Following is a summary of the Corporation’s most significant accounting policies:
Nature of Operations and Use of Estimates
SBC is a financial holding company offering a full range of financial services through its wholly owned banking subsidiary Banco Santander Puerto Rico and its subsidiary Santander Insurance Agency, Inc. (the “Bank”). The Corporation also engaged in porftfolio management and advisory services through its wholly owned subsidiary SAM. The Corporation is a member of a group controlled by Banco Santander, S.A. In addition, the Corporation engages in transactions with other unconsolidated affiliate member of the entity group (Santander Financial Services, Inc).
In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences may be material to the consolidated financial statements. 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 other intangible assets, liability for uncertain tax positions and valuation allowance of deferred tax assets, pension and postretirement benefit obligations, and the valuation of other real estate owned properties, and financial instruments.
Leases
Effective January 1, 2019, the Corporation adopted ASU 2016-02, Leases. The Corporation adopted the ASU using the modified retrospective approach, with application at the adoption date and a cumulative-effect adjustment to the opening balance of retained earnings. Under this approach, comparative periods were not adjusted and, therefore, comparative periods will continue to be presented in accordance with ASC Topic 840. The Corporation elected the practical expedients permitted under transition guidance which allowed: (a) to not reassess at the date of adoption whether existing contracts were or contained leases and (b) to carry forward the historical lease classification. The Corporation also elected not to recognize a lease liability and associated ROU asset for short-term leases. The Corporation adopted this accounting pronouncement resulting in the recognition of a right of-use (“ROU”) asset and lease liability of $58.4 million presented as part of the other assets and other liabilities, respectively, in the consolidated balance sheet for all operating leases with a term greater than 12 months.The Corporation recorded a positive cumulative effect adjustment of $6.9 million to the opening retained earnings as a result of the reclassification of previously deferred gains on sale-leaseback transactions.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Revenue Recognition
Effective January 1, 2018, the Corporation adopted the ASC Topic 606, Revenue from Contracts with Customers. The Corporation adopted this accounting pronouncement using the modified retrospective approach. In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which the Corporation expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the Corporation: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the Corporation satisfies a performance obligation and when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Corporation assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct (Refer to Note 25 for additional details). The cumulative-effect of the adoption of ASC Topic 606 amounted to $3.4 million, net of tax, associated to a deferred gain on disposition of repossessed properties. This effect was recognized as an increase in the opening retained earnings as of January 1, 2018.
Principles of Consolidation
The consolidated financial statements include the accounts of SBC, the Bank, Santander Insurance Agency, Inc. (“SIA”) and SAM. All intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository institutions and interest- bearing deposits in other banks. All highly liquid instruments with a maturity of three months or less, when acquired or generated, are considered cash equivalents. The Corporation maintained the main cash and cash equivalents deposited in highly rated institutions, mainly in the Federal Reserve Bank of NY. The Corporation has maintained balances in various operating and money market accounts in excess of federally insured limits.
Investment Securities
Investment securities are classified into three categories and accounted for as follows:
| • | Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value with unrealized gains and losses included in the consolidated statements of income as part of other income. Financial instruments, including to a limited extent, derivatives are used by the Corporation in dealing and other trading activities and are carried at fair value. Interest revenue and expense are included in the consolidated statements of income as part of net interest income. |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| • | Debt and equity securities not classified as either investment securities held-to-maturity or trading securities, and which have a readily available fair value, are classified as investment securities available-for-sale and reported at fair value, with unrealized gains and losses reported, net of tax, in accumulated other comprehensive income (loss). The specific identification method is used to determine realized gains and losses on sales of securities available-for- sale, which are included in the consolidated statements of income. Interest revenue and expense are included in the consolidated statements of income as part of net interest income. |
| • | 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 adjusted for impairments, if any. 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. Interest revenue and expense are included in the consolidated statements of income as part of net interest income. |
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 investment securities. The cost of investment securities sold is determined by specific identification. For investment securities available-for-sale, investment held-to-maturity, and other investment securities, the Corporation reports separately in the consolidated statements of income, net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any.
Derivative Financial Instruments
The Corporation uses derivative financial instruments to manage interest rate risk and changes in the fair value of assets and liabilities through interest rate swaps and interest rate caps instruments.
The Corporation enters into certain derivative transactions to provide derivative products to customers, which includes interest rate caps and swaps, and simultaneously covers the Corporation’s position with related and unrelated third parties under substantially the same terms and conditions. These derivatives are not linked to specific assets and liabilities in the consolidated balance sheets or to forecasted transactions in an accounting hedge relationship, and therefore, do not qualify for hedge accounting. These derivatives are carried at fair value with changes in fair value recorded as part of other income. Also, 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 FASB ASC Topic 820 and FASB ASC Topic 815, Derivatives and Hedging.
Loans Held for Sale
Loans held for sale are recorded at the lower of cost or market computed on the aggregate portfolio basis. Fair values for loans held for sale are based on observable inputs, such as observable market prices, credit spreads, and interest rate yield curves, when available. In instances when significant valuation assumptions are not readily observable in the market, instruments are valued based on the best available data in order to approximate fair value. This data may be internally developed and considers types of loans, conformity of loans, delinquency statistics, and risk premiums that a market participant would require, and accordingly, may be classified as Level 3 in a nonrecurring fair value measurement. The amount by which cost exceeds market 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. The amounts of loan origination cost and fees are deferred at origination of the loans and recognized as part of the gain and loss on sale of the loans in the consolidated statements of income as part of other income. The Corporation disposes loans held for sale through securitizations mainly conducted with agencies and pass- through sales. The Corporation’s limitation for holding mortgages in the held for sale portfolio is 365 days from the date the loan enters the portfolio. If a mortgage is held for sale beyond this period, it is automatically transferred to the loan held for investment portfolio.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The Corporation rebooked certain individual delinquent GNMA loans (over 90 days past due), previously accounted for as sold, as loan held-for-sale pursuant to the GNMA Mortgage-Backed Securities Guide. The rebooking of GNMA loans is required (together with a liability for the same amount) regardless of whether the Corporation, as seller-servicer, intends to exercise the repurchase (buy-back option) since the Corporation is deemed to have regained effective control over these loans. The Corporation intends to re-sell this portfolio in a reasonable period of time. As of December 31, 2019 and 2018, the unpaid principal balance of the GNMA portfolio rebooked amounted to $5.4 million and $4.3 million, respectively.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff 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, except for credit cards. Credit cards origination fees and origination costs are amortized on a straight-line basis over one year. Unamortized amounts are recognized as an adjustment to interest yield at the time loans receivable are paid in full. Discounts and premiums on purchased loans are amortized to results of operations over the expected lives of the loans using a method that approximates the interest method.
The accrual of interest on commercial loans, lease financing, mortgage and closed-end consumer loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, but in no event it is recognized after 90 days in arrears on payments of principal or interest. Income is generally recognized on open-end (revolving credit) consumer loans until 120 days past due, when the loans are charged-off. For all others loans, when interest accrual is discontinued, unpaid interest is reversed. Interest income is subsequently recognized only to the extent that it is collected. The nonaccrual status is discontinued when loans are below 90 days in arrears. Interest income collected on mortgage Troubled Debt Restructuring (“TDRs”) loans with nonaccrual status is recognized as a deferred item until accrual status is met. The classification of nonaccrual status of TDRs portfolio is maintained until the customer demonstrates a sustained period of performance which consists of six consecutive payments.
