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OFG BANCORP - Quarter Report: 2013 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

     EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

       EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number 001-12647

 

OFG Bancorp

Incorporated in the Commonwealth of Puerto Rico,     IRS Employer Identification No. 66-0538893

 

Principal Executive Offices

254 Muñoz Rivera Avenue

San Juan, Puerto Rico 00918

Telephone Number: (787) 771-6800

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨              Accelerated Filer x                Non-Accelerated Filer ¨                Smaller Reporting Company ¨                                                                                           (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No

 

 

Number of shares outstanding of the registrant’s common stock, as of the latest practicable date:

 

 45,626,596 common shares ($1.00 par value per share) outstanding as of April 30, 2013

 

 


 

 

 

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

 

 

Unaudited Consolidated Statements of Financial Condition

1

 

Unaudited Consolidated Statements of Operations

2

 

Unaudited Consolidated Statements of Comprehensive Income

3

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

4

 

Unaudited Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Note 1– Organization, Consolidation and Basis of Presentation

7

 

 

Note 2 – Business Combinations

11

 

 

Note 3 – Investments

13

 

 

Note 4 – Loans Receivable

19

 

 

Note 5 – Allowance for Loan and Lease Losses

27

 

 

Note 6 – Premises and Equipment

37

 

 

Note 7 – Derivative Activities

38

 

 

Note 8 – Accrued Interests Receivable and Other Assets

40

 

 

Note 9 – Deposits and Related Interests

42

 

 

Note 10 – Borrowings

43

 

 

Note 11 – Related Party Transactions

47

 

 

Note 12 – Income Taxes

48

 

 

Note 13 – Stockholders’ Equity

48

 

 

Note 14 – Commitments

53

 

 

Note 15 – Contingencies

55

 

 

Note 16 – Fair Value of Financial Instruments

55

 

 

Note 17 – Offsetting Arrangements

63

 

 

Note 18 – Business Segments

65

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Selected Financial Data

67

 

 

Critical Accounting Policies and  Estimates

69

 

 

Overview of Financial Performance

70

 

 

Analysis of Results of Operations

76

 

 

Analysis of Financial Condition

84

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

105

Item 4.

Control and Procedures

109

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

110

Item 1A.

Risk Factors

110

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

110

Item 3.

Default upon Senior Securities

110

Item 4.

Mine Safety Disclosures

110

Item 5.

Other Information

110

Item 6.

Exhibits

110

SIGNATURES

111

EXHIBIT INDEX

 

 

 


 

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which by their nature are beyond the Company’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

·      the rate of growth in the economy and employment levels, as well as general business and economic conditions;

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

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

·      a credit default by the U.S. or Puerto Rico governments or a downgrade in the credit ratings of the U.S. or Puerto

Rico governments;

·      changes in federal bank regulatory and supervisory policies, including required levels of capital;

·      the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the

Company’s businesses, business practices and cost of operations;

·      the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market in

Puerto Rico;

·      the performance of the stock and bond markets;

·      competition in the financial services industry;

·      additional Federal Deposit Insurance Corporation (“FDIC”) assessments;

·      possible legislative, tax or regulatory changes; and

·      difficulties in integrating the acquired Puerto Rico operations of Banco Bilbao Vizcaya Argentaria, S. A.  (“BBVAPR”) into the Company’s operations.

 

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; the Company’s ability to grow its core businesses; decisions to downsize, sell or close units or otherwise change the Company’s business mix; and management’s ability to identify and manage these and other risks.

All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to the Company as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, the Company assumes no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

 

 


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2013 AND DECEMBER 31, 2012

  

 

March 31,

 

December 31,

 

 

2013 

 

2012 

 

 

(In thousands, except share data)

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

    Cash and due from banks

 

$

 548,770 

 

$

 855,490 

    Money market investments

 

 

 12,676 

 

 

 13,205 

        Total cash and cash equivalents

 

 

 561,446 

 

 

 868,695 

Securities purchased under agreements to resell

 

 

 60,000 

 

 

 80,000 

Investments:

 

 

 

 

 

 

    Trading securities, at fair value, with amortized cost of $1,835 (December 31, 2012 - $508)

 

 

 1,787 

 

 

 495 

    Investment securities available-for-sale, at fair value, with amortized cost of $1,948,685 (December 31, 2012 - $2,118,825)

 

 

 2,013,155 

 

 

 2,194,286 

    Federal Home Loan Bank (FHLB) stock, at cost

 

 

 33,458 

 

 

 38,411 

    Other investments

 

 

 66 

 

 

 73 

        Total investments

 

 

 2,048,466 

 

 

 2,233,265 

Loans:

 

 

 

 

 

 

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

 

 

 77,644 

 

 

 64,544 

    Loans not covered under shared-loss agreements with the FDIC, net of allowance for loan and lease losses of

 

 

 

 

 

 

        $42,720 (December 31, 2012 - $39,921)

 

 

 4,757,003 

 

 

 4,722,174 

    Loans covered under shared-loss agreements with the FDIC, net of allowance for loan and lease losses of

 

 

 

 

 

 

        $52,974 (December 31, 2012 - $54,124)

 

 

 379,734 

 

 

 395,307 

        Total loans, net

 

 

 5,214,381 

 

 

 5,182,025 

Other assets:

 

 

 

 

 

 

FDIC shared-loss indemnification asset

 

 

 266,958 

 

 

 286,799 

Foreclosed real estate covered under shared-loss agreements with the FDIC

 

 

 26,528 

 

 

 22,283 

Foreclosed real estate not covered under shared-loss agreements with the FDIC

 

 

 54,810 

 

 

 53,164 

Accrued interest receivable

 

 

 20,231 

 

 

 17,554 

Deferred tax asset, net

 

 

 112,575 

 

 

 117,201 

Premises and equipment, net

 

 

 83,461 

 

 

 84,997 

Customers' liability on acceptances

 

 

 32,512 

 

 

 26,996 

Servicing assets

 

 

 11,543 

 

 

 10,795 

Derivative assets

 

 

 23,233 

 

 

 21,889 

Goodwill

 

 

 64,021 

 

 

 64,021 

Other assets

 

 

 122,386 

 

 

 123,684 

                Total assets

 

$

 8,702,551 

 

$

 9,193,368 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

    Demand deposits

 

$

 2,183,785 

 

$

 2,447,152 

    Savings accounts

 

 

 892,654 

 

 

 634,819 

    Certificates of deposit

 

 

 2,487,075 

 

 

 2,607,588 

        Total deposits

 

 

 5,563,514 

 

 

 5,689,559 

Borrowings:

 

 

 

 

 

 

    Short term borrowings

 

 

 60,846 

 

 

 92,222 

    Securities sold under agreements to repurchase

 

 

 1,491,675 

 

 

 1,695,247 

    Advances from FHLB and other borrowings

 

 

 462,906 

 

 

 554,177 

    Subordinated capital notes

 

 

 98,436 

 

 

 146,038 

        Total borrowings

 

 

 2,113,863 

 

 

 2,487,684 

Other liabilities:

 

 

 

 

 

 

    Derivative liabilities

 

 

 24,024 

 

 

 26,260 

    Acceptances executed and outstanding

 

 

 32,512 

 

 

 26,996 

    Accrued expenses and other liabilities

 

 

 98,396 

 

 

 99,263 

            Total liabilities

 

 

 7,832,309 

 

 

 8,329,762 

Stockholders’ equity:

 

 

 

 

 

 

    Preferred stock; 10,000,000 shares authorized;

 

 

 

 

 

 

        1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000 shares of Series D

 

 

 

 

 

 

             issued and outstanding, (December 31, 2012 - 1,340,000 ; 1,380,000 ; and 960,000) $25 liquidation value

 

 

 92,000 

 

 

 92,000 

        84,000 shares of Series C issued and outstanding (December 31, 2012 - 84,000); $1,000 liquidation value

 

 

 84,000 

 

 

 84,000 

    Common stock, $1 par value; 100,000,000 shares authorized; 52,670,878 shares issued;

 

 

 

 

 

 

        45,621,199 shares outstanding (December 31, 2012 - 52,670,878; 45,580,281)

 

 

 52,671 

 

 

 52,671 

    Additional paid-in capital

 

 

 537,500 

 

 

 537,453 

    Legal surplus

 

 

 54,128 

 

 

 52,143 

    Retained earnings

 

 

 83,739 

 

 

 70,734 

    Treasury stock, at cost, 7,049,679 shares (December 31, 2012 - 7,090,597 shares)

 

 

 (80,847) 

 

 

 (81,275) 

    Accumulated other comprehensive income, net of tax of $1,101 (December 31, 2012 - $1,802)

 

 

 47,051 

 

 

 55,880 

            Total stockholders’ equity

 

 

 870,242 

 

 

 863,606 

                Total liabilities and stockholders’ equity

 

$

 8,702,551 

 

$

 9,193,368 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

1

 


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2013 AND 2012

 

Quarter Ended March 31,

  

2013 

 

2012 

 

(In thousands, except per share data)

Interest income:

 

 

 

 

 

        Loans not covered under shared-loss agreements with the FDIC

$

 80,263 

 

$

 18,123 

        Loans covered under shared-loss agreements with the FDIC

 

 20,229 

 

 

 21,541 

                    Total interest income from loans

 

 100,492 

 

 

 39,664 

        Mortgage-backed securities

 

 10,818 

 

 

 28,063 

        Investment securities and other

 

 2,318 

 

 

 2,192 

                    Total interest income

 

 113,628 

 

 

 69,919 

Interest expense:

 

 

 

 

 

        Deposits

 

 10,478 

 

 

 9,123 

        Securities sold under agreements to repurchase

 

 7,248 

 

 

 17,570 

        Advances from FHLB and other borrowings

 

 1,660 

 

 

 3,004 

        FDIC-guaranteed term notes

 

 - 

 

 

 909 

        Subordinated capital notes

 

 1,660 

 

 

 328 

                    Total interest expense

 

 21,046 

 

 

 30,934 

Net interest income

 

 92,582 

 

 

 38,985 

Provision for non-covered loan and lease losses

 

 7,916 

 

 

 3,000 

Provision for covered loan and lease losses, net

 

 672 

 

 

 7,157 

                    Total provision for loan and lease losses

 

 8,588 

 

 

 10,157 

Net interest income after provision for loan and lease losses

 

 83,994 

 

 

 28,828 

Non-interest income:

 

 

 

 

 

        Financial service revenue

 

 7,660 

 

 

 5,889 

        Banking service revenue

 

 12,382 

 

 

 3,080 

        Mortgage banking activities

 

 3,153 

 

 

 2,502 

                    Total banking and financial service revenue

 

 23,195 

 

 

 11,471 

        Net amortization of FDIC shared-loss indemnification asset

 

 (12,871) 

 

 

 (4,827) 

        Net gain (loss) on:

 

 

 

 

 

            Sale of securities

 

 - 

 

 

 7,360 

            Derivatives

 

 (298) 

 

 

 - 

            Foreclosed real estate

 

 (1,793) 

 

 

 (398) 

            Early extinguishment of subordinated capital notes

 

 1,061 

 

 

 - 

        Other

 

 (38) 

 

 

 (842) 

                    Total non-interest income, net

 

 9,256 

 

 

 12,764 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

        Compensation and employee benefits

 

 23,249 

 

 

 10,365 

        Professional and service fees

 

 9,122 

 

 

 5,420 

        Occupancy and equipment

 

 9,216 

 

 

 4,209 

        Insurance

 

 2,678 

 

 

 1,820 

        Electronic banking charges

 

 3,728 

 

 

 1,558 

        Advertising, business promotion, and strategic initiatives

 

 1,409 

 

 

 848 

        Merger and restructuring charges

 

 5,534 

 

 

 - 

        Foreclosure, repossession and other real estate expenses

 

 1,505 

 

 

 749 

        Loan servicing and clearing expenses

 

 1,475 

 

 

 967 

        Taxes, other than payroll and income taxes

 

 2,622 

 

 

 1,174 

        Communication

 

 864 

 

 

 389 

        Printing, postage, stationary and supplies

 

 1,166 

 

 

 308 

        Director and investor relations

 

 236 

 

 

 309 

        Other

 

 2,128 

 

 

 886 

                    Total non-interest expense

 

 64,932 

 

 

 29,002 

Income before income taxes

 

 28,318 

 

 

 12,590 

        Income tax expense

 

 7,126 

 

 

 1,937 

Net income

 

 21,192 

 

 

 10,653 

        Less: dividends on preferred stock

 

 (3,465) 

 

 

 (1,201) 

Income available to common shareholders

$

 17,727 

 

$

 9,452 

Earnings per common share:

 

 

 

 

 

        Basic

$

 0.39 

 

$

 0.23 

        Diluted

$

 0.37 

 

$

 0.23 

Average common shares outstanding and equivalents

 

 52,892 

 

 

 41,162 

Cash dividends per share of common stock

$

 0.06 

 

$

 0.06 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

2

 


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED MARCH 31, 2013 AND 2012

 

 

 

 

 

 

 

  

Quarter ended March 31,

 

 

2013 

 

2012 

 

 

(In thousands)

 

Net income

$

 21,192 

 

$

 10,653 

 

Other comprehensive loss before tax:

 

 

 

 

 

 

     Unrealized (gain) loss on securities available-for-sale

 

 (10,992) 

 

 

 1,944 

 

     Realized gain on investment securities included in net income

 

 - 

 

 

 (7,360) 

 

     Unrealized loss (gain) on cash flow hedges

 

 1,462 

 

 

 (2,001) 

 

Other comprehensive loss before taxes

 

 (9,530) 

 

 

 (7,417) 

 

     Income tax effect

 

 701 

 

 

 384 

 

Other comprehensive loss after taxes

 

 (8,829) 

 

 

 (7,033) 

 

Comprehensive income

$

 12,363 

 

$

 3,620 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

3

 


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS ENDED MARCH 31, 2013 AND 2012

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

(In thousands)

Preferred stock:

 

 

 

 

 

     Balance at beginning and end of period

$

 176,000 

 

$

 68,000 

Common stock:

 

 

 

 

 

     Balance at beginning of year

 

 52,671 

 

 

 47,809 

     Exercised stock options

 

 - 

 

 

 32 

          Balance at end of period

 

 52,671 

 

 

 47,841 

Additional paid-in capital:

 

 

 

 

 

     Balance at beginning of year

 

 537,453 

 

 

 499,096 

     Stock-based compensation expense

 

 437 

 

 

 366 

     Exercised stock options

 

 - 

 

 

 359 

     Lapsed restricted stock units

 

 (351) 

 

 

 (35) 

     Common stock issuance costs

 

 (23) 

 

 

 - 

     Preferred stock issuance costs

 

 (16) 

 

 

 - 

          Balance at end of period

 

 537,500 

 

 

 499,786 

Legal surplus:

 

 

 

 

 

     Balance at beginning of year

 

 52,143 

 

 

 50,178 

     Transfer from retained earnings

 

 1,985 

 

 

 1,068 

          Balance at end of period

 

 54,128 

 

 

 51,246 

Retained earnings:

 

 

 

 

 

     Balance at beginning of year

 

 70,734 

 

 

 68,149 

     Net income

 

 21,192 

 

 

 10,653 

     Cash dividends declared on common stock

 

 (2,737) 

 

 

 (2,442) 

     Cash dividends declared on preferred stock

 

 (3,465) 

 

 

 (1,201) 

     Transfer to legal surplus

 

 (1,985) 

 

 

 (1,068) 

          Balance at end of period

 

 83,739 

 

 

 74,091 

Treasury stock:

 

 

 

 

 

     Balance at beginning of year

 

 (81,275) 

 

 

 (74,808) 

     Stock repurchased

 

 - 

 

 

 (7,022) 

     Lapsed restricted stock units

 

 351 

 

 

 35 

     Stock used to match defined contribution plan

 

 77 

 

 

 23 

          Balance at end of period

 

 (80,847) 

 

 

 (81,772) 

Accumulated other comprehensive income, net of tax:

