
under the Facility, the Lender shall have the right to declare the outstanding balance of the Loan, together
with accrued interest and any other amount owing to the Lender, 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
Corporation's and SFSs obligations to pay interest and principal under the Facility are
several and not joint. However, the Corporation and SFS are jointly and severally responsible for all other
amounts payable under the Facility.
All amounts payable by the Corporation and SFS under the Facility shall be made without set-off
or counter-claim, and free and clear of any withholding or deduction in respect of taxes, levies, imposts,
deductions, charges, withholdings or duties of any nature imposed or levied on such payments. The Loan is
guaranteed by Santander Group. The Corporation and SFS will each pay
Santander Group a guarantee fee equal to 10 basis points (0.1%) of the principal amount of the Loan.
In December 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.
The Corporations parent company, Santander Group, sponsors a Long Term Incentive Plan (the
Plan) for certain of its employees and those of its subsidiaries, including the Corporation. The
Corporations Board of Directors approved the Plan in December 2006, which provides for settlement
in cash to participating employees. The Corporation will accrue the liability and recognize monthly
compensation expense over the fourteen month period from December 2006 to January 2008,
when the plan becomes exercisable. The cost of the plan will be reimbursed to the Corporation by
Santander Group, at which time it will be recognized as a capital contribution.
57
During the second quarter of 2007, the Corporation recognized a compensation expense related
to the grant by Santander Group of 100 shares of its stock to all employees of Santander Groups
operating entities as part of this years celebration of Santander Group 150
th
Anniversary. The settlement of this grant was in August of 2007, at which time the compensation
expense was reimbursed to the Corporation by an affiliate and recognized as a capital contribution.
In April 2007, the Bank transferred its merchant business to a subsidiary, MBPR Services, Inc.
(MBPR). The Bank subsequently sold the stock of MBPR to an unrelated third party. For an interim
period that ended October 30, 2007, the Bank provided certain
processing and other services to the third party acquirer. The gain on the transaction of
$12.3 million was recognized in the fourth quarter of 2007. As part of the transaction, the Bank entered
into a long-term marketing alliance agreement with the third party and will serve as its sponsor
with the card associations and network organizations. The Bank expects to offer better
products and services to its merchant client base and to obtain certain cost efficiencies as a
result of this transaction.
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 September 30, 2007, the Corporation
had a liquidity ratio of 10.27%. At September 30, 2007, the Corporation had total available liquid
assets of $0.9 billion. The Corporation believes it has sufficient liquidity to meet current
obligations.
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.
58
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 acquisition of Island Finance on February 28, 2006 is material to the Corporations
consolidated financial statements and as such represents a material change in internal control
over financial reporting. Changes to certain processes, information technology systems and other
components of internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934) resulting from the acquisition of Island Finance may
occur and are in the process of being evaluated by management as integration activities are
implemented. Management intends to complete its assessment of the effectiveness of internal
controls over financial reporting for the acquired business for the 2007 annual management report
on internal control over financial reporting.
Changes in Internal Controls
With the exception of the Island Finance acquisition as noted above, there have been no
changes in the Corporations internal controls over financial reporting during the fiscal quarter
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.
59
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, 2006.
ITEM 1A. RISK FACTORS
Except as noted below, there have been no material changes in risk factors as previously
disclosed under Item 1A. of the Corporations Form 10-K for the year ended December 31, 2006.
Continued deterioration in economic conditions in Puerto Rico exposes the Corporation to greater
risk.
The Corporations financial activities and credit exposure are concentrated in Puerto Rico.
As a consequence, the Corporations financial condition and results of operations are highly
dependent on Puerto Ricos economic conditions. Any business disruption resulting from a prolonged
economic recession, adverse political and economic events, and/or any natural disasters i.e.,
hurricanes could further reduce lending activity and result in
further increases in nonperforming assets and
charge-offs, thus affecting the Corporations financial performance and profitability in the
short-term.
The Puerto Rican economy is in the midst of an economic recession that has deepened in recent
months according to the Coincident Index of Economic Activity published by Puerto Rico Planning
Board. The index declined from -1.0% in the first quarter of 2007 to -2.7% in the second quarter,
evidencing a weakness in the economy. As of August 2007, the labor market remained fragile with
nonfarm employment declining 1.6%, compared to the same period in 2006, yet the unemployment rate
declined by 0.8% as a result of a reduction in the labor force
participation rate. Construction
activity continues to be adversely affected with the value of construction permits and cement sales
each falling by approximately 12.0% during the second quarter of 2007. In addition, retail sales adjusted
for inflation remained weak with total sales declining 2.0% as of July 2007 and the sale of new
automobile units dropping 17% as of August 2007. The downward trend in retail sales reflects
weakness in the consumer confidence and erosion in purchasing power.