The Corporation restructures certain loans, principally, through the modification of loan terms to accommodate the borrower payments. These loans meet the definition of TDRs, as stated in FASB ASC Topic 310, Receivables. FASB ASC Topic 310 states that a restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. These concessions stem from an agreement between the creditor and the debtor or are imposed by law or a court. Classification of loan modifications as TDRs involves a degree of judgment. Indicators that the debtor is experiencing financial difficulties include, for example (i) the debtor is currently in default on any of its debt; (ii) the debtor has declared, or is in the process of declaring, bankruptcy; (iii) there is significant doubt as to whether the debtor will continue to be a going concern; (iv) currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; and (v) based on estimates and projections that only encompass the current business capabilities, the debtor forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity; and absent the current modification, the debtor cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a nontroubled debtor. Once a loan is determined to be a TDR, then various effects must be considered, such as identifying the loan as impaired, performing an impairment analysis, applying proper revenue recognition accounting, and reviewing its regulatory credit risk grading (see Note 5 for further information).
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Off-Balance Sheet Instruments
In the ordinary course of business, the Corporation enters into off-balance sheet instruments consisting of commitments to extend credit, standby 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.
The Corporation recognized as liabilities the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit, net of the related amortization at inception. The fair value approximates the unamortized fees received from the customers for issuing the standby letters of credit. The fees are deferred and recognized on a straight-line basis over the commitment period. Standby letters of credit outstanding had terms ranging from two months to two years as of December 31, 2019, and from three months to two years as of December 31, 2018.
Fees received for providing loan commitments and letters of credit that result in loans are deferred and amortized to interest income over the life of the related loan. Fees on commitments and letters of credit are amortized to other income as banking fees and commissions over the commitment period.
The Corporation’s off-balance sheet commitments and letters of credit are subject to credit risk. Credit losses related to these instruments are accounted for in accordance with ASC 450-20, and are recorded separately from the allowance for loan losses and reported as other liabilities in the consolidated financial statements. The reserve for unfunded lending commitments represents probable losses for the Corporation’s unfunded lending commitments and other off-balance sheet instruments.
Allowance for Loan Losses
The allowance for loan losses is a current estimate of the losses inherent in the present portfolio based on management’s ongoing monthly 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, management’s estimate of credit losses in the loan portfolio and the related allowance may change in the near term.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
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.
Large commercial, certain residential mortgage and installment unsecured loans that exhibit potential or observed credit weaknesses are subject to individual review. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flows.
Included in the review of individual loans are those that are impaired as defined by FASB ASC Topic 310. Any allowances for loans deemed impaired are measured based either on the present value of expected future discounted cash flows, or on the fair value of the underlying collateral, less estimated disposition costs (incremental direct costs essential to a sale transaction, including foreclosure expenses, property taxes, homeowners’ fees, legal fees, maintenance expenses, broker’s fees and appraisal fees). Commercial business, commercial real estate and residential mortgages exceeding a predetermined monetary threshold, such as unpaid balance over $250,000, are individually evaluated for impairment. All residential mortgages 180 days past due are individually evaluated for impairment and classified as impaired, even when not exceeding the monetary threshold. In addition, any residential mortgage, unsecured consumer or commercial loan, subject to debt modifications that is classified as TDR, as described in further sections, is individually evaluated for impairment and classified as such, even when not exceeding the monetary threshold. At least annually, the Corporation requests updated appraisal reports on real estate collateral for loans that are considered impaired and the impairment measurement is based on the fair value of the collateral, less estimated disposition costs. As a general procedure, the Corporation internally reviews appraisals as part of the underwriting and approval process and also for credits considered impaired. Impaired loans for which the discounted cash flows or collateral fair value, as applicable, exceeds its carrying value do not require an allowance. The Corporation evaluates the collectability of principal, deferred fees and costs, and interest, when assessing the need for loss accrual.
The loan impairment policy requires that, for impaired loans that are deemed collateral dependent, a valuation allowance must be recorded for the excess of the investment in the loan (principal, accrued interest receivable and deferred fees and costs) over the fair value of the collateral, less estimated disposition costs. The partial charge-offs recorded in 2019 and 2018, on such impaired loans, amounted to $10.7 million and $19.7 million, respectively.
Historical loss rates may also be adjusted for significant factors that, in management’s judgment, reflect the impact of any current condition on loss recognition. Factors which management may consider in the analysis include the effect of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual, and problem loans), changes in the internal lending policies and credit standards, decline in property values, collection practices, and examination results from bank regulatory agencies and the Corporation’s internal examiners.
Allowances on individual loans and historical loss rates are reviewed monthly and adjusted as necessary based on changing borrower and/or collateral conditions, actual collection, charge-off experience, and other factors that, based on management’s judgment, reflect the impact of current condition.
The Corporation’s quantitative methodology for estimating the allowance for loan losses for the consumer portfolio is based on a migration analysis/roll rate approach which considers both historical loss rates and loss rates based on the likelihood of credit deterioration (expectation of current loans becoming delinquent in monthly increments until they default and are charged-off). This loss factor may be adjusted to reflect recent economic or business trends that may affect the collectability of the portfolio. The loss factor is then applied to the outstanding portfolio at period end to estimate the amount of expected charge offs and the provision for loan losses required to support an adequate allowance for loan losses.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The Corporation mainly uses internal data in order to consider qualitative factors for developing and maintaining the allowance for loan losses. The consideration of internal factors, which includes loan loss experience, delinquency trends, decrease in real estate, and classification trends, among others, is used to adjust some of the loss factors computed solely by historical data. Furthermore, given the current environmental factors within the local economy and the fact that the Corporation is using the losses of the previous 12 months for the loss factor calculation, the loss ratios have most of these factors already embedded in the results without the need of additional adjusting factors. The Corporation’s methodology includes a back testing analysis. Back testing is a supplemental tool used to evaluate the overall reasonableness of the allowance for loan losses. It helps identify if the allowance for loan losses balance established in prior periods was sufficient to cover subsequent losses.
During 2018 the Corporation undertook a reassessment of the allowance for loan losses related to the additional provision of $42 million recognized associated to the 2017 hurricanes impact. The Corporation incorporated updated information, especially as it relates to the performance of the loan portfolios after the moratorium program granted as part of the relief efforts provided to customers after 2017 hurricanes, which ultimately impacted 2018. The reassessment considered a decrease of the qualitative reserve recorded, partially offset by increases in reserves of certain portfolios upon specific analysis. The analysis considered specific considerations pertaining to the public sector and commercial loans portfolios, as well as an adjustment to loss factors for residential and commercial loans to consider the trends observed during and after the moratorium period and increases in the assumptions used to determine disposition costs used to evaluate impaired loans measured based on the fair value of the underlying collateral.
The Corporation considers in its allowance for loan and lease losses, debt modification of terms that may be identified as TDR as stated in FASB ASC Topic 310. The identification of TDRs is critical in the determination of the adequacy of the allowance for loan losses. While commercial TDRs loans accruing status and impairment analysis are determined by an individual evaluation, a standardized policy is applied to the residential mortgage TDRs. TDRs that were in nonaccrual at the time of the modification continue in nonaccrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (at least six months of sustained performance after being classified as TDR). Those loans modified with less than 90 days past due will still accrue interest; however, these are still classified as impaired.
For purposes of determining the impairment analysis to be applied on residential mortgage TDRs, the Corporation stratifies these loans into performing and nonperforming loans. Impairment for performing loans is measured based on the present value of future cash flows discounted at the loan’s original contractual rate. The impairment measure for loans that have reached nonperforming status (although normalizing afterward) is based on the fair value of the collateral, net of estimated disposition costs. The stratification for the impairment measure is only based on days past due and not on the accruing status of the loans. Performing TDRs are those with less than four payments past due, while nonperforming are those that reached four payments due or more, at any point in the life of the TDR, regardless of days past due at the measurement date. As consumer installment loans are written off at 120 days past due, such stratification is not considered; they are measured based on the present value of future cash flows discounted at the loan’s original contractual rate, which approximates the effective interest at the time of origination.