 

 

 

 

 

     Balance at beginning of year

 

 55,880 

 

 

 37,131 

     Other comprehensive loss, net of tax

 

 (8,829) 

 

 

 (7,033) 

          Balance at end of period

 

 47,051 

 

 

 30,098 

Total stockholders’ equity

$

 870,242 

 

$

 689,290 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

4

 


 

OFG BANCORP

  UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2013 AND 2012

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

(In thousands)

Cash flows from operating activities:

 

 

 

 

 

     Net income

$

 21,192 

 

$

 10,653 

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

 

 

 

 

 

        Amortization of deferred loan origination fees, net of costs

 

 256 

 

 

 142 

        Amortization of fair value discounts on acquired loans

 

 2,579 

 

 

 - 

        Amortization of investment securities premiums, net of accretion of discounts

 

 6,200 

 

 

 11,841 

        Amortization of core deposit and customer relationship intangibles

 

 644 

 

 

 36 

        Amortization of fair value premiums on acquired deposits

 

 5,267 

 

 

 - 

        Net amortization of FDIC shared-loss indemnification asset

 

 12,871 

 

 

 4,827 

        Amortization of prepaid FDIC assessment

 

 860 

 

 

 1,494 

        Other impairments on securities

 

 7 

 

 

 4 

        Depreciation and amortization of premises and equipment

 

 3,092 

 

 

 1,210 

        Deferred income taxes, net

 

 5,265 

 

 

 (1,274) 

        Provision for covered and non-covered loan and lease losses, net

 

 8,588 

 

 

 10,157 

        Stock-based compensation

 

 437 

 

 

 366 

         (Gain) loss on:

 

 

 

 

 

            Sale of securities

 

 - 

 

 

 (7,360) 

            Sale of mortgage loans held for sale

 

 (1,631) 

 

 

 (1,330) 

            Derivatives

 

 298 

 

 

 1 

            Early extinguishment of subordinated capital notes

 

 (1,061) 

 

 

 - 

            Foreclosed real estate

 

 1,793 

 

 

 398 

            Sale of other repossessed assets

 

 84 

 

 

 (2) 

            Sale of premises and equipment

 

 - 

 

 

 (82) 

        Originations of loans held-for-sale

 

 (68,493) 

 

 

 (43,144) 

        Proceeds from sale of loans held-for-sale

 

 29,347 

 

 

 22,906 

        Net (increase) decrease in:

 

 

 

 

 

             Trading securities

 

 (1,292) 

 

 

 (184) 

             Accrued interest receivable

 

 (2,677) 

 

 

 1,432 

             Servicing assets

 

 (748) 

 

 

 (271) 

             Other assets

 

 1,446 

 

 

 11,239 

        Net increase (decrease) in:

 

 

 

 

 

            Accrued interest on deposits and borrowings

 

 (391) 

 

 

 (627) 

            Accrued expenses and other liabilities

 

 (2,518) 

 

 

 (7,409) 

               Net cash provided by operating activities

 

 21,415 

 

 

 15,023 

Cash flows from investing activities:

 

 

 

 

 

      Purchases of:

 

 

 

 

 

         Investment securities available-for-sale

 

 (1,383) 

 

 

 (77,910) 

         Investment securities held-to-maturity

 

 - 

 

 

 (119,025) 

         FHLB stock

 

 (3,150) 

 

 

 - 

      Maturities and redemptions of:

 

 

 

 

 

         Investment securities  available-for-sale

 

 163,940 

 

 

 164,804 

         Investment securities  held-to-maturity

 

 - 

 

 

 51,681 

         FHLB stock

 

 8,103 

 

 

 - 

      Proceeds from sales of:

 

 

 

 

 

         Investment securities  available-for-sale

 

 29,062 

 

 

 210,204 

         Foreclosed real estate

 

 5,620 

 

 

 1,792 

         Other repossessed assets

 

 416 

 

 

 994 

         Premises and equipment

 

 155 

 

 

 101 

      Origination and purchase of loans, excluding loans held-for-sale

 

 (206,229) 

 

 

 (67,024) 

      Principal repayment of loans, including covered loans

 

 161,912 

 

 

 58,969 

      Reimbursements from the FDIC on shared-loss agreements

 

 6,650 

 

 

 24,068 

      Additions to premises and equipment

 

 (1,711) 

 

 

 (431) 

      Net change in securities purchased under agreements to resell

 

 20,000 

 

 

 (170,000) 

             Net cash provided by investing activities

 

 183,385 

 

 

 78,223 

 

 

 

 

 

 

5

 


 

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

FOR THE QUARTERS ENDED MARCH 31, 2013 AND 2012

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

(In thousands)

Cash flows from financing activities:

 

 

 

 

 

      Net increase (decrease) in:

 

 

 

 

 

         Deposits

 

 (133,055) 

 

 

 (124,230) 

         Short term borrowings

 

 (31,382) 

 

 

 3,644 

         Securities sold under agreements to repurchase

 

 (203,636) 

 

 

 - 

         FHLB advances

 

 (91,185) 

 

 

 - 

         Subordinated capital notes

 

 (46,541) 

 

 

 - 

         FDIC-guaranteed term notes

 

 - 

 

 

 (105,000) 

         Exercise of stock options

 

 - 

 

 

 391 

      Issuance of common stock costs

 

 (23) 

 

 

 - 

      Issuance of preferred stock costs

 

 (16) 

 

 

 - 

      Purchase of treasury stock

 

 - 

 

 

 (7,022) 

      Termination of derivative instruments

 

 (9) 

 

 

 9 

      Dividends paid on preferred stock

 

 (3,465) 

 

 

 (1,201) 

      Dividends paid on common stock

 

 (2,737) 

 

 

 (2,442) 

          Net cash used in financing activities

 

 (512,049) 

 

 

 (235,851) 

Net change in cash and cash equivalents

 

 (307,249) 

 

 

 (142,605) 

      Cash and cash equivalents at beginning of period

 

 868,695 

 

 

 591,487 

      Cash and cash equivalents at end of period

$

 561,446 

 

$

 448,882 

Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:

 

 

 

 

 

     Interest paid

$

 21,243 

 

$

 31,683 

     Mortgage loans securitized into mortgage-backed securities

$

 27,679 

 

$

 16,619 

     Transfer from loans to foreclosed real estate

$

 15,459 

 

$

 4,143 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

6

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –  ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION  

 

Nature of Operations

 

OFG Bancorp (the “Company”) is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. The Company operates through various subsidiaries including, a commercial bank, Oriental Bank (or the “Bank”), two broker-dealers, Oriental Financial Services Corp. (“Oriental Financial Services”) and OFS Securities, Inc. (“OFS’ Securities”), an insurance agency, Oriental Insurance, Inc. (“Oriental Insurance”) and a retirement plan administrator, Caribbean Pension Consultants, Inc. (“CPC”). The Company also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). Through these subsidiaries and their respective divisions, the Company provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, leasing, auto loans, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services. On April 25, 2013, the Company changed its corporate name from Oriental Financial Group, Inc. to OFG Bancorp.  Note 17 to the unaudited consolidated financial statements presents information about the Company’s business segments.

 

On December 18, 2012, the Company purchased from Banco Bilbao Vizcaya Argentaria, S. A. (“BBVA”), all of the outstanding common stock of each of (i) BBVAPR Holding Corporation (“BBVAPR Holding”), the sole shareholder of Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR Bank”), a Puerto Rico chartered commercial bank, and BBVA Seguros, Inc. (“BBVA Seguros”), an insurance agency, and (ii) BBVA Securities of Puerto Rico, Inc. (“BBVA Securities,” now known as “OFS Securities”), a registered broker-dealer. This transaction is referred to as the “BBVAPR Acquisition” and BBVAPR Holding, BBVAPR Bank, BBVA Seguros and BBVA Securities are collectively referred to as the “BBVAPR Companies” or “BBVAPR.”. 

 

Basis of Presentation and Use of Estimates

The accounting and reporting policies of the “Company conform with U.S. generally accepted accounting principles (“GAAP”) and to banking industry practices.

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”). All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. Interim period results are not necessarily indicative of the results to be expected for the full year.

 

Certain reclassifications have been made to 2012 unaudited consolidated financial statements and notes to the financial statements to conform to the 2013 presentation.

 

Significant Accounting Policies

We provide a summary of our significant accounting policies in our 2012 Form 10-K under “Notes to Consolidated Financial Statements—Note 1—Summary of Significant Accounting Policies.” Below we describe recent accounting changes.

Reclassification out of Accumulated Other Comprehensive Income - In February 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income, which required new footnote disclosures of items reclassified from accumulated Other Comprehensive Income (OCI) to net income. The requirements became effective for the first quarter of 2013 and are included in Note 13 to the unaudited consolidated financial statements.

 

7

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Testing Indefinite-Lived Intangible Assets for Impairment - In July 2012, the FASB issued ASU No. 2012-02, Intangibles— 

Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The ASU is intended to simplify the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. Some examples of intangible assets subject to the guidance include indefinite-lived trademarks, licenses and distribution rights. The ASU allows companies to perform a qualitative assessment about the likelihood of impairment of an indefinite-lived intangible asset to determine whether further impairment testing is necessary, similar in approach to the goodwill impairment test. The ASU became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Our adoption of the guidance had no effect on our unaudited consolidated financial statements.

 

Offsetting Financial Assets and Liabilities - In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The ASU is intended to enhance current disclosure requirements on offsetting financial assets and liabilities. The new disclosures enable financial statement users to compare balance sheets prepared under U.S. GAAP and IFRS, which are subject to different offsetting models. The guidance require to disclose both gross and net information about instruments and transactions eligible for offset in the balance sheet as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The disclosures are required irrespective of whether such instruments are presented gross or net on the balance sheet. In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarify that the scope of this guidance applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amended guidance was effective for annual and interim reporting periods beginning on or after January 1, 2013, with comparative retrospective disclosures required for all periods presented. We adopted the guidance in the first quarter of 2013. Our adoption of the guidance had no effect on our financial condition, results of operations or liquidity since it impacts disclosures only. The new disclosures required by the amended guidance are included in “Note 17 – Offsetting Arrangements.” 

 

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income - In February 2013, the FASB issued an amendment to enhance current disclosure requirements of reclassifications out of accumulated other comprehensive income and their corresponding effect on net income to be presented, in one place, information about significant amounts reclassified and, in some cases, cross-reference to related footnote disclosures. Previously, this information was presented in different places throughout the financial statements. The amendments require to disclose information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, requires to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in its entirety to net income, the company is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amended guidance was effective for annual and interim reporting periods beginning on or after December 15, 2012, prospectively. Our adoption of the guidance is presented on note 13 to these unaudited consolidated financial statements.

 

Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution—  FASB ASU 2012-06, “Business Combinations” (Topic 805) was issued in October 2012. This update addresses the diversity in practice about how to interpret the terms “on the same basis” and “contractual limitations” when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation) acquisition of a financial institution that includes a loss-sharing agreement (indemnification agreement). When a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently the cash flows expected to be collected on the indemnification asset changes as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement, that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets. The amendments in this update are effective for fiscal years and interim periods within those years, beginning on or after December 15, 2012. The adoption of this guidance did not have a material effect on the unaudited consolidated financial statements, since the Company already followed the same basis approach.

 

8

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The ASU requires an entity to present the total of comprehensive income, the components of net income, and the components of OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements. OFG Bancorp selected the two-statement approach. Under this approach, the Company is required to present components of net income and total net income in the Statement of Income. The Statement of Comprehensive Income follows the Statement of Income and includes the components of OCI and a total for OCI, along with a total for comprehensive income. The ASU removed the option of reporting OCI in the statement of changes in stockholders’ equity. This ASU became effective for OFG Bancorp on January 1, 2012 and a Statement of

Comprehensive Income is included in these unaudited consolidated financial statements.

 

Fair Value Measurement — FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (Topic 820) was issued in May 2011. This update establishes common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Among the changes, additional information about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs will be required. Also, entities now will be required to categorize by level of the fair value hierarchy items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed. The amendments in this update are effective during interim and annual periods beginning after December 15, 2011, are to be applied prospectively. The Company adopted this guidance for fair value measurements.

 

Repurchase Agreements — FASB ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (Topic 860) was issued in April 2011. This update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this update. The amendments in this update are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption was not permitted. The Company adopted this guidance for the repurchase agreements

 

Future Application of Accounting Standards

 

Accounting for Financial Instruments—Credit Losses - In December 2012, the FASB issued a proposed ASU, Financial Instruments—Credit Losses. This proposed ASU, or exposure draft, was issued for public comment in order to allow stakeholders the opportunity to review the proposal and provide comments to the FASB, and does not constitute accounting guidance until a final ASU is issued. The exposure draft contains proposed guidance developed by the FASB with the goal of improving financial reporting about expected credit losses on loans, securities and other financial assets held by banks, financial institutions, and other public and private organizations. The exposure draft proposes a new accounting model intended to require earlier recognition of credit losses, while also providing additional transparency about credit risk. The FASB’s proposed model would utilize a single “expected credit loss” measurement objective for the recognition of credit losses, replacing the multiple existing impairment models in U.S. GAAP which generally require that a loss be “incurred” before it is recognized. The FASB’s proposed model represents a significant departure from existing U.S. GAAP, and may result in material changes to the Company’s accounting for financial instruments. The impact of the FASB’s final ASU to the Company’s financial statements will be assessed when it is issued. The exposure draft does not contain a proposed effective date; this would be included in the final ASU, when issued.

 

Other Potential Amendments to Current Accounting Standards - The FASB and IASB, either jointly or separately, are currently working on several major projects, including amendments to existing accounting standards governing financial instruments, leases, consolidation and investment companies. As part of the joint financial instruments project, the FASB has issued a proposed ASU that would result in significant changes to the guidance for recognition and measurement of financial instruments, in addition to the proposed ASU that would change the accounting for credit losses on financial instruments discussed above. The FASB is also working on a joint project that would require substantially all leases to be capitalized on the balance sheet. Additionally, the FASB has issued a proposal on principal-agent considerations that would change the way the Company needs to evaluate whether to consolidate VIEs and non-VIE partnerships. Furthermore, the FASB has issued a proposed ASU that would change the criteria used to determine whether an entity is subject to the accounting and reporting requirements of an investment company. The principal-agent consolidation proposal would require all VIEs, including those that are investment companies, to be evaluated for consolidation under the same

9

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

requirements. All of these projects may have significant impacts for the Company. Upon completion of the standards, the Company will need to reevaluate its accounting and disclosures. However, due to ongoing deliberations of the standard setters, the Company is currently unable to determine the effect of future amendments or proposals.

  

 

10

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2 BUSINESS COMBINATIONS  

 

BBVAPR Acquisition

 

On December 18, 2012, the Company purchased from BBVA, all of the outstanding common stock of each of BBVAPR Holding and BBVA Securities for an aggregate purchase price of $500 million. Immediately following the closing of the BBVAPR Acquisition, the Company merged BBVAPR Bank with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. The unaudited consolidated financial statements contemplate the effect of the BBVAPR Acquisition.

 

Merger and Restructuring Charges

 

Merger and restructuring charges are recorded in the unaudited consolidated statement of operations and include incremental costs to integrate the operations of the Company and BBVAPR. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization.

 

The following table presents severance and employee-related charges, systems integrations and related charges, and other merger-related charges, related to the BBVAPR Acquisition, for the quarter ended March 31, 2013:

 

  

Quarter ended March 31, 2013

 

(In thousands)

Severance and employee-related charges

$

 750 

Systems integrations and related charges

 

 948 

Other-contract cancellation fee

 

 3,836 

Total merger and restructuring charges

$

 5,534 

 

Restructuring Reserve

Restructuring reserves are established by a charge to merger and restructuring charges, and the restructuring charges are included in the merger and restructuring charges table.

