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Popular Inc. Reports Operating Results (10-K)

March 01, 2011 | About:
10qk

10qk

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Popular Inc. (BPOP) filed Annual Report for the period ended 2010-12-31.

Popular Inc. has a market cap of $3.32 billion; its shares were traded at around $3.25 with and P/S ratio of 1. Hedge Fund Gurus that owns BPOP: John Paulson of Paulson & Co., Bruce Kovner of Caxton Associates, Jim Simons of Renaissance Technologies LLC, Paul Tudor Jones of The Tudor Group, George Soros of Soros Fund Management LLC, Richard Pzena of Pzena Investment Management LLC, Steven Cohen of SAC Capital Advisors. Mutual Fund and Other Gurus that owns BPOP: Diamond Hill Capital of Diamond Hill Capital Management Inc, Pioneer Investments, Chuck Royce of Royce& Associates, Mario Gabelli of GAMCO Investors, John Keeley of Keeley Fund Management.

Highlight of Business Operations:

Popular is a diversified, publicly-owned financial holding company, registered under the Bank Holding Company Act of 1956, as amended (the BHC Act) and subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Popular was incorporated in 1984 under the laws of the Commonwealth of Puerto Rico and is the largest financial institution based in Puerto Rico, with consolidated assets of $38.7 billion, total deposits of $26.8 billion and stockholders equity of $3.8 billion at December 31, 2010. At December 31, 2010, we ranked 38th among bank holding companies based on total assets according to information gathered and disclosed by the Federal Reserve Board.

At the beginning of 2010, it was apparent that the FDIC was likely to take action against various Puerto Rico based commercial banks that were experiencing serious financial difficulties and were operating under cease and desist orders with their banking regulators, which actions could include placing the banks into an FDIC-administered receivership. Management decided that our participation in the consolidation of the Puerto Rico banking industry that would result from any such action was in our best interest, both in order to protect our leading market position and to potentially benefit from acquiring assets and liabilities at an attractive price and with FDIC assistance to mitigate the risk of credit losses. As a condition to allowing us to bid for and acquire a failed depository institution in Puerto Rico, the Federal Reserve Board and the FDIC required us to increase our Tier 1 capital by approximately $1.4 billion. As part of our capital plan agreed to with the FDIC and our primary regulators, during the second quarter of 2010, we completed a capital issuance of $1.15 billion through the sale and subsequent conversion into Common Stock of depositary shares representing interests in shares of contingent convertible perpetual non-cumulative preferred stock. This transaction resulted in the issuance of over 383 million additional shares of our Common Stock in May 2010 upon conversion. The net proceeds from the public offering amounted to $1.1 billion, after deducting the underwriting discount and offering expenses. This transaction strengthened the Populars capital base and facilitated our participation in an FDIC-assisted transaction. In addition, we agreed with our regulators that, if we were a successful bidder for a failed depository institution in an FDIC-assisted transaction, we would raise additional capital through the sale of assets or through the issuance of additional Tier 1 capital, or a combination thereof. The gain recorded from the EVERTEC transaction described below, together with the $1.1 billion capital raise, resulted in approximately $1.6 billion in additional Tier 1 capital, meeting the capital requirement agreed to with our regulators in order for us to participate and consummate the Westernbank FDIC-assisted transaction.

Under the terms of the purchase and assumption agreement, excluding the effects of purchase accounting adjustments, BPPR acquired approximately $9.1 billion in assets, including approximately $8.6 billion in loans and other real estate owned (OREO), and assumed $2.4 billion of deposits of Westernbank. The deposits were acquired without a premium and the assets were acquired at a discount of 12.0% to the former Westernbanks historic book value. The transaction increased our total assets and total deposits, excluding fair value adjustments, by 27% and 9%, respectively, as compared with balances at March 31, 2010. In connection with the transaction, BPPR issued a $5.8 billion five-year promissory note bearing interest at an annual rate of 2.50% (the Purchase Money Note) to the FDIC collateralized by certain loans and foreclosed real estate acquired by BPPR from the FDIC that are subject to loss sharing agreements. As part of the consideration for the transaction, we also issued an equity appreciation instrument in which the FDIC has the opportunity to obtain a cash payment from us for a period of one year from the date of the agreement. The equity appreciation instrument had a fair value of $52.5 million at April 30, 2010. In connection with the Westernbank FDIC-assisted transaction, the FDIC retained the majority of the investment securities, outstanding borrowings and substantially all of the brokered certificates of deposit of Westernbank.

In addition, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day (the True-Up Measurement Date) of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The estimated fair value of such true-up payment is recorded as a reduction in the fair value of the FDIC loss share indemnification asset. Under the loss sharing agreements, BPPR will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the Intrinsic Loss Estimate of $4.6 billion (or $925 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the True-Up Measurement Date in respect of each of the loss sharing agreements during which the loss sharing provisions of the applicable loss sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared loss loans and shared loss assets at the beginning and end of such period times 1%). The true-up payment represents an estimated liability of $169 million. This estimated liability is accounted for as part of the indemnification asset.

As a result of the Westernbank FDIC-assisted transaction, our total assets as of April 30, 2010 increased by $8.3 billion, principally consisting of a loan portfolio with an estimated fair value of $5.2 billion ($8.6 billion unpaid principal balance prior to purchase accounting adjustments) and a $2.3 billion FDIC loss share indemnification asset. Liabilities with a fair value of approximately $8.3 billion were recognized at the acquisition date, including $2.4 billion of assumed deposits, the Purchase Money Note and the equity appreciation instrument. The indemnification asset represents the portion of estimated losses covered by the loss sharing agreements between BPPR and the FDIC. We recorded goodwill of $87 million as part of the transaction.

We offer in Puerto Rico a complete array of retail and commercial banking services through our principal bank subsidiary, BPPR. BPPR was organized in 1893 and is Puerto Ricos largest bank with consolidated total assets of $29.0 billion, deposits of $20.3 billion and stockholders equity of $2.5 billion at December 31, 2010. BPPR accounted for 75% of our total consolidated assets at December 31, 2010. BPPR has the largest retail franchise in Puerto Rico, with 185 branches and 624 ATMs. BPPR also operates seven branches in the U.S. Virgin Islands, one branch in the British Virgin Islands and one branch in New York. BPPRs deposits are insured under the Deposit Insurance Fund (DIF) of the FDIC.

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