The Corporation analyzes its exposure to debt from municipalities separately since it represents a different risk than regular commercial portfolio loans, maintaining a segregated allowance for loan losses balance. The Corporation established an approach to determine the reserve under the assumption that municipalities are covered under PROMESA Title III or VI. This approach focuses on understanding and assessing new developments in the municipalities, probabilities of default based on an updated risk rate analysis and type of debt owed by each municipality.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
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: (i) the assets have been isolated from the Corporation, (ii) 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 (iii) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before the 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization, which is computed utilizing the straight-line method over the estimated useful lives of the assets that range between three and 30 years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is lower. Gains or losses on dispositions are reflected in current operations. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense as incurred. Costs of renewals and improvements are capitalized. When assets are sold or disposed of, their cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings when realized. Measurement of an impairment loss is based on the fair value of the asset or assets group compared to its carrying value. If the fair value of the asset is determined to be less than the carrying value, an impairment loss is incurred. Impairment losses, if any, are reflected in operating expenses in the consolidated statements of income.
Real Estate Held for Sale
The Corporation owns certain real estate properties held for sale which are carried at the lower of cost or fair value, less estimated disposition costs. Each property is appraised or evaluated annually to provide an estimate of the property’s fair value. The fair value is substantiated by a current appraisal or evaluation prepared by an independent, qualified appraiser. The decline in fair value is reflected in operating expense in the consolidated statements of income.
Other Real Estate Owned Properties
The Corporation recognizes as other real estate owned properties (OREO), real estate acquired through purchases at sales under judgments, decrees, or mortgages where the property was originally security for debts previously contracted; a real estate which a borrower conveys to the Corporation to fully or partially satisfy a debt previously contracted (i.e., acceptance of a deed in lieu of foreclosure); real estate which the Corporation obtains in exchange for future advances to an existing borrower to fully satisfy or partially satisfy debts previously contracted; real estate which the Corporation takes possession of collateral in a collateral-dependent real estate loan (i.e., in- substance foreclosure). Other real estate received in satisfaction of a loan is recorded at fair value less estimated cost of disposal. The difference between the carrying amount of the loan and the fair value less cost to sell is recorded as an adjustment to the allowance for loan losses. The Corporation recognizes legal fees and other direct costs related to a foreclosure when they are incurred and are reflected in operating expense in the consolidated statements of income. Each OREO is appraised or evaluated at acquisition, and annually thereafter, to provide an estimate of the property’s fair value. The fair value is substantiated by a current appraisal or evaluation prepared by an independent, qualified appraiser. Subsequent declines in fair value are separately reserved until the property is sold.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The Corporation disposes of OREO through third party sales. Gains and losses resulting from a sale of OREO properties are recognized immediately and included in the consolidated statements of operations, as part of the other income. Effective January 1, 2018, the Corporation adopted the new revenue recognition guidance (ASU Topic 606) and, as consequence, the Corporation reclassified $3.4 million of deferred gain, net of tax, to opening retained earnings. The Corporation should evaluate certain conditions prior to the recognition of the sale, in order to determine the proper accounting treatment of the transaction, such as: (i) the collectability of the sales price and down payment are reasonably assured, and (ii) the seller is not obligated to perform significant activities after the sale to earn the profit. If both conditions are met at the time of sale, the Corporation is required to recognize the transaction as a disposition of an asset. On December 31, 2019 the Corporation sold its entire OREO portfolio amounting to $30.1 million to an affiliate.
Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”) represent the cost of acquiring the contractual rights to service loans for others. The Corporaton recognizes the right to service mortgage loans for others as a separate asset 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).
On a quarterly basis, the Corporation evaluates its MSRs for impairment and charges any such impairment to current period earnings. In order to evaluate its MSRs, the Corporation stratifies the related mortgage loans on the basis of their risk characteristics, which have been determined to be: type of loan (government-guaranteed, conventional, conforming, and nonconforming), interest rates, and maturities. Impairment of MSRs is determined by estimating the fair value of each stratum and comparing it to its carrying value. No impairment loss was recognized during 2019 and 2018.
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. MSRs fair value amounted to $8.2 million and $9.4 million as of December 31, 2019 and 2018, respectively.
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 MSRs arising from the sale of mortgages, advances to investors, and escrow advances. 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.
As of December 31, 2019 and 2018, the unpaid principal balances of mortgage loans serviced for others amounted to approximately $889 million and $955 million, respectively. In connection with these mortgage servicing activities, the Corporation administered escrow and other custodial funds, which amounted to approximately $2.9 million and $2.8 million as of December 31, 2019 and 2018, respectively.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Trust Services
The Corporation administers and is custodian of assets amounting to approximately $107 million and $131 million as of December 31, 2019 and 2018. Due to the nature of trust activities, these assets are not included in the Corporation’s consolidated balance sheets. The Corporation’s trust division focuses its business in transfer paying agent and individual retirement account (IRA) services.
Insurance Commissions
The Corporation’s insurance agency operation earns commissions on the sale of insurance policies issued by unaffiliated insurance companies. Commissions are recognized as revenues based on the insurance policies’ effective date in accordance with individual agreements with the insurance companies. Commission revenue is reported net of the provision for commission returns on insurance policy cancellations, which is based on management’s estimate of future insurance policy cancellations as a result of historical turnover rates by types of credit facilities subject to insurance.
Advisory Fees
The Corporation also engaged in porftfolio management and advisory services. Revenues from portfolio, management and advisory fees resulting from the assets’s management and administration of certain funds and institutional accounts. The advisory fees are recognized over the period that services are rendered.
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 Corporation’s consolidated financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.
The Corporation accounts for uncertain tax positions in accordance with FASB ASC Topic 740, Income Taxes. Accordingly, the Corporation reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Recently Issued Accounting Standards
The adoption of the following accounting pronouncements were not adopted and did not have a material impact on the Corporation’s financial position or results of operations:
| • | FASB ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. |
| • | FASB ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure requirements for Fair Value Measurement. |
The adoption of these accounting pronouncements may have an impact on the Corporation’s consolidated financial statements and disclosures. The Corporation is evaluating the impact that the following recently issued accounting pronouncements may have on its consolidated financial statements and disclosures.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| • | FASB ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued this Update to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For public business entities the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities the amendments in this Update are effective for fiscal years beginning after December 15, 2022 and including interim periods within those fiscal years. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified- retrospective approach). In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments Credit Losses (Topic 326) to provide entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. This amendment provides entities with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments that are within the scope of Subtopic 326-20, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. For entities that have not yet adopted the amendments in Update 2016-13, the effective date and transition methodology for the amendments in this Update are the same as in Update 2016-13. For entities that have adopted the amendments in Update 2016-13, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of this Update as long as an entity has adopted the amendments in Update 2016-13. The amendments in this Update should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13. |