The following table presents the changes in restructuring reserves for the quarter ended March 31, 2013:

 

  

Quarter ended March 31, 2013

 

(In thousands)

Balance at the beginning of the period

$

 4,202 

Merger and restructuring charges

 

 5,534 

Cash payments and other

 

 (3,400) 

Balance at the end of the period

$

 6,336 

 

Payments under merger and restructuring reserves associated with the BBVAPR Acquisition are expected to continue in 2013 and will be accounted under applicable accounting guidance to the cost being incurred.

11

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The FDIC-Assisted Acquisition and FDIC Shared-Loss Indemnification Asset

 

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities in the FDIC-assisted acquisition of Eurobank.  As part of the Purchase and Assumption Agreement between the Bank and the FDIC (the “Purchase and Assumption Agreement”), the Bank and the FDIC entered into shared-loss agreements, whereby the FDIC covers a substantial portion of any losses on loans (and related unfunded loan commitments), foreclosed real estate and other repossessed properties.

 

The acquired loans, foreclosed real estate, and other repossessed property subject to the shared-loss agreements are collectively referred to as “covered assets.” Under the terms of the shared-loss agreements, the FDIC absorbs 80% of losses and shares in 80% of loss recoveries on covered assets. The term of the shared-loss agreement covering single family residential mortgage loans is ten years with respect to losses and loss recoveries, while the term of the shared-loss agreement covering commercial loans is five years with respect to losses and eight years with respect to loss recoveries, from the April 30, 2010 acquisition date. The shared-loss agreements also provide for certain costs directly related to the collection and preservation of covered assets to be reimbursed at an 80% level.

 

The assets acquired and liabilities assumed as of April 30, 2010 were presented at their fair value. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and were subject to change. The fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values became available. The process was completed on April 29, 2011.

 

The Bank agreed to make a true-up payment, also known as clawback liability, to the FDIC on the date that is 45 days following the last day (such day, the “True-Up Measurement Date”) of the final shared-loss month, or upon the final disposition of all covered assets under the shared-loss agreements in the event losses thereunder fail to reach expected levels. Under the shared-loss agreements, the Bank will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the Intrinsic Loss Estimate of $906.0 million (or $181.2 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or $227.5 million); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to the Bank 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 shared-loss agreements during which the shared-loss provisions of the applicable shared-loss 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 $16.2 million and $15.5 million, net of discount, as of March 31, 2013 and December 31, 2012, respectively. This estimated liability is accounted for as a reduction of the indemnification asset. The indemnification asset represents the portion of estimated losses covered by the shared-loss agreements between the Bank and the FDIC.

 

The operating results of the Company for the quarters ended March 31, 2013 and 2012 include the operating results produced by the acquired assets and assumed liabilities in the FDIC-assisted acquisition.

 

The FDIC shared-loss indemnification asset activity for the quarters ended March 31, 2013 and 2012 is as follows:

 

  

Quarter Ended March 31,

 

2013 

 

2012 

 

(In thousands)

Balance at beginning of period

$

 286,799 

 

$

 392,367 

    Shared-loss agreements reimbursements from the FDIC

 

 (6,650) 

 

 

 (24,068) 

    Increase (decrease) in expected credit losses to be

    covered under shared-loss agreements, net

 

 (1,822) 

 

 

 12,024 

    Amortization of FDIC shared-loss indemnification asset, net

 

 (12,871) 

 

 

 (4,827) 

    Incurred expenses to be reimbursed under shared-loss agreements

 

 1,502 

 

 

 2,948 

Balance at end of period

$

 266,958 

 

$

 378,444 

 

 

 

 

 

 

12

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 3 - INVESTMENTS   

 

Money Market Investments

 

The Company considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At March 31, 2013 and December 31, 2012, money market instruments included as part of cash and cash equivalents amounted to $12.7 million and $13.2 million, respectively.

 

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell consist of short-term investments and are carried at the amounts at which the assets will be subsequently resold as specified in the respective agreements. At March 31, 2013 and December 31, 2012, securities purchased under agreements to resell amounted to $60.0 million and $80.0 million, respectively.

The amounts advanced under those agreements are reflected as assets in the unaudited consolidated statements of financial condition. It is the Company’s policy to take possession of securities purchased under agreements to resell. Agreements with third parties specify the Company’s right to request additional collateral based on its monitoring of the fair value of the underlying securities on a daily basis. The fair value of the collateral securities held by the Company on these transactions as of March 31, 2013 and December 31, 2012 was approximately $61.2 million and $82.1 million, respectively.

 

Investment Securities

 

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Company at March 31, 2013 and December 31, 2012 were as follows:

 

  

March 31, 2013

 

 

 

Gross

 

Gross

 

 

Weighted

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Average

  

Cost

 

Gains

 

Losses

 

Value

Yield

 

(In thousands)

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

    Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        FNMA and FHLMC certificates

$

 1,492,332 

 

$

 60,779 

 

$

 1 

 

$

 1,553,110 

 

2.99%

        GNMA certificates

 

 11,977 

 

 

 927 

 

 

 7 

 

 

 12,897 

 

4.87%

        CMOs issued by US Government sponsored agencies

 

 268,739 

 

 

 3,554 

 

 

 685 

 

 

 271,608 

 

1.82%

            Total mortgage-backed securities

 

 1,773,048 

 

 

 65,260 

 

 

 693 

 

 

 1,837,615 

 

2.83%

    Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        US Treasury securities

 

 11,499 

 

 

 1 

 

 

 - 

 

 

 11,500 

 

0.13%

        Obligations of US Government sponsored agencies

 

 18,355 

 

 

 181 

 

 

 - 

 

 

 18,536 

 

1.33%

        Obligations of Puerto Rico Government and

            political subdivisions

 

 120,969 

 

 

 - 

 

 

 573 

 

 

 120,396 

 

4.43%

        Other debt securities

 

 24,814 

 

 

 294 

 

 

 - 

 

 

 25,108 

 

3.45%

            Total investment securities

 

 175,637 

 

 

 476 

 

 

 573 

 

 

 175,540 

 

3.68%

Total securities available for sale

$

 1,948,685 

 

$

 65,736 

 

$

 1,266 

 

$

 2,013,155 

 

2.90%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

  

December 31, 2012

 

 

 

Gross

 

Gross

 

 

Weighted

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Average

  

Cost

 

Gains

 

Losses

 

Value

Yield

 

(In thousands)

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

    Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        FNMA and FHLMC certificates

$

 1,622,037 

 

$

 71,411 

 

$

 1 

 

$

 1,693,447 

 

3.06%

        GNMA certificates

 

 14,177 

 

 

 995 

 

 

 8 

 

 

 15,164 

 

4.89%

        CMOs issued by US Government sponsored agencies

 

 288,409 

 

 

 3,784 

 

 

 793 

 

 

 291,400 

 

1.85%

            Total mortgage-backed securities

 

 1,924,623 

 

 

 76,190 

 

 

 802 

 

 

 2,000,011 

 

2.89%

    Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        US treasury securities

 

 26,498 

 

 

 - 

 

 

 2 

 

 

 26,496 

 

0.71%

        Obligations of US Government sponsored agencies

 

 21,623 

 

 

 224 

 

 

 - 

 

 

 21,847 

 

1.35%

        Obligations of Puerto Rico Government and

            political subdivisions

 

 120,950 

 

 

 9 

 

 

 438 

 

 

 120,521 

 

3.82%

        Other debt securities

 

 25,131 

 

 

 280 

 

 

 - 

 

 

 25,411 

 

3.46%

            Total investment securities

 

 194,202 

 

 

 513 

 

 

 440 

 

 

 194,275 

 

2.99%

                Total securities available-for-sale

$

 2,118,825 

 

$

 76,703 

 

$

 1,242 

 

$

 2,194,286 

 

2.90%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The amortized cost and fair value of the Company’s investment securities at March 31, 2013, by contractual maturity, are shown in the next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

March 31, 2013

  

Available-for-sale

 

Amortized Cost

 

Fair Value

 

(In thousands)

Mortgage-backed securities

 

 

 

 

 

    Due after 5 to 10 years

 

 

 

 

 

        FNMA and FHLMC certificates

$

 36,054 

 

$

 37,194 

            Total due after 5 to 10 years

 

 36,054 

 

 

 37,194 

    Due after 10 years

 

 

 

 

 

        FNMA and FHLMC certificates

 

 1,456,278 

 

 

 1,515,916 

        GNMA certificates

 

 11,977 

 

 

 12,897 

        CMOs issued by US Government sponsored agencies

 

 268,739 

 

 

 271,608 

            Total due after 10 years

 

 1,736,994 

 

 

 1,800,421 

                Total  mortgage-backed securities

 

 1,773,048 

 

 

 1,837,615 

Investment securities

 

 

 

 

 

    Due in less than one year

 

 

 

 

 

        US Treasury securities

 

 11,499 

 

 

 11,500 

            Total due in less than one year

 

 11,499 

 

 

 11,500 

    Due from 1 to 5 years

 

 

 

 

 

        Other debt securities

 

 20,000 

 

 

 20,042 

        Obligations of Puerto Rico Government and political subdivisions

 

 407 

 

 

 399 

            Total due from 1 to 5 years

 

 20,407 

 

 

 20,441 

    Due after 5 to 10 years

 

 

 

 

 

        Obligations of Puerto Rico Government and political subdivisions

 

 11,410 

 

 

 11,205 

        Obligations of US Government and sponsored agencies

 

 18,355 

 

 

 18,536 

            Total due after 5 to 10 years

 

 29,765 

 

 

 29,741 

    Due after 10 years

 

 

 

 

 

        Obligations of Puerto Rico Government and political subdivisions

 

 109,152 

 

 

 108,792 

        Other debt securities

 

 4,814 

 

 

 5,066 

            Total due after 10 years

 

 113,966 

 

 

 113,858 

                Total  investment securities

 

 175,637 

 

 

 175,540 

Total securities available-for-sale

$

 1,948,685 

 

$

 2,013,155 

15

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The BBVAPR Acquisition and the related deleverage of the investment securities portfolio that the Company completed during the second half of 2012 reduced the interest rate risk profile of the Company.  During such quarter the Company did not execute any sale of securities from its portfolio other than $29.1 million of available-for-sale GNMA certificates that were sold as part of its recurring mortgage loan origination and securitization activities. These sales produced a nominal gain during such period. During the quarter ended March 31, 2012, there were certain sales of available-for sale securities because the Company felt that gains could be realized and that there were good opportunities to invest the proceeds in other investment securities with attractive yields and terms that would allow the Company to continue protecting its net interest margin.

 

The Company, as part of its asset/liability management, may purchase U.S. Treasury securities and U.S. government sponsored agency discount notes close to their maturities as alternative to cash deposits at correspondent banks or as a short term vehicle to reinvest the proceeds of sale transactions until investment securities with attractive yields can be purchased.

 

For the quarter ended March 31, 2012, the Company recorded a net gain on sale of securities of $7.4 million. The tables below present the gross realized gains by category for such period:

 

 

Quarter Ended March 31, 2012

 

 

 

Book Value

 

 

 

 

Description

Sale Price

 

at Sale

 

Gross Gains

 

Gross Losses

 

(In thousands)

Sale of Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

    Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

        FNMA and FHLMC certificates

$

 139,834 

 

$

 133,839 

 

$

 5,995 

 

$

 - 

        GNMA certificates

 

 17,438 

 

 

 17,437 

 

 

 1 

 

 

 - 

        CMOs issued by US Government sponsored agencies

 

 19,725 

 

 

 18,372 

 

 

 1,353 

 

 

 - 

            Total mortgage-backed securities

 

 176,997 

 

 

 169,648 

 

 

 7,349 

 

 

 - 

    Investment securities

 

 

 

 

 

 

 

 

 

 

 

        Obligations of U.S. Government sponsored agencies

 

 22,677 

 

 

 22,666 

 

 

 11 

 

 

 - 

Structured credit investments

 

 10,530 

 

 

 10,530 

 

 

 - 

 

 

 - 

            Total investment securities

 

 33,207 

 

 

 33,196 

 

 

 11 

 

 

 - 

Total

$

 210,204 

 

$

 202,844 

 

$

 7,360 

 

$

 - 

16

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables show the Company’s gross unrealized losses and fair value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2013 and December 31, 2012:

 

 

March 31, 2013

  

12 months or more

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities Available-for-sale

 

 

 

 

 

 

 

 

    Obligations of Puerto Rico Government and political subdivisions

$

 1,692 

 

$

 34 

 

$

 1,658 

    CMOs issued by US Government sponsored agencies

 

 2,151 

 

 

 176 

 

 

 1,975 

 

$

 3,843 

 

$

 210 

 

$

 3,633 

 

 

 

 

 

 

 

 

 

  

Less than 12 months

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities Available-for-sale

 

 

 

 

 

 

 

 

    CMOs issued by US Government sponsored agencies

$

 6,857 

 

$

 509 

 

$

 6,348 

    Obligations of Puerto Rico Government and political subdivisions

 

 20,587 

 

 

 539 

 

 

 20,048 

GNMA certificates

 

 83 

 

 

 7 

 

 

 76 

FNMA and FHLMC certificates

 

 67 

 

 

 1 

 

 

 66 

 

$

 27,594 

 

$

 1,056 

 

$

 26,538 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

TOTAL

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities Available-for-sale

 

 

 

 

 

 

 

 

    Obligations of Puerto Rico Government and political subdivisions

$

 22,279 

 

$

 573 

 

$

 21,706 

    CMOs issued by US Government sponsored agencies

 

 9,008 

 

 

 685 

 

 

 8,323 

FNMA and FHLMC certificates

 

 67 

 

 

 1 

 

 

 66 

GNMA certificates

 

 83 

 

 

 7 

 

 

 76 

 

$

 31,437 

 

$

 1,266 

 

$

 30,171 

17

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

December 31, 2012

  

12 months or more

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities Available-for-sale

 

 

 

 

 

 

 

 

    Obligations of Puerto Rico Government and political subdivisions

$

 1,673 

 

$

 12 

 

$

 1,661 

    CMOs issued by US Government sponsored agencies

 

 2,194 

 

 

 178 

 

 

 2,016 

 

$

 3,867 

 

$

 190 

 

$

 3,677 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Less than 12 months

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities Available-for-sale

 

 

 

 

 

 

 

 

    CMOs issued by US Government sponsored agencies

$

 10,671 

 

$

 615 

 

$

 10,056 

US Treasury Securities

 

 11,498 

 

 

 2 

 

 

 11,496 

    Obligations of Puerto Rico Government and political subdivisions

 

 19,086 

 

 

 426 

 

 

 18,660 

GNMA certificates

 

 84 

 

 

 8 

 

 

 76 

FNMA and FHLMC certificates

 

 68 

 

 

 1 

 

 

 67 

 

$

 41,407 

 

$

 1,052 

 

$

 40,355 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

TOTAL

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities Available-for-sale

 

 

 

 

 

 

 

 

    Obligations of Puerto Rico Government and political subdivisions

$

 20,759 

 

$

 438 

 

$

 20,321 

    CMOs issued by US Government sponsored agencies

 

 12,865 

 

 

 793 

 

 

 12,072 

US Treasury Securities

 

 11,498 

 

 

 2 

 

 

 11,496 

FNMA and FHLMC certificates

 

 68 

 

 

 1 

 

 

 67 

GNMA certificates

 

 84 

 

 

 8 

 

 

 76 

 

$

 45,274 

 

$

 1,242 

 

$

 44,032 

 

The Company conducts quarterly reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment.  Any portion of a decline in value associated with credit loss is recognized in income with the remaining noncredit-related component recognized in other comprehensive income. A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.”

 

Other-than-temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while the Company believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing refinement, including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or conditions could result in the need to recognize additional other-than-temporary impairment charges in the future.

 

Securities in an unrealized loss position at March 31, 2013 are mainly composed of highly liquid securities that in most cases have a large and efficient secondary market. Valuations are performed on a monthly basis. The Company’s management believes that the unrealized losses of such other securities at March 31, 2013 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuer or guarantor. At March 31, 2013, the Company does not have the intent to sell these investments in an unrealized loss position.