The ongoing economic environment and uncertainties in Puerto Rico may continue to have an
adverse effect on the quality of the Corporations loan portfolios and may result in a rise in
delinquency rates and charge offs, until the economic condition in Puerto Rico improves. These
concerns may also impact growth in interest and non interest income. Although the Corporations
management utilizes its best judgment in providing for loan losses, there can be no assurance that
management has accurately estimated the level of probable loan losses or that the Corporation will
not have to increase its provisions for loan losses in the future as a result of future increases
in non-performing loans or for other reasons beyond its control. Any such increases in the
Corporations provisions for loan and lease losses could have a material adverse impact on the
Corporations future financial condition and results of operations.
As
a result of the current unfavorable economic environment in Puerto
Rico, SFSs short-term financial performance and profitability have declined
significantly during 2007, caused by reduced lending activity and
increases in nonperforming assets and
charge-offs. The Corporation decided to perform the impairment test of the goodwill and other
intangibles of SFS as of July 1, 2007, a quarter in advance of the scheduled annual impairment
test. The Corporation completed the first step of the impairment test and determined that the
carrying amount of the goodwill and other intangibles assets of SFS exceeds its fair value, thereby requiring performance of the
second step of the impairment test to calculate the amount of the impairment. The Corporation, with
the assistance of an independent valuation firm, has begun the second step of the impairment test
and expects the resulting valuation report to be completed during the fourth quarter of 2007.
However, because an impairment loss is
probable and can be reasonably estimated, the Corporation has, in
accordance with SFAS No. 142,
recorded preliminary estimated non-cash impairment charges of approximately $34.3 million and $5.4
million, which have been recorded as reductions to goodwill and trade name, respectively. The
estimated impairment charges were calculated based on market and
income approach valuation methodologies. The
Corporation will change these estimates, as necessary, upon the completion of the valuation
report, which will include additional procedures for determining the fair value of SFSs
60
assets and
liabilities. These impairment charges did not result
in cash expenditures and will not result in future cash expenditures.
In
conjunction with this impairment test the Corporation also conducted an
impairment test of its intangible assets with definite lives
associated with its consumer finance business 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 indicates that the carrying amount of
such assets may not be fully recoverable. The determination of
recoverability is based on an estimate of undiscounted future cash
flows resulting from the use of the assets and their eventual
disposition. The Corporation determined, based on this test, that
undiscounted future cash flows from the use of the assets and their
eventual disposition exceeded their current carrying amount and thus,
an impairment was not required as of
September 30, 2007. Consequently, no impairment losses on intangible
assets with definite lives were recorded in operating expenses in the
consolidated statement of operations as of September 30, 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
None
ITEM 5 OTHER INFORMATION
None
61
ITEM 6 EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
Reference
|
(2.0)
|
|
Agreement and Plan of Merger-Banco Santander Puerto Rico and
Santander BanCorp
|
|
Exhibit 3.3 8-A12B
|
|
|
|
|
|
(2.1)
|
|
Stock Purchase Agreement Santander BanCorp and Banco Santander
Central Hispano, S.A.
|
|
Exhibit 2.1 10K-12/31/00
|
|
|
|
|
|
(2.2)
|
|
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
|
|
Exhibit 2.2 10Q-06/30/04
|
|
|
|
|
|
(2.3)
|
|
Settlement Agreement between Santander BanCorp and Administración
de Bancos Latinoamericanos Santander, S.L.
|
|
Exhibit 2.3 10Q-06/30/04
|
|
|
|
|
|
(3.1)
|
|
Articles of Incorporation
|
|
Exhibit 3.1 8-A12B
|
|
|
|
|
|
(3.2)
|
|
Bylaws
|
|
Exhibit 3.1 8-A12B
|
|
|
|
|
|
(4.1)
|
|
Authoring and Enabling Resolutions 7% Noncumulative Perpetual
Monthly Income Preferred Stock, Series A
|
|
Exhibit 4.1 10Q-06/30/04
|
|
|
|
|
|
(4.2)
|
|
Offering Circular for $30,000,000 Banco Santander PR Stock Market Growth
Notes Linked to the S&P 500 Index
|
|
Exhibit 4.6 10Q-03/31/04
|
|
|
|
|
|
(4.3)
|
|
Private Placement Memorandum Santander BanCorp $75,000,000 6.30%
Subordinated Notes
|
|
Exhibit 4.3 10KA-12/31/04
|
|
|
|
|
|
(4.4)
|
|
Private Placement Memorandum Santander BanCorp $50,000,000 6.10%
Subordinated Notes
|
|
Exhibit 4.4 10K-12/31/05
|
|
|
|
|
|
(4.5)
|
|
Indenture dated as of February 28, 2006, between the Santander BanCorp and
Banco Popular de Puerto Rico
|
|
Exhibit 4.6 10Q-03/31/06
|
|
|
|
|
|
(4.6)
|
|
First Supplemental Indenture, dated as of February 28, 2006, between Santander
Bancorp and Banco Popular de Puerto Rico
|
|
Exhibit 4.7 10Q-03/31/06
|
|
|
|
|
|
(4.7)
|
|
Amended and Restated Declaration of Trust and Trust Agreement, dated as of
February 28, 2006, among Santander BanCorp, Banco Popular de Puerto Rico
Wilmintong 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.