The Corporation established a cross-functional working group for implementation of this standard. The implementation process included data sourcing and validation, development and validation of loss forecasting methodologies and models, including determining the length of the reasonable and supportable forecast period and selecting macroeconomic forecasting methodologies to comply with the new guidance, updating the design of the established governance, financial reporting, and internal control over financial reporting frameworks, and updating accounting policies and procedures. The increase in the allowance for loan losses will be reflected as a decrease to opening retained earnings, net of income taxes, at January 1, 2020.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| • | FASB ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans— General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. In August 2018, the FASB issued this Update to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The following disclosure requirements, among others, are removed from Subtopic 715-20: (i) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, (ii) the amount and timing of plan assets expected to be returned to the employer. The following disclosure requirements, among others, are added to Subtopic 715-20: (i) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments in this Update also clarify the disclosure requirements: (i) of the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets, (ii) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments in this Update are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities. An entity should apply the amendments in this Update on a retrospective basis to all periods presented. The Corporation is currently assessing if this update will have an impact on its consolidated financial statements, if any. |
| • | FASB ASU No. 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued this Update to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. If a cloud computing arrangement includes a license to internal-use software, then the software license is accounted for by the customer in accordance with Subtopic 350-40. An intangible asset is recognized for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract and fees associated with the hosting element (service) of the arrangement are expensed as incurred. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period, for all entities. The amendments in this Update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Corporation is currently assessing if this update will have an impact on its consolidated financial statements, if any. |
| • | FASB ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued this Update to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Exceptions include, but are not limited to, increments approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income), exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, among others. The amendments in this Update also simplify the accounting for income taxes by: (i) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; (ii) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; (iii) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The Corporation is currently assessing if this update will have an impact on its consolidated financial statements, if any. |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| • | FASB ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. In January 2020, the FASB issued this Update to clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period, (1) for public business entities for periods for which financial statements have not yet been issued and (2) for all other entities for periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. The Corporation is currently assessing if this update will have an impact on its consolidated financial statements, if any. |
Proceeds from sales of trading securities during 2019 and 2018, were approximately $5,894,000 and $3,875,000, respectively. Gross gains of approximately $160,000 were realized during 2019 and gross gains and losses of approximately $36,000 and $5,000, respectively, were realized during 2018.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| | 3. | 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 as of December 31, 2019 and 2018, were as follows:
| 2019 | |
| | | Amortized | | | Gross Unrealized | | | Gross Unrealized | | | Fair | | | Weighted- Average | |
| (in thousands of dollars) | | Cost | | | Gains | | | Losses | | | Value | | | Yield | |
| U.S. Treasury bills/notes - within one year | | $ | 1,092,039 | | | $ | 1,375 | | | $ | - | | | $ | 1,093,414 | | | | 1.85 | % |
| U.S. Treasury bills/notes - after one but within five years | | | 707,593 | | | | 1,401 | | | | 167 | | | | 708,827 | | | | 1.71 | % |
| Mortgage-backed securities - after five years but within ten years | | | 49,245 | | | | 494 | | | | 164 | | | | 49,575 | | | | 2.20 | % |
| Mortgage-backed securities - over ten years | | | 339,804 | | | | 714 | | | | 597 | | | | 339,921 | | | | 2.98 | % |
| Total investment securities available for sale | | $ | 2,188,681 | | | $ | 3,984 | | | $ | 928 | | | $ | 2,191,737 | | | | 1.99 | % |
| | 2018 | |
| | | Amortized | | | Gross Unrealized | | | Gross Unrealized | | | Fair | | | Weighted- Average | |
| (in thousands of dollars) | | Cost | | | Gains | | | Losses | | | Value | | | Yield | |
| U.S. Treasury bills/notes - within one year | | $ | 296,989 | | | $ | 52 | | | $ | 321 | | | $ | 296,720 | | | | 2.39 | % |
| U.S. Treasury bills/notes - after one but within five years | | | 229,590 | | | | 447 | | | | 393 | | | | 229,644 | | | | 2.50 | % |
| Mortgage-backed securities - over ten years | | | 179,592 | | | | 87 | | | | 3,815 | | | | 175,864 | | | | 2.58 | % |
| Total investment securities available for sale | | $ | 706,171 | | | $ | 586 | | | $ | 4,529 | | | $ | 702,228 | | | | 2.47 | % |
The average duration of mortgage-backed securities is approximately 3.3 and 3.6 years at December 31, 2019 and 2018, respectively.
The number of positions, fair value, and unrealized losses 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 as of December 31, 2019 and 2018 were as follows:
| | | December 31, 2019 | |
| |
| Less Than 12 Months | | | 12 Months or More | | |
| | Total
| | |
| |
(in thousands) | | Number of Positions | | |
Fair Value | | |
Unrealized Losses | | |
Number of Positions | | | | | | | | | | Number of Positions | | | Fair Value | | | Unrealized Losses | |
| U.S. Treasury bills/notes | | | 2 | | | $ | 200,096 | | | | (167 | ) | | | | | | | | | | | | 2 | | | $ | 200,096 | | | $ | (167 | ) |
| Mortgage-backed securities | | | 6 | | | | 178,103 | | | | (505 | ) | | | 6 | | | | 60,546 | | | | (256 | ) | | | 12 | | | | 238,649 | | | | (761 | ) |
| | | | 8 | | | $ | 378,199 | | | $ | (672 | ) | | | 6 | | | $ | 60,546 | | | | (256 | ) | | | 14 | | | $ | 438,745 | | | $ | (928 | ) |
| | | December 31, 2018 | |
| | | Less Than 12 Months | | | 12 Months or More | | | | | | Total | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | Unrealized Losses | | | | | | | | | | |
| U.S. Treasury bills/notes | | | 8 | | | $ | 198,851 | | | $ | 304 | | | | 2 | | | $ | 74,491 | | | $ | 410 | | | | 10 | | | $ | 273,342 | | | $ | 714 | |
| Mortgage-backed securities | | | 1 | | | | 18,539 | | | | 184 | | | | 16 | | | | 161,178 | | | | 3,631 | | | | 17 | | | | 179,717 | | | | 3,815 | |
| | | | 9 | | | $ | 217,390 | | | $ | 488 | | | | 18 | | | $ | 235,669 | | | $ | 4,041 | | | | 27 | | | $ | 453,059 | | | $ | 4,529 | |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The Corporation evaluates its investment securities for other-than-temporary impairment on a quarterly basis, or earlier if other factors indicate that potential impairment exists. 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, the financial condition of the issuers and any rating changes, the Corporation’s intent to sell, and consideration of whether it is more likely-than-not that the Corporation will be required to sell the security prior to recovery of the carrying amount of the investment.
As of December 31, 2019 and 2018, management concluded that there were no other-than- temporary impairments in its investment securities portfolio.
The unrealized losses in the Corporation’s investments in debt securities were caused by changes in market interest rates and not credit quality. All debt securities are investment grade, as rated by major rating agencies. The Corporation evaluates debt securities for other-than-temporary impairment based on any of the following triggering events: (i) the Corporation has the intent to sell the security, (ii) it is more likely than not that the Corporation will be required to sell the security before recovery, or (iii) the Corporation does not expect to recover the entire amortized cost basis of the security. Upon evaluation of these triggering events, the Corporation believes that none of such conditions were present as of December 31, 2019, because the Corporation has sufficient capital and liquidity to operate its business, it has no requirements or needs to sell such securities, and the Corporation is not subject to any contractual arrangements that would require the Corporation to sell such securities.
Contractual maturities on certain securities, including mortgage-backed securities, could differ from actual maturities since certain issuers may 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.
Proceeds from sale of investment securities available for sale were approximately $253.8 million in 2019. Gross gains of approximately of $289,000 were realized in 2019. There were no sales of investment securities available for sale during 2018.
As of December 31, 2019, and 2018, investment securities and loans were pledged to secure deposits of public funds and FHLB advances. The classification and carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge as of December 31, 2019 and 2018, were as follows:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
| Investment securities available for sale | | $ | 1,555,063 | | | $ | 652,480 | |
| Residential mortgage and commercial loans | | | 1,018,507 | | | | 1,194,959 | |
| | | $ | 2,573,570 | | | $ | 1,847,439 | |
On December 31, 2019 and 2018, there were no pledged securities that the creditor has the right or contract to repledge.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| 5. | Loans and Allowance for Loan Losses |
The Corporation’s loan portfolio as of December 31, 2019 and 2018, consists of the following:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
Commercial with mortgage guaranty | | $ | 1,185,689 | | | $ | 1,185,533 | |
Commercial without mortgage guaranty | | | 422,784 | | | | 521,010 | |
Residential mortgage | | | 877,820 | | | | 1,055,916 | |
Consumer | | | 166,388 | | | | 177,506 | |
Credit cards | | | 91,962 | | | | 179,951 | |
| | | | 2,744,643 | | | | 3,119,916 | |
| Unearned income and deferred fees and costs — net | | | | | | | | |
| Commercial banking | | | 1,016 | | | | 411 | |
| Allowance for loan losses | | | (67,344 | ) | | | (111,039 | ) |
| | | $ | 2,678,315 | | | $ | 3,009,288 | |
As of December 31, 2019, the Corporation sold to an affiliate $115 million of non-performing loans which comprise $40 million of commercial and $75 of mortgage loans. No gain or loss was recorded in this transaction since the book value of assets sold approximated their fair value. Also, the Corporation sold $73 million of credit cards to an unrelated third party with a gain of approximately $4 million.