18

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 4 - LOANS RECEIVABLE

 

The Company’s loan portfolio is composed of covered loans and non-covered loans. The risks of the Eurobank FDIC-assisted acquisition acquired loans are significantly different from those loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Accordingly, the Company presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to FDIC loss sharing agreements as “non-covered loans.”  Also, loans acquired in the BBVAPR Acquisition are included as non-covered loans in the unaudited consolidated statements of financial condition. Non-covered loans are furthered segregated between originated loans, acquired loans accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium) and acquired loans accounted for under ASC 310-30 (loans acquired with deteriorated credit quality, including those by analogy).

 

For a summary of the accounting policy related to loans, interest recognition and allowance for loan and lease losses refer to the summary of significant accounting policies included in Note 1 to the unaudited consolidated financial statements.

19

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

The composition of the Company’s loan portfolio at March 31, 2013 and December 31, 2012 was as follows:

 

 

March 31,

 

December 31,

 

2013 

 

2012 

 

(In thousands)

Loans not covered under shared-loss agreements with FDIC:

 

 

 

 

 

    Originated loans and leases:

 

 

 

 

 

        Mortgage 

$

 792,830 

 

$

 804,942 

        Commercial

 

 450,312 

 

 

 353,930 

        Auto and leasing

 

 146,689 

 

 

 50,720 

        Consumer

 

 65,363 

 

 

 48,136 

 

 

 1,455,194 

 

 

 1,257,728 

    Acquired loans:

 

 

 

 

 

     Accounted for under ASC 310-20 (Loans with revolving feature and/or

 

 

 

 

 

        acquired at a premium)

 

 

 

 

 

        Commercial and industrial

 

 315,706 

 

 

 317,632 

        Construction and commercial real estate

 

 19,153 

 

 

 20,337 

        Auto

 

 417,649 

 

 

 457,894 

        Consumer

 

 65,388 

 

 

 68,878 

 

 

 817,896 

 

 

 864,741 

     Accounted for under ASC 310-30 (Loans acquired with deteriorated 

 

 

 

 

 

         credit quality, including those by analogy)

 

 

 

 

 

        Commercial and industrial

 

 934,843 

 

 

 960,502 

        Construction and commercial real estate

 

 191,521 

 

 

 198,560 

        Mortgage 

 

 791,537 

 

 

 810,235 

        Auto

 

 506,613 

 

 

 555,510 

        Consumer

 

 104,257 

 

 

 118,282 

 

 

 2,528,771 

 

 

 2,643,089 

 

 

 4,801,861 

 

 

 4,765,558 

        Deferred loan fees, net

 

 (2,138) 

 

 

 (3,463) 

    Loans receivable

 

 4,799,723 

 

 

 4,762,095 

        Allowance for loan and lease losses on non-covered loans

 

 (42,720) 

 

 

 (39,921) 

    Loans receivable, net

 

 4,757,003 

 

 

 4,722,174 

        Mortgage loans held-for-sale

 

 77,644 

 

 

 64,544 

    Total loans not covered under shared-loss agreements with FDIC, net

 

 4,834,647 

 

 

 4,786,718 

Loans covered under shared-loss agreements with FDIC:

 

 

 

 

 

    Loans secured by 1-4 family residential properties

 

 129,472 

 

 

 128,811 

    Construction and development secured by 1-4 family residential properties

 

 13,971 

 

 

 15,969 

    Commercial and other construction

 

 278,500 

 

 

 289,070 

    Leasing

 

 2,640 

 

 

 7,088 

    Consumer

 

 8,125 

 

 

 8,493 

    Total loans covered under shared-loss agreements with FDIC

 

 432,708 

 

 

 449,431 

        Allowance for loan and lease losses on covered loans

 

 (52,974) 

 

 

 (54,124) 

    Total loans covered under shared-loss agreements with FDIC, net

 

 379,734 

 

 

 395,307 

Total loans receivable, net

$

 5,214,381 

 

$

 5,182,025 

20

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Non-covered Loans

 

Originated Loans and Leases

 

The Company’s originated loan transactions are encompassed within five portfolio segments: mortgage, commercial, consumer, auto and leasing.

 

The following table presents the aging of the recorded investment in gross originated loans, excluding mortgage loans held for sale, as of March 31, 2013 and December 31, 2012 by class of loans. Mortgage loans past due included delinquent loans in the GNMA buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 90+

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due and

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total Past

 

 

 

 

 

Still

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Total Loans

 

Accruing

 

(In thousands)

 

 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Traditional (by origination year):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Up to the year 2002

$

 9,709 

 

$

 885 

 

$

 9,476 

 

$

 20,070 

 

$

 75,165 

 

$

 95,235 

 

$

 - 

        Years 2003 and 2004

 

 18,813 

 

 

 1,540 

 

 

 15,385 

 

 

 35,738 

 

 

 109,645 

 

 

 145,383 

 

 

 - 

        Year 2005

 

 7,391 

 

 

 892 

 

 

 7,131 

 

 

 15,414 

 

 

 62,735 

 

 

 78,149 

 

 

 - 

        Year 2006

 

 12,774 

 

 

 2,125 

 

 

 13,086 

 

 

 27,985 

 

 

 82,302 

 

 

 110,287 

 

 

 - 

        Years 2007, 2008

            and 2009

 

 7,090 

 

 

 569 

 

 

 7,945 

 

 

 15,604 

 

 

 102,495 

 

 

 118,099 

 

 

 - 

        Years 2010, 2011, 2012

            and 2013

 

 674 

 

 

 734 

 

 

 946 

 

 

 2,354 

 

 

 76,534 

 

 

 78,888 

 

 

 - 

 

 

 56,451 

 

 

 6,745 

 

 

 53,969 

 

 

 117,165 

 

 

 508,876 

 

 

 626,041 

 

 

 - 

        Non-traditional

 

 3,219 

 

 

 186 

 

 

 8,968 

 

 

 12,373 

 

 

 43,375 

 

 

 55,748 

 

 

 - 

        Loss mitigation program

 

 18,476 

 

 

 2,070 

 

 

 18,261 

 

 

 38,807 

 

 

 51,295 

 

 

 90,102 

 

 

 

 

 

 78,146 

 

 

 9,001 

 

 

 81,198 

 

 

 168,345 

 

 

 603,546 

 

 

 771,891 

 

 

 - 

    Home equity secured personal loans

 

 - 

 

 

 - 

 

 

 12 

 

 

 12 

 

 

 737 

 

 

 749 

 

 

 - 

    GNMA's buy-back option program

 

 - 

 

 

 - 

 

 

 20,190 

 

 

 20,190 

 

 

 - 

 

 

 20,190 

 

 

 - 

 

 

 78,146 

 

 

 9,001 

 

 

 101,400 

 

 

 188,547 

 

 

 604,283 

 

 

 792,830 

 

 

 - 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Commercial secured by real estate

 

 2,675 

 

 

 825 

 

 

 21,126 

 

 

 24,626 

 

 

 286,409 

 

 

 311,035 

 

 

 - 

    Other commercial and industrial

 

 546 

 

 

 23 

 

 

 2,519 

 

 

 3,088 

 

 

 136,189 

 

 

 139,277 

 

 

 - 

 

 

 3,221 

 

 

 848 

 

 

 23,645 

 

 

 27,714 

 

 

 422,598 

 

 

 450,312 

 

 

 - 

Consumer

 

 475 

 

 

 205 

 

 

 341 

 

 

 1,021 

 

 

 64,342 

 

 

 65,363 

 

 

 - 

Auto and leasing

 

 3,008 

 

 

 305 

 

 

 72 

 

 

 3,385 

 

 

 143,304 

 

 

 146,689 

 

 

 - 

    Total non-covered originated loans

$

 84,850 

 

$

 10,359 

 

$

 125,458 

 

$

 220,667 

 

$

 1,234,527 

 

$

 1,455,194 

 

$

 - 

21

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 90+

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due and

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total Past

 

 

 

 

 

 

 

Still

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Total Loans

 

Accruing

 

(In thousands)

Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Traditional

        (by origination year):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Up to the year 2002

$

 6,906 

 

$

 2,116 

 

$

 11,363 

 

$

 20,385 

 

$

 80,883 

 

$

 101,268 

 

$

 - 

        Years 2003 and 2004

 

 12,048 

 

 

 5,206 

 

 

 18,162 

 

 

 35,416 

 

 

 114,446 

 

 

 149,862 

 

 

 - 

        Year 2005

 

 4,983 

 

 

 1,746 

 

 

 8,860 

 

 

 15,589 

 

 

 65,312 

 

 

 80,901 

 

 

 - 

        Year 2006

 

 9,153 

 

 

 3,525 

 

 

 15,363 

 

 

 28,041 

 

 

 85,045 

 

 

 113,086 

 

 

 - 

        Years 2007, 2008

            and 2009

 

 2,632 

 

 

 1,682 

 

 

 8,965 

 

 

 13,279 

 

 

 108,358 

 

 

 121,637 

 

 

 - 

        Years 2010, 2011 and 2012

            and 2012

 

 632 

 

 

 769 

 

 

 1,162 

 

 

 2,563 

 

 

 64,084 

 

 

 66,647 

 

 

 - 

 

 

 36,354 

 

 

 15,044 

 

 

 63,875 

 

 

 115,273 

 

 

 518,128 

 

 

 633,401 

 

 

 - 

        Non-traditional

 

 2,850 

 

 

 1,067 

 

 

 11,160 

 

 

 15,077 

 

 

 42,742 

 

 

 57,819 

 

 

 - 

        Loss mitigation program

 

 8,933 

 

 

 4,649 

 

 

 19,989 

 

 

 33,571 

 

 

 53,739 

 

 

 87,310 

 

 

 

 

 

 48,137 

 

 

 20,760 

 

 

 95,024 

 

 

 163,921 

 

 

 614,609 

 

 

 778,530 

 

 

 - 

        Home equity secured personal loans

 

 - 

 

 

 - 

 

 

 10 

 

 

 10 

 

 

 726 

 

 

 736 

 

 

 - 

        GNMA's buy-back option program

 

 - 

 

 

 - 

 

 

 25,676 

 

 

 25,676 

 

 

 - 

 

 

 25,676 

 

 

 - 

 

 

 48,137 

 

 

 20,760 

 

 

 120,710 

 

 

 189,607 

 

 

 615,335 

 

 

 804,942 

 

 

 - 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Commercial secured by real estate

 

 9,062 

 

 

 271 

 

 

 15,335 

 

 

 24,668 

 

 

 226,606 

 

 

 251,274 

 

 

 - 

    Other commercial and industrial

 

 345 

 

 

 189 

 

 

 2,378 

 

 

 2,912 

 

 

 99,744 

 

 

 102,656 

 

 

 - 

 

 

 9,407 

 

 

 460 

 

 

 17,713 

 

 

 27,580 

 

 

 326,350 

 

 

 353,930 

 

 

 - 

Consumer

 

 747 

 

 

 92 

 

 

 409 

 

 

 1,248 

 

 

 46,888 

 

 

 48,136 

 

 

 - 

Auto and leasing

 

 251 

 

 

 129 

 

 

 131 

 

 

 511 

 

 

 50,209 

 

 

 50,720 

 

 

 - 

            Total non-covered originated loans

$

 58,542 

 

$

 21,441 

 

$

 138,963 

 

$

 218,946 

 

$

 1,038,782 

 

$

 1,257,728 

 

$

 - 

22

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Acquired Loans Accounted under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

 

Credit cards, retail and commercial lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium as part of the BBVAPR Acquisition are to be accounted for under the guidance of ASC 310-20, which requires that any contractually required loan payment receivable in excess of the Company’s initial investment in the loans be accreted into interest income on a level-yield basis over the life of the loan.  Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with the Company’s non-accrual policy, and any accretion of discount or amortization of premium is discontinued.

 

The following table presents the aging of the recorded investment in gross acquired loans accounted for under ASC 310-20 as of March 31, 2013 and December 31, 2012 by class of loans:

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 90+

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due and

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total Past

 

 

 

 

 

Still

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Total Loans

 

Accruing

 

(In thousands)

 

 

 

    Commercial lines of credits

$

 1,211 

 

$

 34 

 

$

 153 

 

$

 1,398 

 

$

 314,308 

 

$

 315,706 

 

$

 - 

    Commercial real estate

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 19,153 

 

 

 19,153 

 

 

 - 

    Auto

 

 7,096 

 

 

 1,304 

 

 

 572 

 

 

 8,972 

 

 

 408,677 

 

 

 417,649 

 

 

 - 

    Consumer lines of credit and credit cards

 

 650 

 

 

 - 

 

 

 1,002 

 

 

 1,652 

 

 

 63,736 

 

 

 65,388 

 

 

 - 

       Total acquired loans accounted

         for under ASC 310-20

$

 8,957 

 

$

 1,338 

 

$

 1,727 

 

$

 12,022 

 

$

 805,874 

 

$

 817,896 

 

$

 - 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 90+

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due and

 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total Past

 

 

 

 

 

Still

 

Past Due

 

Past Due

 

Past Due

 

Due

 

Current

 

Total Loans

 

Accruing

 

(In thousands)

 

 

 

    Commercial lines of credits

$

 715 

 

$

 76 

 

$

 193 

 

$

 984 

 

$

 316,648 

 

$

 317,632 

 

$

 - 

    Commercial real estate

 

 315 

 

 

 - 

 

 

 - 

 

 

 315 

 

 

 20,022 

 

 

 20,337 

 

 

 - 

    Auto

 

 6,753 

 

 

 1,023 

 

 

 275 

 

 

 8,051 

 

 

 449,843 

 

 

 457,894 

 

 

 - 

    Consumer lines of credit and credit cards

 

 982 

 

 

 - 

 

 

 1,095 

 

 

 2,077 

 

 

 66,801 

 

 

 68,878 

 

 

 - 

       Total acquired loans accounted

         for under ASC 310-20

$

 8,765 

 

$

 1,099 

 

$

 1,563 

 

$

 11,427 

 

$

 853,314 

 

$

 864,741 

 

$

 - 

23

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Acquired Loans Accounted under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

 

Loans acquired as part of the BBVAPR Acquisition, except for credit cards, retail and commercial lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium, are accounted for by the Company in accordance with ASC 310-30.