|
|
Exhibit 4.8 10-Q-03/31/06
|
|
|
|
|
|
(4.8)
|
|
Guarantee Agreement, dated as of February 28, 2006 between Santander
BanCorp and Banco Popular de Puerto Rico
|
|
Exhibit 4.9 10-Q-03/31/06
|
|
|
|
|
|
(4.9)
|
|
Global Capital Securities Certificate
|
|
Exhibit 4.10 10Q-03/31/06
|
|
|
|
|
|
(4.10)
|
|
Certificate of Junior Subordinated Debenture
|
|
Exhibit 4.11 10Q-03/31/06
|
|
|
|
|
|
(10.1)
|
|
Contract for Systems Maintenance between ALTEC & Banco Santander Puerto Rico
|
|
Exhibit 10A 10K-12/31/02
|
|
|
|
|
|
(10.2)
|
|
Employment Contract-José Ramón González
|
|
Exhibit 10.1 8K-01/04/07
|
|
|
|
|
|
(10.3)
|
|
Employment Contract-Carlos M. García
|
|
Exhibit 10.2 8K-01/04/07
|
|
|
|
|
|
(10.4)
|
|
Deferred Compensation Contract-María Calero
|
|
Exhibit 10C 10K-12/31/02
|
|
|
|
|
|
(10.5)
|
|
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.
|
|
Exhibit 10A 10Q-06/30/03
|
|
|
|
|
|
(10.6)
|
|
Employment Contract-Roberto Córdova
|
|
Exhibit 10.3 10Q-03/31/05
|
|
|
|
|
|
(10.7)
|
|
Employment Contract-Bartolomé Vélez
|
|
Exhibit 10.7 10K-12/31/06
|
|
|
|
|
|
(10.8)
|
|
Employment Contract-Lillian Díaz
|
|
Exhibit 10.5 10Q-03/31/05
|
|
|
|
|
|
(10.9)
|
|
Technology Assignment Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
|
|
Exhibit 10.12 10KA-12/31/04
|
|
|
|
|
|
(10.10)
|
|
Altair System License Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
|
|
Exhibit 10.13 10KA-12/31/04
|
|
|
|
|
|
(10.11)
|
|
2005 Employee Stock Option Plan
|
|
Exhibit B Def14-03/26/05
|
|
|
|
|
|
(10.12)
|
|
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.
|
|
Exhibit 10.1 8K-01/25/06
|
62
EXHIBIT INDEX Cont
|
|
|
|
|
Exhibit No.
|
|
Exhibit Description
|
|
Reference
|
(10.13)
|
|
Employment Contract-Tomás Torres
|
|
Exhibit 10.16 10Q-09/30/06
|
|
|
|
|
|
(10.14)
|
|
Employment Contract-Eric Delgado
|
|
Exhibit 10.17 10Q-09/30/06
|
|
|
|
|
|
(10.15)
|
|
Agreement of Benefits Coverage Agreed with Officers of Grupo Santander
|
|
Exhibit 10.18 10K-12/31/06
|
|
|
|
|
|
(10.16)
|
|
Employment Contract-Justo Muñoz
|
|
Exhibit 10.18 10Q-06/30/07
|
|
|
|
|
|
(10.17)
|
|
Bridge Facility Agreement between Santander BanCorp, Santander Financial
Services, Inc. and Banco Santander Puerto Rico
|
|
Exhibit 10.1 8K-09/26/07
|
|
|
|
|
|
(10.18)
|
|
Bridge Facility Agreement among Santander BanCorp, Santander Financial
Services, Inc. and National Australia Bank Limited.
|
|
Exhibit 10.1 8K-10/09/07
|
|
|
|
|
|
(12)
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
Exihbit 12
|
|
|
|
|
|
(14)
|
|
Code of Ethics
|
|
Exhibit 14 10-KA-12/31/04
|
|
|
|
|
|
(22)
|
|
Registrants Proxy Statement for the April 30, 2007 Annual
Meeting of Stockholders
|
|
Def14A-04/20/07
|
|
|
|
|
|
(31.1)
|
|
Certification from the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.1
|
|
|
|
|
|
(31.2)
|
|
Certification from the Chief Operating Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.2
|
|
|
|
|
|
(31.3)
|
|
Certification from the Chief Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.3
|
|
|
|
|
|
(32.1)
|
|
Certification from the Chief Executive Officer, Chief Operating Officer and
Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
Exhibit 32.1
|
63
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
|
|
|
|
|
Dated: November 14, 2007
|
|
By:/s/ José Ramón González
|
|
|
|
|
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
Dated: November 14, 2007
|
|
By:/s/ Carlos M. García
|
|
|
|
|
|
|
|
|
|
Senior Executive Vice President and
|
|
|
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
Dated: November 14, 2007
|
|
By:/s/ María Calero
|
|
|
|
|
|
|
|
|
|
Executive Vice President and
|
|
|
|
|
Chief Accounting Officer
|
|
|
64
Santander (NYSE:SBP)
Historical Stock Chart
From Jun 2024 to Jul 2024
Santander (NYSE:SBP)
Historical Stock Chart
From Jul 2023 to Jul 2024