Loans individually evaluated for impairment as of December 31, 2019 and 2018, are as follows:
| | | 2019 | |
| (in thousands) | | Recorded Investment* | | | Unpaid Principal Balance** | | | Related Allowance | | | Average Recorded Investment | |
| | | | | | | | | | | | | |
| Commercial with mortgage guaranty | | $ | 44,738 | | | $ | 44,738 | | | $ | - | | | $ | 46,720 | |
| Commercial without mortgage guaranty | | | 6,523 | | | | 6,523 | | | | - | | | | 4,542 | |
| Residential mortgage | | | 27,276 | | | | 35,868 | | | | - | | | | 62,416 | |
Subtotal impaired loans with no allowance recorded | | | 78,537 | | | | 87,129 | | | | - | | | | 113,678 | |
| Commercial with mortgage guaranty | | | 17,191 | | | | 17,191 | | | | 2,824 | | | | 28,196 | |
| Commercial without mortgage guaranty | | | 1,650 | | | | 1,650 | | | | 185 | | | | 10,489 | |
| Consumer | | | 12,850 | | | | 12,850 | | | | 3,701 | | | | 13,748 | |
| Residential mortgage | | | 82,270 | | | | 86,840 | | | | 8,369 | | | | 96,717 | |
Subtotal impaired loans with an allowance recorded | | | 113,961 | | | | 118,531 | | | | 15,079 | | | | 149,150 | |
| Total loans individually evaluated for impairment | | $ | 192,498 | | | $ | 205,660 | | | $ | 15,079 | | | $ | 262,828 | |
* The recorded investment includes unpaid principal balance - net of partial charge-offs.
**The unpaid principal balance is the contractual amount receivable without considering any charge-off
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| | 2018 | |
(in thousands) | | Recorded Investment* | | | Unpaid Principal Balance** | | | Related Allowance | | | Average Recorded Investment | |
| | | | | | | | | | | | | |
| Commercial with mortgage guaranty | | $ | 48,702 | | | $ | 55,820 | | | $ | - | | | $ | 48,956 | |
| Commercial without mortgage guaranty | | | 2,561 | | | | 4,130 | | | | - | | | | 4,197 | |
| Residential mortgage | | | 97,556 | | | | 153,758 | | | | - | | | | 77,872 | |
Subtotal impaired loans with no allowance recorded | | | 148,819 | | | | 213,708 | | | | - | | | | 131,025 | |
| Commercial with mortgage guaranty | | | 39,200 | | | | 45,798 | | | | 3,888 | | | | 43,521 | |
| Commercial without mortgage guaranty | | | 19,328 | | | | 22,458 | | | | 9,223 | | | | 20,247 | |
| Consumer | | | 14,646 | | | | 14,646 | | | | 5,634 | | | | 14,894 | |
| Residential mortgage | | | 111,164 | | | | 122,167 | | | | 13,340 | | | | 141,976 | |
Subtotal impaired loans with an allowance recorded | | | 184,338 | | | | 205,069 | | | | 32,085 | | | | 220,638 | |
| Total loans individually evaluated for impairment | | $ | 333,157 | | | $ | 418,777 | | | $ | 32,085 | | | $ | 351,663 | |
* The recorded investment includes unpaid principal balance - net of partial charge-offs.
**The unpaid principal balance is the contractual amount receivable without considering any charge-off
Impaired loans measured based on the fair value of collateral or discounted cash flows, segregated by class of loans as of December 31, 2019 and 2018, are as follows:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
| Fair value of collateral | | | | | | |
| Commercial with mortgage guaranty | | $ | 46,974
| | | $ | 69,422
| |
| Commercial without mortgage guaranty | | | 5,947 | | | | 15,031 | |
| Residential mortgage | | | 22,656 | | | | 104,791 | |
| | | | 75,577 | | | | 189,244 | |
| Discounted cash flows | | | | | | | | |
| Commercial with mortgage guaranty | | | 14,955 | | | | 18,480 | |
| Commercial without mortgage guaranty | | | 2,226 | | | | 6,858 | |
| Consumer | | | 12,850 | | | | 14,646 | |
| Residential mortgage | | | 86,890 | | | | 103,929 | |
| | | | 116,921 | | | | 143,913 | |
| | | $ | 192,498 | | | $ | 333,157 | |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Interest income recognized on impaired loans, segregated by class of loans for the years ended December 31, 2019 and 2018, are as follows:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
Commercial with mortgage guaranty | | $ | 3,523 | | | $ | 2,775 | |
Commercial without mortgage guaranty | | | 564 | | | | 513 | |
Consumer | | | 1,429 | | | | 1,739 | |
Residential mortgage | | | 9,361 | | | | 6,526 | |
| | | $ | 14,877 | | | $ | 11,553 | |
Total nonaccrual loans, segregated by class of loans as of December 31, 2019 and 2018, are as follows:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
Commercial with mortgage guaranty | | $ | - | | | $ | 49,183 | |
Commercial without mortgage guaranty | | | 18 | | | | 15,335 | |
Residential mortgage | | | 4,940 | | | | 111,060 | |
Consumer | | | 662 | | | | 945 | |
Credit cards | | | 1,550 | | | | 2,657 | |
| | | $ | 7,170 | | | $ | 179,180 | |
Interest income which would have been recorded had the loans not been classified as nonaccruing were $4.9 million and $6.6 million during the years ended December 31, 2019 and 2018, respectively.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The Corporation’s loan portfolio composition, segregated by class of loans and by past due status, including those that are in non-performing status and those that are accruing interest but are past due 90 days or more as of December 31, 2019 and 2018, is as follows:
| | | 2019 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | Accruing | |
| Category | | | | | | | | | | | | | | Current | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Commercial with mortgage guaranty | | $ | 202 | | | $ | 370 | | | $ | - | | | $ | 572 | | | $ | 1,185,117 | | | $ | 1,185,689 | | | $ | - | |
Commercial without mortgage guaranty | | | 36 | | | | 12 | | | | 18 | | | | 67 | | | | 422,717 | | | | 422,784 | | | | - | |
| Residential mortgage | | | 28,851 | | | | 8,773 | | | | 4,819 | | | | 42,443 | | | | 835,377 | | | | 877,820 | | | | - | |
| Consumer | | | 1,584 | | | | 842 | | | | 697 | | | | 3,123 | | | | 163,265 | | | | 166,388 | | | | 35 | |
| Credit cards | | | 724 | | | | 776 | | | | 1,550 | | | | 3,050 | | | | 88,912 | | | | 91,962 | | | | - | |
| | | $ | 31,397 | | | $ | 10,773 | | | $ | 7,084 | | | $ | 49,255 | | | $ | 2,695,388 | | | $ | 2,744,643 | | | $ | 35 | |
| | | 2018 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | Accruing | |
| | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Greater than 90 Days | | | Total Past Due
| | | Current | | | Total | | | loan past due 90 days or more | |
| | |
| | |
| | |
| | |
| | | | | |
| | |
| |
| Category | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Commercial with mortgage guaranty | | $ | 3,644 | | | $ | 712 | | | $ | 25,694 | | | $ | 30,050 | | | $ | 1,155,483 | | | $ | 1,185,533 | | | $ | - | |
| Commercial without mortgage guaranty | | | 159 | | | | 95 | | | | 13,487 | | | | 13,741 | | | | 507,269 | | | | 521,010 | | | | - | |
| Residential mortgage | | | 39,809 | | | | 17,348 | | | | 82,465 | | | | 139,622 | | | | 916,294 | | | | 1,055,916 | | | | - | |
| Consumer | | | 2,013 | | | | 1,274 | | | | 1,045 | | | | 4,332 | | | | 173,174 | | | | 177,506 | | | | 101 | |
| Credit cards | | | 1,704 | | | | 1,519 | | | | 2,657 | | | | 5,880 | | | | 174,071 | | | | 179,951 | | | | - | |
| | | $ | 47,329 | | | $ | 20,948 | | | $ | 125,348 | | | $ | 193,625 | | | $ | 2,926,291 | | | $ | 3,119,916 | | | $ | 101 | |
Credit Quality Indicators
As part of the ongoing monitoring of the credit quality of the Corporation’s loan portfolio, management tracks certain credit quality indicators. The model for monitoring credit quality for commercial clients with commitments with common collateral and total exposure over $250,000, denominated by the Corporation as “nonstandardized loans,” has an analytical focus where areas must be evaluated independently. Each area of analysis is assessed for each borrower individually, to arrive at certain weighted quantitative and qualitative factors. These factors are: (i) product/demand/market: evaluates the sector in which the company operates and analyze the company’s position within the sector; (ii) shareholder/management: evaluates shareholders’ willingness and ability to support the company (at financial, commercial, or technological levels) and management team’s experience in both the company and the sector; (iii) access to credit: evaluates the capacity of obtaining financing from the banking system and from the capital markets; (iv) profitability: evaluates the company’s capacity to generate profits in the short and long term; (v) cash flows generation: evaluates the company’s capacity to generate cash from its normal operations in order to service its debt, investments in both fixed assets and current assets, to pay taxes and to offer return on capital; and (vi) solvency: evaluates the company’s capacity to maintain, in the mid and long term, its position in the market, its liquidity, and its capacity to generate cash.