 

The carrying amount corresponding to non-covered loans acquired with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, and covered loans in the statement of financial condition at March 31, 2013 and December 31, 2012 is as follows:

 

 

 

March 31, 2013

 

December 31, 2012

 

 

(In thousands)

Contractual required payments receivable

 

$ 3,770,439

 

$ 3,941,171

Less: Non-accretable discount

 

 733,564 

 

 742,310 

Cash expected to be collected

 

 3,036,875 

 

 3,198,861 

Less: Accretable yield

 

 508,104 

 

 555,772 

Carrying amount

 

$ 2,528,771

 

$ 2,643,089

 

The following tables describe the accretable yield and non-accretable discount activity of acquired loans accounted for under ASC 310-30 for the quarter ended March 31, 2013, excluding covered loans:

 

 

 

 

Quarter Ended March 31, 2013

 

(In thousands)

Accretable Yield Activity

 

 

 

Balance at beginning of period

 

$

 555,772 

    Accretion

 

 

 (47,668) 

    Transfer from non-accretable discount

 

 

 - 

Balance at end of period

 

$

 508,104 

 

 

 

 

 

 

 

Quarter Ended March 31, 2013

 

(In thousands)

Non-Accretable Discount Activity

 

 

 

Balance at beginning of period

 

$

 742,310 

    Principal losses

 

 

 (8,746) 

    Transfer to accretable yield

 

 

 - 

Balance at end of period

 

$

 733,564 

24

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Covered Loans

 

The carrying amount of covered loans included in the consolidated statements of financial condition at March 31, 2013 and December 31, 2012 are as follows:

 

 

March 31, 2013

 

December 31, 2012

 

(In thousands)

Contractual required payments receivable

$

 821,051 

 

$

 874,994 

Less: Non-accretable discount

 

 214,236 

 

 

 237,555 

Cash expected to be collected

 

 606,815 

 

 

 637,439 

Less: Accretable yield

 

 174,107 

 

 

 188,008 

Carrying amount, gross

 

 432,708 

 

 

 449,431 

Less: Allowance for covered loan and lease losses

 

 52,974 

 

 

 54,124 

Carrying amount, net

$

 379,734 

 

$

 395,307 

 

The following tables describe the accretable yield and non-accretable discount activity of covered loans for the quarters ended March 31, 2013 and 2012:

 

 

Quarter Ended March 31,

 

2013

 

2012

 

(In thousands)

Accretable yield activity

 

 

 

 

 

Balance at beginning of period

$

 188,008 

 

$

 188,822 

    Accretion

 

 (20,229) 

 

 

 (21,541) 

    Transfer from non-accretable discount

 

 6,328 

 

 

 7,597 

Balance at end of period

$

 174,107 

 

$

 174,878 

 

 

 

 

 

 

 

Quarter Ended March 31,

 

2013

 

2012

 

(In thousands)

Non-accretable discount activity

 

 

 

 

 

Balance at beginning of period

$

 237,555 

 

$

 412,170 

    Principal losses

 

 (16,991) 

 

 

 (24,793) 

    Transfer to accretable yield

 

 (6,328) 

 

 

 (7,597) 

Balance at end of period

$

 214,236 

 

$

 379,780 

25

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Non-accrual Loans

 

The following table presents the recorded investment in loans in non-accrual status by class of loans as of March 31, 2013 and December 31, 2012:

 

 

March 31,

 

December 31,

 

2013

 

2012

 

(In thousands)

Originated loans

 

 

 

 

 

Mortgage

 

 

 

 

 

    Traditional

        (by origination year):

 

 

 

 

 

        Up to the year 2002

$

 9,476 

 

$

 11,362 

        Years 2003 and 2004

 

 15,434 

 

 

 18,162 

        Year 2005

 

 7,131 

 

 

 8,859 

        Year 2006

 

 13,086 

 

 

 15,363 

        Years 2007, 2008

            and 2009

 

 8,057 

 

 

 8,967 

        Years 2010, 2011, 2012

            and 2013

 

 946 

 

 

 1,162 

 

 

 54,130 

 

 

 63,875 

        Non-traditional

 

 8,968 

 

 

 11,160 

        Loss mitigation program

 

 36,000 

 

 

 39,957 

 

 

 99,098 

 

 

 114,992 

    Home equity secured personal loans

 

 12 

 

 

 10 

 

 

 99,110 

 

 

 115,002 

Commercial

 

 

 

 

 

    Commercial secured by real estate

 

 27,190 

 

 

 26,517 

    Other commercial and industrial

 

 3,566 

 

 

 2,989 

 

 

 30,756 

 

 

 29,506 

Consumer

 

 371 

 

 

 442 

Auto and leasing

 

 219 

 

 

 131 

 

 

 

 

 

 

Acquired loans accounted under ASC 310-20

 

 

 

 

 

    Commercial lines of credit

 

 153 

 

 

 193 

    Auto

 

 605 

 

 

 275 

    Consumer lines of credit and credit cards

 

 1,001 

 

 

 1,095 

 

 

 1,759 

 

 

 1,563 

            Total non-accrual loans

$

 132,215 

 

$

 146,644 

 

Loans accounted for under ASC 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

 

At March 31, 2013 and December 31, 2012, loans whose terms have been extended and which are classified as troubled-debt restructuring that are not included in non-accrual loans amounted to $48.3 million and $52.0 million, respectively.

26

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5 - ALLOWANCE FOR LOAN AND LEASE LOSSES

 

Non-Covered Loans

 

The Company maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. The Company’s allowance for loan and lease losses policy provides for a detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond the Company’s control.

 

We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

 

The following table presents the activity in our allowance for loan and lease losses on loans and related recorded investment of the associated loans in our originated loan portfolio by segment for the period indicated:

 

 

Quarter Ended March 31, 2013

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Unallocated

 

Total

 

(In thousands)

Allowance for loan and lease losses for

    non-covered originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Balance at beginning of period

$

 21,092 

 

$

 17,072 

 

$

 856 

 

$

 533 

 

$

 368 

 

$

 39,921 

          Charge-offs

 

 (2,588) 

 

 

 (557) 

 

 

 (246) 

 

 

 (91) 

 

 

 - 

 

 

 (3,482) 

          Recoveries

 

 - 

 

 

 28 

 

 

 65 

 

 

 7 

 

 

 - 

 

 

 100 

          Provision for non-covered

            loan and lease losses

 

 4,385 

 

 

 (229) 

 

 

 638 

 

 

 1,292 

 

 

 (291) 

 

 

 5,795 

                Balance at end of period

$

 22,889 

 

$

 16,314 

 

$

 1,313 

 

$

 1,741 

 

$

 77 

 

$

 42,334 

 

 

March 31, 2013

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Unallocated

 

Total

 

(In thousands)

Allowance for loan and lease losses

    for originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Ending allowance balance attributable

      to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Individually evaluated for impairment

$

 5,385 

 

$

 4,065 

 

$

 - 

 

$

 - 

 

$

 - 

 

$

 9,450 

        Collectively evaluated for impairment

 

 17,504 

 

 

 12,249 

 

 

 1,313 

 

 

 1,741 

 

 

 77 

 

 

 32,884 

                Total ending allowance balance

$

 22,889 

 

$

 16,314 

 

$

 1,313 

 

$

 1,741 

 

$

 77 

 

$

 42,334 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Individually evaluated for impairment

$

 78,564 

 

$

 45,964 

 

$

 - 

 

$

 - 

 

$

 - 

 

$

 124,528 

        Collectively evaluated for impairment

 

 714,266 

 

 

 404,348 

 

 

 65,363 

 

 

 146,689 

 

 

 - 

 

 

 1,330,666 

                Total ending loan balance

$

 792,830 

 

$

 450,312 

 

$

 65,363 

 

$

 146,689 

 

$

 - 

 

$

 1,455,194 

27

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Quarter Ended March 31, 2012

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Unallocated

 

Total

 

(In thousands)

Allowance for loan and lease losses for

    non-covered originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Balance at beginning of period

$

 21,652 

 

$

 12,548 

 

$

 1,423 

 

$

 845 

 

$

 542 

 

$

 37,010 

        Charge-offs

 

 (922) 

 

 

 (1,637) 

 

 

 (182) 

 

 

 (31) 

 

 

 - 

 

 

 (2,772) 

        Recoveries

 

 - 

 

 

 67 

 

 

 52 

 

 

 4 

 

 

 - 

 

 

 123 

        Provision for (recapture of) non-covered

            loan and lease losses

 

 (1,763) 

 

 

 4,067 

 

 

 35 

 

 

 (308) 

 

 

 969 

 

 

 3,000 

                Balance at end of period

$

 18,967 

 

$

 15,045 

 

$

 1,328 

 

$

 510 

 

$

 1,511 

 

$

 37,361 

 

 

December 31, 2012

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Unallocated

 

Total

 

(In thousands)

Allowance for loan and lease losses for

    originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Individually evaluated for impairment

$

 5,334 

 

$

 4,121 

 

$

 - 

 

$

 - 

 

$

 - 

 

$

 9,455 

        Collectively evaluated for impairment

 

 15,758 

 

 

 12,951 

 

 

 856 

 

 

 533 

 

 

 368 

 

 

 30,466 

                Total ending allowance balance

$

 21,092 

 

$

 17,072 

 

$

 856 

 

$

 533 

 

$

 368 

 

$

 39,921 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Individually evaluated for impairment

$

 74,783 

 

$

 46,199 

 

$

 - 

 

$

 - 

 

$

 - 

 

$

 120,982 

        Collectively evaluated for impairment

 

 730,159 

 

 

 307,731 

 

 

 48,136 

 

 

 50,720 

 

 

 - 

 

 

 1,136,746 

                Total ending loans balance

$

 804,942 

 

$

 353,930 

 

$

 48,136 

 

$

 50,720 

 

$

 - 

 

$

 1,257,728 

28

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans in our non-covered acquired loan portfolio, excluding loans accounted for under ASC 310-30, for the quarter ended March 31, 2013:

 

 

Quarter Ended March 31, 2013

 

Mortgage

 

Commercial

 

Consumer

 

Auto

 

Unallocated

 

Total

 

(In thousands)

Allowance for loan and lease losses for

    non-covered loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Acquired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Charge-offs

 

 - 

 

 

 - 

 

 

 (1,456) 

 

 

 (1,715) 

 

 

 - 

 

 

 (3,171) 

          Recoveries

 

 - 

 

 

 - 

 

 

 207 

 

 

 1,230 

 

 

 - 

 

 

 1,437 

          Provision for non-covered

            loan and lease losses

 

 - 

 

 

 386 

 

 

 1,249 

 

 

 485 

 

 

 - 

 

 

 2,120 

                Balance at end of period

$

 - 

 

$

 386 

 

$

 - 

 

$

 - 

 

$

 - 

 

$

 386 

 

 

March 31, 2013

 

Mortgage

 

Commercial

 

Consumer

 

Auto

 

Unallocated

 

Total

 

(In thousands)

Allowance for loan and lease losses

    for acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Ending allowance balance attributable

      to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Collectively evaluated for impairment

 

 - 

 

 

 386 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 386 

                Total ending allowance balance

$

 - 

 

$

 386 

 

$

 - 

 

$

 - 

 

$

 - 

 

$

 386 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Collectively evaluated for impairment

 

 - 

 

 

 334,859 

 

 

 65,388 

 

 

 417,649 

 

 

 - 

 

 

 817,896 

                Total ending loan balance

$

 - 

 

$

 334,859 

 

$

 65,388 

 

$

 417,649 

 

$

 - 

 

$

 817,896 

 

Impaired Loans

 

The Company evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The total investment in impaired commercial loans was $46.0 million and $46.2 million at March 31, 2013 and December 31, 2012, respectively.  The impaired commercial loans were measured based on the fair value of collateral or the present value of cash flows method, including those identified as troubled-debt restructurings. The valuation allowance for impaired commercial loans amounted to approximately $4.1 million and $4.1 million at March 31, 2013 and December 31, 2012, respectively. The total investment in impaired mortgage loans was $78.6 million and $74.8 million at March 31, 2012 and December 31, 2012, respectively. Impairment on mortgage loans assessed as troubled-debt restructurings was measured using the present value of cash flows. The valuation allowance for impaired mortgage loans amounted to approximately $5.4 million and $5.3 million at March 31, 2013 and December 31, 2012, respectively.

29

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company’s recorded investment in commercial and mortgage loans that were individually evaluated for impairment, excluding loans accounted for under ASC 310-30, and the related allowance for loan and lease losses at March 31, 2013 and December 31, 2012 are as follows:

 

 

March 31, 2013

  

Unpaid

 

Recorded

 

Specific

 

  

  

Principal

 

Investment

 

Allowance

 

Coverage

 

(In thousands)

Impaired loans with specific allowance

 

 

 

 

 

 

 

 

 

 

        Commercial

$

 10,490 

 

$

 10,047 

 

$

 4,065 

 

40%

        Residential troubled-debt restructuring

 

 81,362 

 

 

 78,564 

 

 

 5,385 

 

7%

Impaired loans with no specific allowance

 

 

 

 

 

 

 

 

 

 

        Commercial

 

 42,483 

 

 

 35,917 

 

 

N/A

 

N/A

            Total investment in impaired loans

$

 134,335 

 

$

 124,528 

 

$

 9,450 

 

8%

 

 

December 31, 2012

  

Unpaid

 

Recorded

 

Specific

 

  

  

Principal

 

Investment

 

Allowance

 

Coverage

 

(In thousands)

Impaired loans with specific allowance

 

 

 

 

 

 

 

 

 

 

        Commercial

$

 16,666 

 

$

 14,570 

 

$

 4,121 

 

28%

        Residential troubled-debt restructuring

 

 76,859 

 

 

 74,783 

 

 

 5,334 

 

7%

Impaired loans with no specific allowance

 

 

 

 

 

 

 

 

 

 

        Commercial

 

 36,293 

 

 

 31,629 

 

 

N/A

 

N/A

            Total investment in impaired loans

$

 129,818 

 

$

 120,982 

 

$

 9,455 

 

8%

 

There were no impaired acquired loans accounted for under ASC 310-20 at March 31, 2013 and December 31, 2012.

 

The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for impairment, excluding loans accounted for under ASC 310-30, for the quarters ended March 31, 2013 and  2012:

 

 

Quarter Ended March 31,

 

2013 

 

2012 

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

(In thousands)

Impaired loans with specific allowance

 

 

 

 

 

 

 

 

 

 

 

        Commercial

$

 4 

 

$

 15,472 

 

$

 149 

 

$

 24,927 

        Residential troubled-debt restructuring

 

 443 

 

 

 78,748 

 

 

 424 

 

 

 56,385 

Impaired loans with no specific allowance

 

 

 

 

 

 

 

 

 

 

 

        Commercial

 

 293 

 

 

 30,360 

 

 

 38 

 

 

 18,698 

            Total interest income from impaired loans

$

 740 

 

$

 124,580 

 

$

 611 

 

$

 100,010 

30

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Modifications

 

The following table presents the troubled-debt restructurings modified during the quarters ended March 31, 2013 and 2012:

 

 

Quarter Ended March 31, 2013

 

Number of contracts

 

Pre Modification Outstanding Recorded Investment

 

Pre-Modification Weighted Average Rate

 

Pre-Modification Weighted Average Term (in Months)

 

Post-Modification Outstanding Recorded Investment

 

Post-Modification Weighted Average Rate

 

Post-Modification Weighted Average Term (in Months)

 

(Dollars in thousands)

Mortgage loans

 57 

 

$

7,518 

 

6.28%

 

331 

 

$

8,040 

 

4.35%

 

409 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2012

 

Number of contracts

 

Pre Modification Outstanding Recorded Investment

 

Pre-Modification Weighted Average Rate

 

Pre-Modification Weighted Average Term (in Months)

 

Post-Modification Outstanding Recorded Investment

 

Post-Modification Weighted Average Rate

 

Post-Modification Weighted Average Term (in Months)

 

(Dollars in thousands)

Mortgage loans

 58 

 

$

9,445 

 

6.49%

 

328 

 

$

10,039 

 

4.96%

 

403 

Commercial loans

 4 

 

 

 811 

 

6.67%

 

 71 

 

 

 1,173 

 

7.18%

 

 48 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents troubled-debt restructurings modified and for which there was a payment default during the twelve-month periods ended March 31, 2013 and 2012:

 

 

Twelve-Month Period Ended March 31,

 

2013 

 

2012 

 

Number of contracts

 

Recorded Investment

 

Number of contracts

 

Recorded Investment

 

(Dollars in thousands)

Mortgage loans

 32 

 

$

 4,295 

 

 36 

 

$

 4,425 

Consumer

 1 

 

$

 18 

 

 - 

 

$

 - 

Commercial

 - 

 

$

 - 

 

 1 

 

$

 357 

31

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Credit Quality Indicators

 

The Company categorizes non-covered originated and acquired loans accounted for under ASC 310-20 into risk categories based on relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics, prior loss experience, and the results of periodic credit reviews of individual loans.

 

The Company uses the following definitions for risk ratings:

 

Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or 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 added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, questionable and improbable.

 

Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

32

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As of March 31, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of gross non-covered originated and acquired loans accounted for under ASC 310-20 subject to risk rating by class of loans is as follows:

 

 

March 31, 2013

 

Risk Ratings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

Balance

 

 

 

 

Special

 

 

 

 

 

 

 

Measured for

 

Outstanding

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Impairment

 

(In thousands)

Commercial - originated loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Commercial secured

        by real estate

$

 311,304 

 

$

 233,917 

 

$

 30,185 

 

$

 5,907 

 

$

 89 

 

$

 41,206 

    Other commercial

        and industrial

 

 139,009 

 

 

 120,780 

 

 

 9,905 

 

 

 3,565 

 

 

 - 

 

 

 4,759 

 

 

 450,313 

 

 

 354,697 

 

 

 40,090 

 

 

 9,472 

 

 

 89 

 

 

 45,965 

Commercial - acquired loans

      (under ASC 310-20)

 

 

 

 

 

 

 

 

 

 

 

 

 

    Commercial secured

        by real estate

 

 19,153 

 

 

 18,623 

 

 

 245 

 

 

 285 

 

 

 - 

 

 

 - 

    Other commercial

        and industrial

 

 315,706 

 

 

 313,737 

 

 

 582 

 

 

 1,387 

 

 

 - 

 

 

 - 

 

 

 334,859 

 

 

 332,360 

 

 

 827 

 

 

 1,672 

 

 

 - 

 

 

 - 

        Total

$

 785,172 

 

$

 687,057 

 

$

 40,917 

 

$

 11,144 

 

$

 89 

 

$

 45,965 

 

 

December 31, 2012

 

Risk Ratings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

Balance

 

 

 

 

Special

 

 

 

 

 

 

 

Measured for

 

Outstanding

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Impairment

 

(In thousands)

Commercial - originated loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Commercial secured

        by real estate

$

 251,274 

 

$

 183,033 

 

$

 23,928 

 

$

 2,127 

 

$

 99 

 

$

 42,087 

    Other commercial

        and industrial

 

 102,656 

 

 

 85,806 

 

 

 8,569 

 

 

 4,169 

 

 

 - 

 

 

 4,112 

 

 

 353,930 

 

 

 268,839 

 

 

 32,497 

 

 

 6,296 

 

 

 99 

 

 

 46,199 

Commercial - acquired loans

      (under ASC 310-20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Construction and commercial

        real estate

 

 20,337 

 

 

 19,701 

 

 

 245 

 

 

 391 

 

 

 - 

 

 

 - 

    Commercial and industrial

 

 317,632 

 

 

 315,085 

 

 

 213 

 

 

 2,334 

 

 

 - 

 

 

 - 

 

 

 337,969 

 

 

 334,786 

 

 

 458 

 

 

 2,725 

 

 

 - 

 

 

 - 

        Total

$

 691,899 

 

$

 603,625 

 

$

 32,955 

 

$

 9,021 

 

$

 99 

 

$

 46,199 

 

33

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For residential and consumer loan classes, the Company evaluates credit quality based on the delinquency status of the loan. As of March 31, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of non-covered gross originated loans and acquired loans accounted for under ASC 310-20 not subject to risk rating by class of loans is as follows:

 

 

March 31, 2013

 

Delinquency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured for

 

Outstanding

 

0-29 days

 

30-59 days

 

60-89 days

 

90-119 days

 

120-364 days

 

365+ days

 

Impairment

 

(In thousands)

Originated loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Traditional

        (by origination year)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Up to the year 2002

$

 95,235 

 

$

 75,167 

 

$

 9,603 

 

$

 886 

 

$

 - 

 

$

 3,255 

 

$

 6,218 

 

$

 106 

        Years 2003 and 2004

 

 145,383 

 

 

 109,546 

 

 

 18,812 

 

 

 1,490 

 

 

 - 

 

 

 4,953 

 

 

 10,318 

 

 

 264 

        Year 2005

 

 78,149 

 

 

 62,692 

 

 

 7,391 

 

 

 892 

 

 

 - 

 

 

 1,664 

 

 

 5,297 

 

 

 213 

        Year 2006

 

 110,287 

 

 

 82,251 

 

 

 12,634 

 

 

 2,125 

 

 

 - 

 

 

 4,552 

 

 

 8,352 

 

 

 373 

        Years 2007, 2008

            and 2009

 

 118,099 

 

 

 102,143 

 

 

 6,978 

 

 

 569 

 

 

 - 

 

 

 2,446 

 

 

 5,342 

 

 

 621 

        Years 2010, 2011,

            2012 and 2013

 

 78,888 

 

 

 76,534 

 

 

 674 

 

 

 734 

 

 

 - 

 

 

 500 

 

 

 365 

 

 

 81 

 

 

 626,041 

 

 

 508,333 

 

 

 56,092 

 

 

 6,696 

 

 

 - 

 

 

 17,370 

 

 

 35,892 

 

 

 1,658 

    Non-traditional

 

 55,748 

 

 

 43,375 

 

 

 3,219 

 

 

 186 

 

 

 - 

 

 

 2,230 

 

 

 6,738 

 

 

 - 

    Loss mitigation program

 

 90,102 

 

 

 8,802 

 

 

 973 

 

 

 - 

 

 

 - 

 

 

 206 

 

 

 3,215 

 

 

 76,906 

 

 

 771,891 

 

 

 560,510 

 

 

 60,284 

 

 

 6,882 

 

 

 - 

 

 

 19,806 

 

 

 45,845 

 

 

 78,564 

    Home equity secured

        personal loans

 

 749 

 

 

 737 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 12 

 

 

 - 

GNMA's buy-back option program

 

 20,190 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 12,211 

 

 

 7,979 

 

 

 - 

 

 

 792,830 

 

 

 561,247 

 

 

 60,284 

 

 

 6,882 

 

 

 - 

 

 

 32,017 

 

 

 53,836 

 

 

 78,564 

Consumer

 

 65,363 

 

 

 64,342 

 

 

 475 

 

 

 205 

 

 

 214 

 

 

 124 

 

 

 3 

 

 

 - 

Auto and Leasing

 

 146,689 

 

 

 143,304 

 

 

 3,008 

 

 

 305 

 

 

 69 

 

 

 3 

 

 

 - 

 

 

 - 

 

 

 1,004,882 

 

 

 768,893 

 

 

 63,767 

 

 

 7,392 

 

 

 283 

 

 

 32,144 

 

 

 53,839 

 

 

 78,564 

Acquired loans (under ASC 310-20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Auto

 

 417,649 

 

 

 408,677 

 

 

 7,096 

 

 

 1,304 

 

 

 420 

 

 

 152 

 

 

 - 

 

 

 - 

    Consumer

 

 65,388 

 

 

 63,736 

 

 

 650 

 

 

 - 

 

 

 991 

 

 

 9 

 

 

 2 

 

 

 - 

 

 

 483,037 

 

 

 472,413 

 

 

 7,746 

 

 

 1,304 

 

 

 1,411 

 

 

 161 

 

 

 2 

 

 

 - 

     Total

$

 1,487,919 

 

$

 1,241,306 

 

$

 71,513 

 

$

 8,696 

 

$

 1,694 

 

$

 32,305 

 

$

 53,841 

 

$

 78,564 

34

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

December 31, 2012

 

Delinquency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured for

 

Outstanding

 

0-29 days

 

30-59 days

 

60-89 days

 

90-119 days

 

120-364 days

 

365+ days

 

Impairment

 

(In thousands)

Originated loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Traditional

        (by origination year):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Up to the year 2002

$

 101,268 

 

$

 80,715 

 

$

 6,907 

 

$

 2,116 

 

$

 886 

 

$

 3,720 

 

$

 6,442 

 

$

 482 

        Years 2003 and 2004

 

 149,862 

 

 

 114,341 

 

 

 12,048 

 

 

 5,206 

 

 

 2,082 

 

 

 3,994 

 

 

 11,533 

 

 

 658 

        Year 2005

 

 80,900 

 

 

 65,245 

 

 

 4,983 

 

 

 1,746 

 

 

 1,202 

 

 

 1,846 

 

 

 5,727 

 

 

 151 

        Year 2006

 

 113,086 

 

 

 84,926 

 

 

 9,012 

 

 

 3,525 

 

 

 1,530 

 

 

 5,103 

 

 

 8,695 

 

 

 295 

        Years 2007, 2008

            and 2009

 

 121,639 

 

 

 108,357 

 

 

 2,632 

 

 

 1,682 

 

 

 641 

 

 

 2,532 

 

 

 5,732 

 

 

 63 

        Years 2010, 2011

            and 2012

 

 66,646 

 

 

 64,084 

 

 

 632 

 

 

 769 

 

 

 249 

 

 

 452 

 

 

 460 

 

 

 - 

 

 

 633,401 

 

 

 517,668 

 

 

 36,214 

 

 

 15,044 

 

 

 6,590 

 

 

 17,647 

 

 

 38,589 

 

 

 1,649 

    Non-traditional

 

 57,819 

 

 

 42,742 

 

 

 2,850 

 

 

 1,067 

 

 

 455 

 

 

 2,287 

 

 

 8,418 

 

 

 - 

    Loss mitigation program

 

 87,310 

 

 

 9,595 

 

 

 606 

 

 

 128 

 

 

 102 

 

 

 253 

 

 

 3,492 

 

 

 73,134 

 

 

 778,530 

 

 

 570,005 

 

 

 39,670 

 

 

 16,239 

 

 

 7,147 

 

 

 20,187 

 

 

 50,499 

 

 

 74,783 

    Home equity secured

        personal loans

 

 736 

 

 

 726 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 10 

 

 

 - 

    GNMA's buy back

        option program

 

 25,676 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 6,064 

 

 

 10,659 

 

 

 8,953 

 

 

 - 

 

 

 804,942 

 

 

 570,731 

 

 

 39,670 

 

 

 16,239 

 

 

 13,211 

 

 

 30,846 

 

 

 59,462 

 

 

 74,783 

Consumer

 

 48,136 

 

 

 46,888 

 

 

 747 

 

 

 92 

 

 

 188 

 

 

 218 

 

 

 3 

 

 

 - 

Auto and leasing

 

 50,720 

 

 

 50,209 

 

 

 251 

 

 

 129 

 

 

 46 

 

 

 85 

 

 

 - 

 

 

 - 

 

 

 903,798 

 

 

 667,828 

 

 

 40,668 

 

 

 16,460 

 

 

 13,445 

 

 

 31,149 

 

 

 59,465 

 

 

 74,783 

Acquired loans (under ASC 310-20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Auto

 

 457,894 

 

 

 449,843 

 

 

 6,753 

 

 

 1,023 

 

 

 264 

 

 

 11 

 

 

 - 

 

 

 - 

    Consumer

 

 68,878 

 

 

 66,801 

 

 

 982 

 

 

 - 

 

 

 1,089 

 

 

 4 

 

 

 2 

 

 

 - 

 

 

 526,772 

 

 

 516,644 

 

 

 7,735 

 

 

 1,023 

 

 

 1,353 

 

 

 15 

 

 

 2 

 

 

 - 

  Total

$

 1,430,570 

 

$

 1,184,472 

 

$

 48,403 

 

$

 17,483 

 

$

 14,798 

 

$

 31,164 

 

$

 59,467 

 

$

 74,783 

 

Non-covered Acquired Loans Accounted under ASC 310-30

 

Loans acquired in the BBVAPR Acquisition accounted for under ASC 310-30 were recognized at fair value as of December 18, 2012, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at the acquisition date. To the extent credit deterioration occurs after the date of acquisition, the Company would record an allowance for loan and lease losses. Management determined that there was no need to record an allowance for loan and lease losses on loans acquired in the BBVAPR Acquisition accounted for under ASC 310-30 as of March 31, 2013 and December 31, 2012.

 

Covered Loans

 

For covered loans, as part of the evaluation of actual versus expected cash flows, the Company assesses on a quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions. Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through the end of the reporting period.

 

During the first quarter of 2012, the Company reviewed certain pools composed of commercial real estate, construction and development loans, which have been in non-accrual status since acquisition, whose cash flows were lower than the expectations exceeding the established thresholds. The Company reviewed the timing of the collections expected through workouts and/or the timing assessed for the particular workout loan to foreclose for the most significant loans comprising the particular pools selected for review. The credit quality assumptions for these pools were updated to reflect increases in default rates, severities and extension of

35

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

recovery lags resulting in an increase in the provision for covered loan and lease losses. For other pools composed of performing commercial real estate loans and leases, the Company noted that the actual cash flows were better than expected. Thus, for these pools a reversal of previously recorded allowance and a re-yielding of the leasing pools were recorded. As a result of such assessment, during the first quarter of 2012, the Company recorded a net increase in the allowance for covered loans of $19.2 million which was partially offset by an increase in the FDIC shared-loss indemnification asset of $12.0 million.

 

During the quarter ended March 31, 2013, the assessment of actual versus expected cash flows resulted in a net provision of $672 thousand as certain pools of real estate backed loans and of commercial and industrial loans underperformed.  The net provision also included the reversal of a previously recorded allowance in certain commercial real estate and commercial and industrial pools whose loans the Company has managed to workout with better outcomes than forecasted.  The loss share portion of the reversal of allowance during the quarter ended March 31, 2013 was proportionally higher than the allowance reversal recorded on the impaired loans. This resulted from the fact that there were some pools in which an additional allowance was recognized but no offsetting adjustment was done to the FDIC shared-loss indemnification asset as these losses were not covered by a loss share agreement.

 

The changes in the allowance for loan and lease losses on covered loans for the quarters ended March 31, 2013 and 2012 were as follows:

 

 

Quarter Ended March 31,

 

2013

 

2012

 

(In thousands)

Balance at beginning of the period

$

 54,124 

 

$

 37,256 

    Provision for covered loan and lease losses, net

 

 672 

 

 

 7,157 

    FDIC shared-loss portion of provision for (recapture of)

 

 

 

 

 

      covered loan and lease losses, net

 

 (1,822) 

 

 

 12,024 

Balance at end of the period

$

 52,974 

 

$

 56,437 

 

FDIC shared-loss portion of provision for (recapture of) covered loans and lease losses net, represents the credit impairment losses to be covered under the FDIC loss-share agreement which is increasing (decreasing) the FDIC loss-share indemnification asset.

 

36

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company’s recorded investment in covered loan pools that have recorded impairments and their related allowance for covered loan and lease losses as of March 31, 2013 and December 31, 2012 are as follows:

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

  

Unpaid

 

Recorded

 

Specific

 

  

  

Principal

 

Investment

 

Allowance

 

Coverage

 

(In thousands)

Impaired covered loan pools with specific allowance

 

 

 

 

 

 

 

 

 

 

        Loans secured by 1-4 family residential properties

$

 39,309 

 

$

 27,001 

 

$

 7,062 

 

26%

        Construction and development secured by 1-4 family

            residential properties

 

 66,429 

 

 

 13,255 

 

 

 6,796 

 

51%

        Commercial and other construction

 

 241,848 

 

 

 115,932 

 

 

 38,441 

 

33%

        Consumer

 

 13,690 

 

 

 8,125 

 

 

 675 

 

8%

            Total investment in impaired covered loan pools

$

 361,276 

 

$

 164,313 

 

$

 52,974 

 

32%

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

  

Unpaid

 

Recorded

 

Specific

 

  

  

Principal

 

Investment

 

Allowance

 

Coverage

 

(In thousands)

Impaired covered loan pools with specific allowance

 

 

 

 

 

 

 

 

 

 

        Loans secured by 1-4 family residential properties

$

 45,208 

 

$

 29,482 

 

$

 4,986 

 

17%

        Construction and development secured by 1-4 family

            residential properties

 

 68,255 

 

 

 15,185 

 

 

 6,137 

 

40%

        Commercial and other construction

 

 252,373 

 

 

 121,237 

 

 

 42,323 

 

35%

        Consumer

 

 14,494 

 

 

 8,493 

 

 

 678 

 

8%

            Total investment in impaired covered loan pools

$

 380,330 

 

$

 174,397 

 

$

 54,124 

 

31%

 

NOTE 6 —  PREMISES AND EQUIPMENT  

 

Premises and equipment at March 31, 2013 and December 31, 2012 are stated at cost less accumulated depreciation and amortization as follows:

 

   

Useful Life

 

March 31,

 

December 31,

 

(Years)

 

2013 

 

2012 

 

 

 

(In thousands)

Land

 

$

 2,876 

 

$

 2,876 

Buildings and improvements

40 

 

 

 63,877 

 

 

 63,133 

Leasehold improvements

5 — 10

 

 

 23,608 

 

 

 23,602 

Furniture and fixtures

3 — 7

 

 

 11,638 

 

 

 10,441 

Information technology and other

3 — 7

 

 

 22,145 

 

 

 20,874 

 

 

 

 

 124,144 

 

 

 120,926 

Less: accumulated depreciation and amortization

 

 

 

 (40,683) 

 

 

 (35,929) 

 

 

 

$

 83,461 

 

$

 84,997 

 

Depreciation and amortization of premises and equipment totaled $3.1 million in the quarter ended March 31, 2013 and $1.2 million in the quarter ended March 31, 2012.  These are included in the unaudited consolidated statements of operations as part of occupancy and equipment expenses.