The Corporation performs a credit analysis and classifies certain loans over an internal threshold based on the commercial lending classifications described below:
Non-Adversely Classified Loans:
| • | Pass – Loans classified as pass have a well-defined primary source of repayment, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and strong capitalization. |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| • | Watch – Loans classified as watch have acceptable business credit, but borrower’s operations, cash flow or financial condition evidence more than average risk, requires above average levels of supervision and attention from Loan Officers. |
| • | Special Mention – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date. |
Adversely Classified Loans:
| • | Substandard – Loans classified as substandard are deemed to be inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans classified as such have well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
| • | Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the additional characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
| • | Loss – Uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future. |
Standardized borrowers with commercial loans under $250,000 and nonstandardized above $250,000 receive a portfolio classification of Pass at the inception of the loan. During the life of the loan, review and classification of the loan to Pass, Watch, Special Mention, Substandard, Doubtful or Loss are determined based upon loan delinquencies, days past due and collateral. Commercial loans with less than 90 days past due are classified as Pass and if 90-179 days past due are classified as substandard. When these loans are 180 days past due, they are classified as loss and charged off.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Standardized loans as of December 31, 2019 and 2018, are classified as follows:
| (in thousands) | | | | | | |
| | | | | | | |
| Standardized commercial with mortgage guaranty | | 2019 | | | 2018 | |
| | | | | | | |
Pass | | $ | 58,090 | | | $ | 59,947 | |
Special Mention | | | 232 | | | | - | |
Watch List | | | 134 | | | | 21 | |
Substandard | | | 284 | | | | 12,864 | |
Doubtful | | | - | | | | - | |
Loss | | | - | | | | - | |
| | | $ | 58,740 | | | $ | 72,832 | |
(in thousands)
| | 2019 | | | 2018 | |
| | | | | | | |
| Standardized commercial without mortgage guaranty | | | |
Pass | | $ | 30,250 | | | $ | 32,157 | |
Special Mention | | | - | | | | - | |
Watch List | | | 1 | | | | 426 | |
Substandard | | | 140 | | | | 1,594 | |
Doubtful | | | - | | | | - | |
Loss | |
| - | | |
| - | |
| | | $
| 30,391 | | | $
| 34,177 | |
Nonstandardized loans as of December 31, 2019 and 2018, are classified as follows:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
| Nonstandardized commercial with mortgage guaranty | |
| | |
| |
| Pass | | $ | 655,604 | | | $ | 561,342 | |
| Special Mention | | | 74,603 | | | | 133,023 | |
| Watch List | | | 285,393 | | | | 270,198 | |
| Substandard | | | 111,349 | | | | 148,138 | |
Doubtful
| | | - | | | | - | |
| Loss | | | - | | | | - | |
| | | $ | 1,126,949 | | | $ | 1,112,701 | |
| (in thousands) | | | 2019 | | | | 2018 | |
| | | | | | | | | |
| Nonstandardized commercial without mortgage guaranty | | | | | | | | |
Pass | | $ | 158,127 | | | $ | 125,449 | |
Special Mention | | | 67,187 | | | | 46,267 | |
Watch List | | | 159,162 | | | | 288,442 | |
Substandard
| | | 7,917 | | | | 26,675 | |
| Doubtful | | | - | | | | - | |
| Loss | | | - | | | | - | |
| | | $ | 392,393 | | | $ | 486,833 | |
The consumer and residential loan portfolio credit risk categories are defined as performing and nonperforming in accordance with its days past due. Those loans with less than 90 days past due and accruing are classified as performing, while those loans with 90 days past due or more and/or in nonaccrual, regardless of days past due, are classified as nonperforming.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
Consumer loans based on its credit risk categories as of December 31, 2019 and 2018, are as follows:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
| Consumer | |
| | |
| |
| Performing | | $ | 165,691 | | | $ | 176,461 | |
| Nonperforming | | | 697 | | | | 1,045 | |
| | | $ | 166,388 | | | $ | 177,506 | |
| (in thousands) | | | 2019 | | | | 2018 | |
| | | | | | | | | |
| Credit cards | | | | | | | | |
| Performing | | $ | 90,412 | | | $ | 177,294 | |
| Nonperforming | | | 1,550 | | | | 2,657 | |
| | | $ | 91,962 | | | $ | 179,951 | |
Residential mortgage loan portfolio based on its credit risk categories as of December 31, 2019 and 2018, are as follows:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
Residential mortgage loans | |
| | |
| |
| Performing | | $ | 872,880 | | | $ | 944,854 | |
| Nonperforming | | | 4,940 | | | | 111,062 | |
| | | $ | 877,820 | | | $ | 1,055,916 | |
The Corporation restructures certain loans, principally, through a modification program to accommodate the borrowers payments based on a new loan term structure.The following tables present, by type, quantitative information of modification for those loans modified as a TDR during the years ended December 31, 2019 and 2018:
| (dollars in thousands) | | 2019 | | | | |
| Category | | Loan Count | | | Pre- Modification Outstanding Recorded Investment | | | Post- Modification Outstanding Recorded Investment | | | Increase (decrease) in the allowance for for loan losses | |
Commercial with mortgage guaranty | | | 23 | | | $ | 10,202 | | | $ | 10,167 | | | $ | (83 | ) |
Commercial without mortgage guaranty | | | 4 | | | | 270 | | | | 270 | | | | 4 | |
Consumer | | | 205 | | | | 2,538 | | | | 2,572 | | | | 552 | |
Residential mortgage | | | 43 | | | | 5,582 | | | | 5,751 | | | | (52 | ) |
| | | | 275 | | | $ | 18,592 | | | $ | 18,760 | | | $ | 421 | |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| |
| | |
| | | Combination of change in interest | | | | |
| Category | | interest rate | | | maturity date | | | rate and extension of maturity date | | | Other | | | Total | |
Commercial with mortgage guaranty | | | 3 | | | | 4 | | | | 14 | | | | 2 | | | | 23 | |
Commercial without mortgage guaranty | | | - | | | | 1 | | | | 2 | | | | 1 | | | | 4 | |
Consumer | | | 8 | | | | 76 | | | | 121 | | | | - | | | | 205 | |
Residential mortgage | | | - | | | | 10 | | | | 8 | | | | 25 | | | | 43 | |
| | | | 11 | | | | 91 | | | | 145 | | | | 28 | | | | 275 | |
| (dollars in thousands) | | 2018 | | | | |
| Category | | Loan Count | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | | | Increase (decrease) in the allowance for for loan losses | |
Commercial with mortgage guaranty | | | 45 | | | $ | 18,376 | | | $ | 17,352 | | | $ | (124 | ) |
Commercial without mortgage guaranty | | | 19 | | | | 3,367 | | | | 2,969 | | | | 24 | |
Consumer | | | 287 | | | | 3,972 | | | | 3,968 | | | | 568 | |
Residential mortgage | | | 51 | | | | 7,006 | | | | 7,044 | | | | 197 | |
| | | | 402 | | | $ | 32,721 | | | $ | 31,333 | | | $ | 665 | |
| |
| | |
| | | Combination of change in interest | | | | |
Category | | Reduction in interest rate | | | Extension of maturity date | | | rate and extension of maturity date | | | Other | | | Total | |
Commercial with mortgage guaranty | | | 6 | | | | 1 | | | | 24 | | | | 14 | | | | 45 | |
Commercial without mortgage guaranty | | | 2 | | | | 1 | | | | 12 | | | | 4 | | | | 19 | |
Consumer | | | - | | | | 122 | | | | 162 | | | | 3 | | | | 287 | |
Residential mortgage | | | - | | | | 9 | | | | 11 | | | | 31 | | | | 51 | |
| | | | 8 | | | | 133 | | | | 209 | | | | 52 | | | | 402 | |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The following tables present by class, TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date. Payment default is defined as a restructured loan becoming 90 days past due after being modified. The recorded investment as of December 31, 2019 and 2018 is inclusive of all partial paydowns and charge-offs since modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.