37

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 7 —  DERIVATIVE ACTIVITIES  

 

During the quarter ended March 31, 2013, losses of $298 thousand were recognized and reflected as “Derivative Activities” in the unaudited consolidated statements of operations, which were mainly related to the options tied to the S&P Index. During the quarter ended March 31, 2012, there were no significant transactions impacting the Group’s operations reflected as “Derivative Activities” in the unaudited consolidated statements of operations.

 

The following table details “Derivative Assets” and “Derivative Liabilities” as reflected in the unaudited consolidated statements of financial condition at March 31, 2013 and December 31, 2012:

 

   

March 31,

 

December 31,

 

2013 

 

2012 

 

(In thousands)

Derivative assets:

 

 

 

 

 

   Options tied to S&P 500 Index

$

 15,404 

 

$

 13,233 

    Interest rate swaps not designated as hedges

 

 7,599 

 

 

 8,426 

    Interest rate caps

 

 230 

 

 

 230 

 

$

 23,233 

 

$

 21,889 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

    Interest rate swaps designated as cash flow hedges

$

 16,202 

 

$

 17,665 

    Interest rate swaps not designated as hedges

 

 7,546 

 

 

 8,365 

    Interest rate caps

 

 230 

 

 

 230 

    Other

 

 46 

 

 

 - 

 

$

 24,024 

 

$

 26,260 

 

 

 

 

 

 

 

Interest Rate Swaps

 

The Company enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale borrowings, attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix the Company’s interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowings transactions and are properly documented as such, and therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of our cash flow hedges was recognized in other comprehensive income and is subsequently reclassified into earnings in the period during which the hedged forecasted transactions affects earnings.  Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently, the Company does not expect to reclassify any amount included in other comprehensive income related to these interest rate swaps to earnings in the next twelve months.

 

The following table shows a summary of these swaps and their terms at March 31, 2013:

 

 

 

Notional

 

Fixed

 

Variable

 

Trade

 

Settlement

 

Maturity

Type

 

Amount

 

Rate

 

Rate Index

 

Date

 

Date

 

Date

 

 

 (In thousands)

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

 25,000 

 

2.4365%

 

1-Month Libor

 

05/05/11

 

05/04/12

 

05/04/16

 

 

 

 25,000 

 

2.6200%

 

1-Month Libor

 

05/05/11

 

07/24/12

 

07/24/16

 

 

 

 25,000 

 

2.6350%

 

1-Month Libor

 

05/05/11

 

07/30/12

 

07/30/16

 

 

 

 50,000 

 

2.6590%

 

1-Month Libor

 

05/05/11

 

08/10/12

 

08/10/16

 

 

 

 100,000 

 

2.6750%

 

1-Month Libor

 

05/05/11

 

08/16/12

 

08/16/16

 

 

$

 225,000 

 

 

 

 

 

 

 

 

 

 

38

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

An unrealized loss of $16.2 million was recognized in accumulated other comprehensive income related to the valuation of these swaps at March 31, 2013, and the related liability is being reflected in the accompanying unaudited consolidated statements of financial condition. 

 

At March 31, 2013 and December 31, 2012, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $7.6 million and $8.4 million, respectively, and were included as part of derivative assets in the unaudited consolidated statements of financial position.  At March 31, 2013 and December 31, 2012, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $7.5 million and $8.4 million, respectively, and were included as part of derivative liabilities in the unaudited consolidated statements of financial condition. 

 

 The following table shows a summary of these interest rate swaps not designated as hedging instruments and their terms at March 31, 2013:

 

 

 

Notional

 

Fixed

 

Variable

 

Settlement

 

Maturity

Type

 

Amount

 

Rate

 

Rate Index

 

Date

 

Date

 

 

 (In thousands)

 

 

 

 

 

 

 

 

Interest Rate Swaps - Derivatives Offered to Clients

 

$

 4,278 

 

5.1300%

 

1-Month Libor

 

07/03/06

 

07/03/16

 

 

 

 12,500 

 

5.5050%

 

1-Month Libor

 

04/11/09

 

04/11/19

 

 

 

 29,157 

 

4.6200%

 

1-Month Libor

 

12/31/07

 

12/31/14

 

 

 

 19,858 

 

4.6200%

 

1-Month Libor

 

12/31/07

 

12/31/14

 

 

 

 1,905 

 

3.5000%

 

1-Month Libor

 

03/28/08

 

04/01/13

 

 

 

 2,036 

 

3.8500%

 

1-Month Libor

 

04/18/08

 

04/18/13

 

 

 

 1,169 

 

5.1500%

 

3-Month Libor

 

10/24/08

 

10/24/13

 

 

$

 70,903 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps - Mirror Image Derivatives

 

$

 4,278 

 

5.1300%

 

1-Month Libor

 

07/03/06

 

07/03/16

 

 

 

 12,500 

 

5.5050%

 

1-Month Libor

 

04/11/09

 

04/11/19

 

 

 

 29,157 

 

4.5600%

 

1-Month Libor

 

12/31/07

 

12/31/14

 

 

 

 19,858 

 

4.5600%

 

1-Month Libor

 

12/31/07

 

12/31/14

 

 

 

 1,905 

 

3.5000%

 

1-Month Libor

 

03/28/08

 

04/01/13

 

 

 

 2,036 

 

3.8000%

 

1-Month Libor

 

04/18/08

 

04/18/13

 

 

 

 1,169 

 

4.9550%

 

3-Month Libor

 

10/24/08

 

10/24/13

 

 

$

 70,903 

 

 

 

 

 

 

 

 

 

Options Tied to Standard & Poor’s 500 Stock Market Index  

 

The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P 500 Index.  The Company uses option agreements with major broker-dealers to manage its exposure to changes in this index. Under the terms of the option agreements, the Company receives the average increase in the month-end value of the index in exchange for a fixed premium. The changes in fair value of the option agreements used to manage the exposure in the stock market in the certificates of deposit are recorded in earnings. At March 31, 2013 and December 31, 2012, the purchased options used to manage the exposure to the S&P 500 Index on stock indexed deposits represented an asset of $15.4 million (notional amount of $58.6 million) and $13.2 million (notional amount of $66.6 million), respectively, and the options sold to customers embedded in the certificates of deposit and recorded as deposits in the unaudited consolidated statements of financial condition, represented a liability of $14.8 million (notional amount of $56.6 million) and $12.7 million (notional amount of $62.3 million), respectively.

 

.

 

 

 

39

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Interest rate caps

 

The Company has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial results against increases in interest rates. The Company simultaneously enters into mirror-image interest rate cap transactions with financial counterparties. None of these cap transactions qualify for hedge accounting; therefore, they are marked to market through earnings. The outstanding total notional amount of interest rate caps was $94 million at both March 31, 2013 and December 31, 2012. At both March 31, 2013 and December 31, 2012, the interest rate caps sold to clients represented a liability of $230 thousand and were included as part of derivative liabilities in the unaudited consolidated statements of financial condition.  At both March 31, 2013and December 31, 2012, the interest rate caps purchased as mirror-images represented an asset of $230 thousand and were included as part of derivative assets in the unaudited consolidated statements of financial condition.

 

NOTE 8 —  ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS  

 

Accrued interest receivable at March 31, 2013 and December 31, 2012 consists of the following:

 

  

March 31,

 

December 31,

  

2013 

 

2012 

 

(In thousands)

Non-covered loans

$

 13,435 

 

$

 10,533 

Investments

 

 6,796 

 

 

 7,021 

 

$

 20,231 

 

$

 17,554 

 

Other assets at March 31, 2013 and December 31, 2012 consist of the following:

 

 

March 31,

 

December 31,

  

2013 

 

2012 

 

(In thousands)

Prepaid FDIC insurance

$

 5,592 

 

$

 6,451 

Other prepaid expenses

 

 17,338 

 

 

 19,674 

Servicing advances

 

 11,400 

 

 

 7,976 

Mortgage tax credits

 

 8,706 

 

 

 8,706 

Core deposit and customer relationship intangibles

 

 13,846 

 

 

 14,490 

Investment in Statutory Trust

 

 1,086 

 

 

 1,086 

Other repossessed assets

 

 7,739 

 

 

 6,084 

Accounts receivable and other assets

 

 56,679 

 

 

 59,217 

 

$

 122,386 

 

$

 123,684 

40

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay on December 31, 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009. The prepayment balance of the assessment amounted to $5.6 million and $6.5 million at March 31, 2013 and December 31, 2012, respectively. Pursuant to guidelines issued by the FDIC, the assessment due for the first quarter of 2013 payable on June 28, 2013 will be offset by the amount of the credit for prepaid assessments, and the Company will be billed or refunded the difference, as the case may be, on such payment date.

 

Other prepaid expenses amounting to $17.3 million and $19.7 million at March 31, 2013 and December 31, 2012, respectively, include prepaid municipal, property and income taxes aggregating to $10.1 million and $12.0 million, respectively.

 

Servicing advances amounting to $11.4 million and $8.0 million at March 31, 2013 and December 31, 2012, respectively, represent the advances made to Bayview Loan Servicing, LLC in order to service some of the loans acquired in the FDIC-assisted acquisition of Eurobank. This servicing agreement will be terminated effective May 31, 2013.

 

At both March 31, 2012 and December 31, 2012, tax credits for the Company amounted $8.7 million.  Mortgage loan tax credits acquired as part of the BBVAPR Acquisition amounted to $6.3 million and $7.4 million at March 31, 2013 and December 31, 2012, respectively. These tax credits do not have an expiration date.

 

As part of the FDIC-assisted acquisition of Eurobank and the recent BBVAPR Acquisition, the Company recorded a core deposit intangible representing the value of checking and savings deposits acquired. At March 31, 2013 and December 31, 2012, this core deposit intangible amounted to $8.0 million and $8.4 million, respectively. In addition, as part of the BBVAPR Acquisition on December 18, 2012, the Company recorded a customer relationship intangible amounting to $5.0 million representing the value of customer relationships acquired in the broker-dealer and insurance subsidiaries as of December 31, 2012.  At March 31, 2013 this customer relationship intangible amounted to $4.8 million.

 

Other repossessed assets totaled $7.7 million and $6.1 million at March 31, 2013 and December 31, 2012, respectively. Repossessed auto loans acquired as part of the BBVAPR Acquisition amounted to $7.4 million and $5.9 million at March 31, 2013 and December 31, 2012, respectively.

41

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 9 —  DEPOSITS AND RELATED INTEREST  

 

Total deposits as of March 31, 2013 and December 31, 2012 consist of the following:

 

  

March 31, 2013

 

December 31, 2012

 

(In thousands)

Non-interest bearing demand deposits

$

 753,291 

 

$

 799,667 

Interest-bearing savings and demand deposits

 

 2,323,153 

 

 

 2,282,305 

Individual retirement accounts

 

 368,637 

 

 

 376,611 

Retail certificates of deposit

 

 684,477 

 

 

 699,983 

       Total core deposits

 

 4,129,558 

 

 

 4,158,566 

Institutional deposits

 

 593,524 

 

 

 602,828 

Brokered deposits

 

 840,432 

 

 

 928,165 

       Total deposits

$

 5,563,514 

 

$

 5,689,559 

 

At March 31, 2013 and December 31, 2012, the weighted average interest rate of the Company’s deposits was 0.75% and 1.33%, respectively, inclusive of non-interest bearing deposits of $753.3 million and $799.7 million, respectively. Interest expense for the quarters ended March 31, 2013 and 2012 was as follows:

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

(In thousands)

Demand and savings deposits

$

 5,962 

 

$

 3,176 

Certificates of deposit

 

 4,516 

 

 

 5,947 

 

$

 10,478 

 

$

 9,123 

 

At March 31, 2013 and December 31, 2012, demand and interest-bearing deposits and certificates of deposit included deposits of the Puerto Rico Cash & Money Market Fund, which amounted to $95.9 million and $101.5 million, respectively, with a weighted average rate of 0.76% and 0.77%, and were collateralized with investment securities with a fair value of $74.5 million and $80.3 million, respectively.

 

At March 31, 2013 and December 31, 2012 time deposits in denominations of $100 thousand or higher, excluding accrued interests and unamortized discounts, amounted to $1.75 billion and $1.87 billion, including public fund time deposits from various Puerto Rico government municipalities, agencies, and corporations of $114.5 million and $78.3 million, respectively, at a weighted average rate of 0.55% in March 31, 2013 and 0.72% in December 31, 2012.

 

At March 31, 2013 and December 31, 2012, public fund deposits from various Puerto Rico government agencies were collateralized with investment securities with a fair value of $98.7 million and $114.6 million, respectively, and with commercial loans amounting to $513.5 million at March 31, 2013 and $485.8 at December 31, 2012.

42

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Excluding equity indexed options in the amount of $15.4 million, which are used by the Company to manage its exposure to the S&P 500 Index, and also excluding accrued interest of $3.2 million and unamortized deposit discounts in the amount of $2.0 million, the scheduled maturities of certificates of deposit at March 31, 2013 are as follows:

 

 

March 31, 2013

  

(In thousands)

Within one year:

 

 

    Three (3) months or less

$

 688,183 

    Over 3 months through 1 year

 

 840,542 

 

 

 1,528,725 

Over 1 through 2 years

 

 595,683 

Over 2 through 3 years

 

 152,285 

Over 3 through 4 years

 

 123,153 

Over 4 through 5 years

 

 56,606 

Thereafter

 

 11,491 

 

$

 2,467,943 

 

The aggregate amount of overdraft in demand deposit accounts that were reclassified to loans amounted to $4.1 million and $2.8 million as of March 31, 2013 and December 31, 2012, respectively.

 

NOTE 10 —  BORROWINGS  

 

Short term borrowings

 

At March 31, 2013 and December 31, 2012, short term borrowings amounted to $60.8 million and $92.2 million, respectively, which mainly consist of unsecured fixed rate borrowings with a weighted average rate of 0.35% and 0.30%, respectively.

 

Securities Sold under Agreements to Repurchase

 

At March 31, 2013, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Company the same or similar securities at the maturity of the agreements.

 

At March 31, 2013 and December 31, 2012, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $2.4 million and $2.3 million, respectively, were as follows:

 

 

March 31,

 

December 31,

 

2013 

 

2012 

 

 

 

 

Fair Value of

 

 

 

 

Fair Value of

 

Borrowing

 

Underlying

 

Borrowing

 

Underlying

 

Balance

 

Collateral

 

Balance

 

Collateral

 

(In thousands)

UBS Financial Services Inc.

$

 500,000 

 

$

 608,861 

 

$

 500,000 

 

$

 616,751 

JP Morgan Chase Bank NA

 

 275,019 

 

 

 297,606 

 

 

 412,837 

 

 

 443,436 

Credit Suisse Securities (USA) LLC

 

 255,000 

 

 

 269,656 

 

 

 255,000 

 

 

 269,943 

Deutsche Bank

 

 255,000 

 

 

 271,194 

 

 

 255,000 

 

 

 273,288 

Citigroup Global Markets Inc.