| (dollars in thousands) | | 2019 | | | 2018 | |
| Category | | Loan Count | | | Recorded Investment as of First Default Date | | | Loan Count | | | Recorded Investment as of First Default Date | |
| | | | | | | | | | | | | |
Commercial with mortgage guaranty | | | - | | | $ | - | | | | 40 | | | $ | 16,520 | |
Commercial without mortgage guaranty | | | 1 | | | | 157 | | | | 5 | | | | 281 | |
Consumer | | | 8 | | | | 248 | | | | 69 | | | | 783 | |
Residential | | | 2 | | | | 75 | | | | 40 | | | | 5,717 | |
| | | 11
| | | $ | 480 | | | | 154
| | | $ | 23,301 | |
The recorded investment of TDRs as of December 31, 2019 and 2018 is summarized as follows:
| | | 2019 | |
| (in thousands) | | Current | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | | | | | | | Valuation Allowance | |
| Category | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 44,587 | | | $ | - | | | $ | - | | | $ | - | | | $ | 44,587 | | | $ | 2,932 | |
Residential mortgage | | | 94,452 | | | | 8,586 | | | | 2,353 | | | | 697 | | | | 106,088 | | | | 8,382 | |
Consumer | | | 11,718 | | | | 597 | | | | 294 | | | | 241 | | | | 12,850 | | | | 3,701 | |
Credit cards | | | 14 | | | | - | | | | - | | | | 1 | | | | 15 | | | | - | |
| | | $ | 150,771 | | | $ | 9,183 | | | $ | 2,647 | | | $ | 939 | | | $ | 163,540 | | | $ | 15,015 | |
| | | 2018 | |
| (in thousands) | | Current | | | | | | | | | | | | | | | Valuation Allowance | |
| Category | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 37,611 | | | $ | - | | | $ | 95 | | | $ | 36,876 | | | $ | 74,582 | | | $ | 3,931 | |
Residential mortgage | | | 88,626 | | | | 9,634 | | | | 3,316 | | | | 56,877 | | | | 158,453 | | | | 12,086 | |
Consumer | | | 12,904 | | | | 805 | | | | 629 | | | | 308 | | | | 14,646 | | | | 5,633 | |
Credit cards | | | 22 | | | | - | | | | - | | | | - | | | | 22 | | | | 4 | |
| | | $ | 139,163 | | | $ | 10,439 | | | $ | 4,040 | | | $ | 94,061 | | | $ | 247,703 | | | $ | 21,654 | |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The allowance for loan losses by portfolio segment for the years ended December 31, 2019 and 2018, is detailed in the following table. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| | | 2019 | |
(in thousands)
| | Commercial With Mortgage Guaranty | | | Commercial Without Mortgage Guaranty | | | Consumer | | | Credit Cards | | | Residential Mortgage | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses | | | | | | | | | | | | | | | | | | |
| Beginning balances | | $ | 17,729 | | | $ | 33,591 | | | $ | 12,957 | | | $ | 13,088 | | | $ | 33,674 | | | $ | 111,039 | |
| Charge offs | | | (3,587 | ) | | | (5,171 | ) | | | (8,454 | ) | | | (9,688 | ) | | | (14,693 | ) | | | (41,593 | ) |
| Recoveries | | | 486 | | | | 1,968 | | | | 583 | | | | 268 | | | | 2,501 | | | | 5,806 | |
| Provision | | | (2,630 | ) | | | (8,107 | ) | | | 5,023 | | | | 2,555 | | | | (4,749 | ) | | | (7,908 | ) |
| Balances at end of period | | $ | 11,998 | | | $ | 22,281 | | | $ | 10,109 | | | $ | 6,223 | | | $ | 16,733 | | | $ | 67,344 | |
Allowance for loans individually evaluated for impairment
| | $ | 2,824 | | | $ | 185 | | | $ | 3,701 | | | $ | - | | | $ | 8,369 | | | $ | 15,079 | |
Allowance for loans collectively evaluated for impairment | | $ | 9,174 | | | $ | 22,096 | | | $ | 6,408 | | | $ | 6,223 | | | $ | 8,364 | | | $ | 52,265 | |
| Loans | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balances | | $ | 1,185,689 | | | $ | 422,784 | | | $ | 166,388 | | | $ | 91,962 | | | $ | 877,820 | | | $ | 2,744,643 | |
Ending balances individually evaluated for impairment | | $ | 61,929 | | | $ | 8,173 | | | $ | 12,850 | | | $ | - | | | $ | 109,546 | | | $ | 192,498 | |
Ending balances collectively evaluated for impairment | | $ | 1,123,760 | | | $ | 414,611 | | | $ | 153,538 | | | $ | 91,962 | | | $ | 768,274 | | | $ | 2,552,145 | |
| | | 2018 | |
| | Commercial With Mortgage Guaranty | | | Commercial Without Mortgage Guaranty | | | Consumer | | | Credit Cards | | | Residential Mortgage | | | Qualitative Adjustment | | | Total | |
(in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | |
| Beginning balances | | $ | 18,952 | | | $ | 12,393 | | | $ | 15,062 | | | $ | 13,621 | | | $ | 31,658 | | | $ | 42,023 | | | $ | 133,709 | |
| Charge offs | | | (3,499 | ) | | | (3,765 | ) | | | (10,286 | ) | | | (13,288 | ) | | | (21,907 | ) | | | - | | | | (52,745 | ) |
| Recoveries | | | 1,977 | | | | 468 | | | | 739 | | | | 734 | | | | 2,257 | | | | - | | | | 6,175 | |
| Provision | | | 299 | | | | 24,495 | | | | 7,442 | | | | 12,021 | | | | 21,666 | | | | (42,023 | ) | | | 23,900 | |
| Balances at end of period | | $ | 17,729 | | | $ | 33,591 | | | $ | 12,957 | | | $ | 13,088 | | | $ | 33,674 | | | $ | - | | | $ | 111,039 | |
Allowance for loans individually evaluated for impairment | | $ | 3,093 | | | $ | 9,223 | | | $ | 5,634 | | | $ | - | | | $ | 13,340 | | | $ | - | | | $ | 31,290 | |
Allowance for loans collectively evaluated for impairment | | $ | 14,636 | | | $ | 24,368 | | | $ | 7,323 | | | $ | 13,088 | | | $ | 20,334 | | | $ | - | | | $ | 79,749 | |
| Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balances | | $ | 1,185,533 | | | $ | 521,010 | | | $ | 177,506 | | | $ | 179,951 | | | $ | 1,055,916 | | | $ | - | | | $ | 3,119,916 | |
Ending balances individually evaluated for impairment | | $ | 87,902 | | | $ | 21,889 | | | $ | 14,646 | | | $ | - | | | $ | 208,720 | | | $ | - | | | $ | 333,157 | |
Ending balances collectively evaluated for impairment | | $ | 1,097,631 | | | $ | 499,121 | | | $ | 162,860 | | | $ | 179,951 | | | $ | 847,196 | | | $ | - | | | $ | 2,786,759 | |
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
The Corporation’s premises and equipment as of December 31, 2019 and 2018, were as follows:
| (in thousands) | | Useful Life in Years | | | 2019 | | | 2018 | |
| Land | | | | | $ | 977 | | | $ | 977 | |
| Buildings | | | 30 | | | | 3,122 | | | | 2,957 | |
| Equipment | | | 3–10 | | | | 26,409 | | | | 23,777 | |
| Leasehold improvements | | Various | | | | 24,262 | | | | 22,287 | |
| Total premises and equipment | | | | | | | 54,770 | | | | 49,998 | |
| Accumulated depreciation and amortization | | | | | | | (40,466 | ) | | | (35,495 | ) |
| Premises and equipment – net | | | | | | $ | 14,304 | | | $ | 14,503 | |
Depreciation and amortization of premises and equipment for the years ended December 31, 2019 and 2018, were approximately $4 million and $4.7 million, respectively.
As of December 31, 2019, the Corporation owned four facilities, which consisted of two branches and two parking lots. The Corporation occupies twenty-two leased branch premises while warehouse space is rented in one location, in addition, office spaces are rented at Torre Santander building in Hato Rey, Puerto Rico; at the GAM Tower Galeria San Patricio Building, in Guaynabo, Puerto Rico; and at the operational center in Hato Rey, Puerto Rico. The Corporation’s management believes that each of its facilities is well maintained and suitable for its purpose.
| 7. | Real Estate Held for Sale |
The Corporation owns certain real estate properties held for sale, which are carried at the lower of cost or fair value, less estimated selling cost. The Corporation classified real estate properties for the purpose of selling them in the near term. At December 31, 2019 and 2018, the Corporation’s real estate held for sale was $1.1 million and $1.8 million, respectively. At December 31, 2019 and 2018, the Corporation had seven and ten properties, respectively, classified as held for sale.
The properties are subject to annual valuation process resulting in an unfavorable valuation adjustment of $22,000 and $652,000 for the years ended December 31, 2019 and 2018, respectively. Both effects are presented as part of other operating expenses, in the consolidated statements of income.
In addition, during 2019, the Corporation sold three propertIes with a gain of approximately $129,000. During 2018, the Corporation sold one property with a gain of approximately $162,000.
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| 8. | Mortgage Servicing Rights |
The Corporation has mortgage servicing rights as of December 31, 2019 and 2018, as follows:
| (in thousands) | | 2019 | | | 2018 | |
| Gross balances at the beginning of the year | | $ | 27,752 | | | $ | 27,655 | |
| Additions | | | 143 | | | | 97 | |
| Gross balances at year end | | | 27,895 | | | | 27,752 | |
| Accumulated amortization balances at the beginning of the year | | | (25,291 | ) | | | (24,451 | ) |
| Additions | | | (777 | ) | | | (840 | ) |
| Accumulated amortization balances at year end | | | (26,068 | ) | | | (25,291 | ) |
| Balances at end of the year | | $ | 1,828 | | | $ | 2,461 | |
MSRs arise from the right to service mortgages sold and have an estimated useful life of eight years. Amortization of the asset for the years ended December 31, 2019 and 2018 were approximately $777,000 and $840,000, respectively.
The estimated amortization expense of this asset for each of the next five years and thereafter as of December 31, 2019, is as follows:
| (in thousands) | | | |
| | | | |
| Year Ending December 31 | | Amount | |
2020 | | $ | 599 | |
2021 | | | 448 | |
2022 | | | 321 | |
2023 | | | 229 | |
2024 | | | 139 | |
Thereafter | | | 92 | |
| | | $ | 1,828 | |
The Corporation acquires real estate through foreclosure proceedings or borrower conveys to the Corporation to fully or partially satisfy a debt previously contracted. Legal fees and other direct cost related to a foreclosure are expensed as incurred. In connection with the Agreement, the Corporation sold the outstanding balance at year end amounting to $30.1 million at fair value to an affiliate (which approximated book value). The Corporation will not have any continuing involvement in the sold assets, nor any rights to the future cash flows of the OREO. As of December 31, 2018, the Bank had OREO amounting to $54 million. The activity of OREO for the years ended December 31, 2019 and 2018, is as follows:
Santander BanCorp and Subsidiaries(A Wholly Owned Subsidiary of Santander Holding USA, Inc.) Notes to Consolidated Financial Statements December 31, 2019 and 2018 |
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
| Balances at beginning of the year | | $ | 54,035 | | | $ | 71,456 | |
| Additions | | | 16,651 | | | | 16,816 | |
| Sales | | | (61,952 | ) | | | (26,019 | ) |
| Valuation adjustments | | | (8,734 | ) | | | (8,218 | ) |
| Balances at the end of the year | | $ | - | | | $ | 54,035 | |
After the acquisition and thereafter on an annual basis, each OREO is appraised or evaluated to provide an estimate of the property’s fair market value. The Corporation recognized $8.7 million and $8.2 million for the years ended December 31, 2019 and 2018, respectively, of valuation adjustments in the results of operations.
Other assets as of December 31, 2019 and 2018, consist of the following:
| (in thousands) | | 2019 | | | 2018 | |
| | | | | | | |
Deferred tax assets – net (Note 16) | | $ | 56,975 | | | $ | 99,657 | |
Operating leases - Right of use assets | | | 52,551 | | | | - | |
Accounts receivable – net | | | 7,944 | | | | 7,874 | |
Software – net | | | 4,364 | | | | 4,796 | |
Prepaid expenses | | | 10,324 | | | | 7,665 | |
Customers’ liabilities on acceptances | | | 68 | | | | 70 | |
Derivative assets (Note 21) | | | 1,392 | | | | 1,239 | |
Other | | | 1,525 | | | | 3,888 | |
| | | $ | 135,144 | | | $ | 125,189 | |
Amortization of software assets for the years ended December 31, 2019 and 2018, was approximately $1.9 million and $5.3 million, respectively.
Operating Leases – Right of use assets
The Corporation has operating leases for real estate and non-real estate assets. Real estate leases relate to office space and retail branches. Operating leases, other than real estate, include automated teller machines ("ATMs"), vehicles and certain equipment leases.
Leases with an initial term of 12 months or less are excluded from the operating leases assets. The Corporation recognizes lease expense for these leases on a straight-line basis over the lease term. Some lease payments may vary based on the changes in the consumer price index. The Corporation generally uses the contractual lease terms to allocate lease and non-lease components. Real estate leases may include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more at the Corporation’s sole discretion. The Corporation includes a renewal option period in the lease term if it is reasonably certain that it will exercise such option. The Corporation uses the Federal Home Loan Bank facility rate for purposes of discounting lease payments since this is the only borrowing capacity that the Corporation has and there were no borrowings outstanding as of December 31, 2019. The amortization term of assets and leasehold improvements is limited by the expected lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized based on the present value of lease payments over the lease term, using incremental borrowing rates.