 

 204,276 

 

 

 226,644 

 

 

 150,000 

 

 

 162,652 

Barclays Bank

 

 - 

 

 

 - 

 

 

 68,650 

 

 

 77,521 

Wells Fargo

 

 - 

 

 

 - 

 

 

 51,444 

 

 

 54,943 

      Total

$

 1,489,295 

 

$

 1,673,961 

 

$

 1,692,931 

 

$

 1,898,534 

43

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table shows a summary of the Company’s repurchase agreements and their terms, excluding accrued interest in the amount of $2.4 million, at March 31, 2013:

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 Borrowing  

 

Average

 

  

 

Maturity

 

 Next Put

Year of Maturity

 

Balance

 

Coupon

 

Settlement Date

 

Date

 

Date

 

 

(In thousands)

 

 

 

 

 

 

 

 

2013 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 22,178 

 

0.400%

 

3/7/2013

 

4/8/2013

 

N/A

 

 

 

 182,098 

 

0.490%

 

3/7/2013

 

4/8/2013

 

N/A

 

 

 

 20,019 

 

0.420%

 

3/15/2013

 

4/9/2013

 

N/A

 

 

 

 224,295 

 

 

 

 

 

 

 

 

2014 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 255,000 

 

0.500%

 

12/13/2012

 

1/7/2014

 

N/A

 

 

 

 255,000 

 

0.550%

 

12/10/2012

 

6/13/2014

 

N/A

 

 

 

 85,000 

 

0.675%

 

12/3/2012

 

12/3/2014

 

N/A

 

 

 

 170,000 

 

0.675%

 

12/6/2012

 

12/8/2014

 

N/A

 

 

 

 765,000 

 

 

 

 

 

 

 

 

2017 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 500,000 

 

4.665%

 

3/2/2007

 

3/2/2017

 

6/3/2013

 

 

 

 500,000 

 

 

 

 

 

 

 

 

 

 

$

 1,489,295 

 

1.933%

 

 

 

 

 

 

44

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Advances from the Federal Home Loan Bank

 

Advances are received from the FHLB under an agreement whereby the Company is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At March 31, 2013 and December 31, 2012, these advances were secured by mortgage and commercial loans amounting to $1.4 billion and $1.3 billion, respectively. Also, at March 31, 2013, the Company had an additional borrowing capacity with the FHLB of $599.7 million. At March 31, 2013 and December 31, 2012, the weighted average remaining maturity of FHLB’s advances was 8.8 months and 3.5 months, respectively. The original terms of these advances range between one month and five years, and the FHLB does not have the right to exercise put options at par on any advances outstanding as of March 31, 2013.    The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $468 thousand and unamortized premium in the amount of $191 thousand, at March 31, 2013:

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 Borrowing  

 

Average

 

  

 

Maturity

 

 Next Put

Year of Maturity

 

Balance

 

Coupon

 

Settlement Date

 

Date

 

Date

 

 

(In thousands)

 

 

 

 

 

 

 

 

2013 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 25,000 

 

0.410%

 

2/28/2013

 

4/1/2013

 

N/A

 

 

 

 40,000 

 

0.380%

 

3/28/2013

 

4/2/2013

 

N/A

 

 

 

 25,000 

 

0.390%

 

3/4/2013

 

4/4/2013

 

N/A

 

 

 

 50,000 

 

0.410%

 

3/11/2013

 

4/10/2013

 

N/A

 

 

 

 100,000 

 

0.400%

 

3/18/2013

 

4/16/2013

 

N/A

 

 

 

 25,000 

 

0.380%

 

3/25/2013

 

4/24/2013

 

N/A

 

 

 

 100,000 

 

1.950%

 

6/11/2010

 

6/11/2013

 

N/A

 

 

 

 365,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 4,901 

 

1.240%

 

4/3/2012

 

4/3/2017

 

N/A

 

 

 

 4,901 

 

 

 

 

 

 

 

 

2018 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 30,000 

 

2.187%

 

1/16/2013

 

1/16/2018

 

N/A

 

 

 

 25,000 

 

2.177%

 

1/16/2013

 

1/16/2018

 

N/A

 

 

 

 55,000 

 

 

 

 

 

 

 

 

 

 

$

 424,901 

 

1.003%

 

 

 

 

 

 

45

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

All of the advances referred to above with maturity dates up to the date of this report were renewed as one-month short-term advances.

 

FDIC-Guaranteed Term Notes —  Temporary Liquidity Guarantee Program  

 

On March 16, 2012, the Company’s banking subsidiary repaid at maturity the $105 million in senior unsecured notes that it issued in March 2009 under the FDIC’s Temporary Liquidity Guarantee Program.

 

Subordinated Capital Notes

 

Subordinated capital notes amounted to $98.4 million and $146.0 million at March 31, 2013 and December 31, 2012, respectively.

 

In August 2003, the Statutory Trust II, a special purpose entity of the Company, was formed for the purpose of issuing trust redeemable preferred securities. In September 2003, $35.0 million of trust redeemable preferred securities were issued by the Statutory Trust II as part of a pooled underwriting transaction. Pooled underwriting involves participating with other bank holding companies in issuing the securities through a special purpose pooling vehicle created by the underwriters.

 

The proceeds from this issuance were used by the Statutory Trust II to purchase a like amount of a floating rate junior subordinated deferrable interest debenture issued by the Company. The subordinated deferrable interest debenture has a par value of $36.1 million, bears interest based on 3-month LIBOR plus 295 basis points (3.23% at March 31, 2013; 3.26% at December 31, 2012), is payable quarterly, and matures on September 17, 2033. It may be called at par after five years and quarterly thereafter (next call date June 2013). The trust redeemable preferred securities have the same maturity and call provisions as the subordinated deferrable interest debenture.  The subordinated deferrable interest debenture issued by the Company is accounted for as a liability denominated as a subordinated capital note on the unaudited consolidated statements of financial condition.

 

The subordinated capital note is treated as Tier 1 capital for regulatory purposes. Under Federal Reserve Board rules, restricted core capital elements, which are qualifying trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. However, under the Dodd-Frank Act, bank holding companies are prohibited from including in their Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments issued before May 19, 2010 by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion as of December 31, 2009, may continue to be included as Tier 1 capital. Therefore, the Company is permitted to continue to include its existing trust preferred securities as Tier 1 capital.  

 

 As part of the BBVAPR Acquisition on December 18, 2012, the Company’s banking subsidiary assumed three subordinated capital notes issued by BBVAPR Bank consisting of the following:

 

·         Subordinated capital notes issued in September 2004 amounting to $50.0 million at a variable rate of three-month LIBOR plus 1.44%  (1.75% at December 31, 2012 ), that was due September 23, 2014. During the quarter ended March 31, 2013, the Bank repurchased and cancelled these subordinated capital notes in whole before maturity and realized a gain of $1.1 million in the Company’s unaudited consolidated statements of operations.

·         Subordinated capital notes issued in September 2006 amounting to $37.0 million at a fixed rate of 5.76% through September 29, 2011, and three-month LIBOR plus 1.56% thereafter (1.84% at March 31, 2013; 1.87% at December 31, 2012), due September 29, 2016. Interest on these subordinated notes is payable quarterly during the floating-rate period. The Bank has the option to redeem these subordinated capital notes in whole or in part from time to time before maturity at 100% of the principal amount plus any accrued but unpaid interest to the date of redemption, beginning September 29, 2011, and at each payment date thereafter.

·         Subordinated capital notes issued in September 2006 amounting to $30.0 million at a variable rate of three-month LIBOR plus 1.56% thereafter ( 1.84% at March 31, 2013; 1.87% at December 31, 2012), due September 29, 2016. Interest on these subordinated notes is payable quarterly. The Bank has the option to redeem these subordinated capital notes in whole or in part from time to time before maturity at 100% of the principal amount plus any accrued but unpaid interest to the date of redemption, beginning September 29, 2011, and at each payment date thereafter.

 

46

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

These notes qualify as Tier 2 capital at a discounted rate, which totals $40.2 million at March 31, 2013 and $50.2 million at December 31, 2012.  Generally speaking, subordinated notes are included as Tier 2 capital if they have an original weighted average maturity of at least 5 years and comply with certain other requirements.  As the notes approach maturity, they begin to take on characteristics of a short term obligation.  For this reason, the outstanding amount eligible for inclusion in Tier 2 capital is reduced, or discounted, as the instruments approach maturity: one fifth of the outstanding amount is excluded each year during the instruments last five years before maturity.  When the remaining maturity is less than one year, the instrument is excluded from tier 2 capital.

 

Under the requirements of Puerto Rico Banking Act, the Bank must establish a redemption fund for the subordinated capital notes by transferring from undivided profits pre-established amounts as follows:

 

 

 

 

Redemption fund

 

(In thousands)

2013 

$

 48,575 

2014 

 

 6,700 

2015 

 

 6,700 

2016 

 

 5,025 

 

$

 67,000 

 

Other borrowings

 

Other borrowings, presented in the unaudited consolidated statement of financial condition within “Advances from FHLB and other borrowings”, amounted to $37.3 million and $17.6 million at March 31, 2013 and December 31, 2012, respectively. These borrowings mainly consists of federal funds purchased of $29.6 million and $9.9 million at March 31, 2013 and December 31, 2012, respectively, with a weighted average interest rate of 0.30% at both dates; and unsecured fixed-rate borrowings of $7.7 million at both March 31, 2013 and December 31, 2012, with a weighted average interest rate of 0.67% and 0.67%, respectively.

 

NOTE 11 —  RELATED PARTY TRANSACTIONS

 

The Bank grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. These loans are offered at the same terms as loans to unrelated third parties. As of March 31, 2013 and December 31, 2012, these loan balances amounted to $8.7 million and $6.1 million, respectively. The activity and balance of these loans for the quarters ended March 31, 2013 and 2012, were as follows:

 

 

Quarter Ended March 31,

 

2013 

 

2012 

 

(In thousands)

Balance at the beginning of period

$

 6,055 

 

$

 3,772 

    New loans

 

 4,234 

 

 

 1,505 

    Repayments

 

 (833) 

 

 

 (39) 

    Credits of persons no longer

        considered related parties

 

 (768) 

 

 

 - 

Balance at the end of period

$

 8,688 

 

$

 5,238 

47

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 12 —  INCOME TAXES

 

At March 31, 2013 and December 31, 2012, the Company’s net deferred tax asset amounted to $112.6 million and $117.2 million, respectively. Income tax expense for the quarters ended March 31, 2013 and 2012 totaled $7.1 million and $1.9 million, respectively. 

 

At March 31, 2013 and December 31, 2012, OIB had $458 thousand and $504 thousand in the income tax effect of unrecognized gain on available-for-sale securities included in other comprehensive income, respectively. Following the change in OIB’s applicable tax rate from 5% to 0% as a result of new Puerto Rico legislation adopted in 2011, this remaining tax balance will flow through income as these securities are repaid or sold in future periods. During the quarters ended March 31, 2013 and 2012, the income tax provision included $47 thousand and $558 thousand, respectively, related to this residual tax effect from OIB.

 

The Company classifies unrecognized tax benefits in income taxes payable. These gross unrecognized tax benefits would affect the effective tax rate if realized. The balance of unrecognized tax benefits at March 31, 2013 was $4.9 million (December 31, 2012 - $18.8 million). The Company had accrued $1.6 million at March 31, 2013 (December 31, 2012 - $1.5 million) for the payment of interest and penalties relating to unrecognized tax benefits.

 

 

NOTE 13 —  STOCKHOLDERS’ EQUITY

 

Regulatory Capital Requirements

 

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Pursuant to the Dodd-Frank Act, federal banking regulators are required to establish minimum leverage and risk-based capital requirements, on a consolidated basis, for insured institutions, depository institutions, depository institution holding companies, and non-bank financial companies supervised by the Federal Reserve Board. The minimum leverage and risk-based capital requirements are to be determined based on the minimum ratios established for insured depository institutions under prompt corrective action regulations.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in the regulations). As of March 31, 2013 and December 31, 2012, the Company and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 2013 and December 31, 2012, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.

48

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2013 and December 31, 2012 are as follows:

 

  

 

 

 

 

 

Minimum Capital

 

Actual

 

Requirement

  

Amount

 

Ratio

 

Amount

 

Ratio

 

(Dollars in thousands)

Company Ratios

 

 

 

 

 

 

 

 

 

As of March 31, 2013

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

 805,320 

 

15.26%

 

$

 422,159 

 

8.00%

Tier 1 capital to risk-weighted assets

$

 698,786 

 

13.24%

 

$

 211,080 

 

4.00%

Tier 1 capital to total assets

$

 698,786 

 

8.07%

 

$

 346,284 

 

4.00%

As of December 31, 2012

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

 794,195 

 

15.15%

 

$

 419,269 

 

8.00%

Tier 1 capital to risk-weighted assets

$

 678,127 

 

12.94%

 

$

 209,634 

 

4.00%

Tier 1 capital to total assets

$

 678,127 

 

6.42%

 

$

 422,307 

 

4.00%

 

 

 

 

 

 

 

 

 

 

 

 

Minimum to be Well

 

 

 

 

 

 

 

 

 

 

 

Capitalized Under Prompt

  

 

 

 

 

 

Minimum Capital

 

Corrective Action

 

Actual

 

Requirement

 

Provisions

  

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

(Dollars in thousands)

Bank Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

 735,713 

 

14.23%

 

$

 413,616 

 

8.00%

 

$

 517,020 

 

10.00%

Tier 1 capital to risk-weighted assets

$

 630,498 

 

12.19%

 

$

 206,808 

 

4.00%

 

$

 310,212 

 

6.00%

Tier 1 capital to total assets

$

 630,498 

 

7.34%

 

$

 343,805 

 

4.00%

 

$

 429,756 

 

5.00%

As of December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

 719,675 

 

14.03%

 

$

 410,268 

 

8.00%

 

$

 512,835 

 

10.00%

Tier 1 capital to risk-weighted assets

$

 604,997 

 

11.80%

 

$

 205,134 

 

4.00%

 

$

 307,701 

 

6.00%

Tier 1 capital to total assets

$

 604,997 

 

5.75%

 

$

 420,298 

 

4.00%

 

$

 525,373 

 

5.00%

 

The Company’s ability to pay dividends to its shareholders and other activities can be restricted if its capital falls below levels established by the Federal Reserve Board’s guidelines. In addition, any bank holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital.

 

    Additional paid-in capital

 

Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of costs of the issuance. As of March 31, 2013, accumulated issuance costs charged against additional paid in capital amounted to $10.1 million and $13.6 million for preferred and common stock, respectively.

 

 

Legal Surplus

 

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At March 31, 2013 and December 31, 2012, the Bank’s legal surplus amounted to $54.1 million and $52.1 million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders.

49

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Earnings per Common Share

 

The calculation of earnings per common share for the quarters ended March 31, 2013 and 2012 is as follows:

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

 

 

 

 

 

Net income

$

 21,192 

 

$

 10,653 

    Less: Dividends on preferred stock

 

 

 

 

 

      Non-Convertible Preferred Stock (Series A, B, and D)

 

 (1,628) 

 

 

 (1,201) 

      Convertible preferred stock (Series C)

 

 (1,837) 

 

 

 - 

Income available to common shareholders

$

 17,727 

 

$

 9,452 

    Effect of assumed conversion of the Convertible             '    'Preferred Stock

 

 1,837 

 

 

 - 

Income available to common shareholders                       assuming conversion

$

 19,564 

 

$

 9,452 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents:

 

 

 

 

 

  Average common shares outstanding

 

 45,595 

 

 

 41,043 

  Effect of dilutive securities:

 

 

 

 

 

    Average potential common shares-options

 

 159 

 

 

 119 

    Average potential common shares-assuming                    '     'conversion of convertible preferred stock

 

 7,138 

 

 

 - 

Total weighted average common shares                       ' 'outstanding and equivalents

 

 52,892 

 

 

 41,162 

Earnings per common share - basic

$

 0.39 

 

$

 0.23 

Earnings per common share - diluted

$

 0.37 

 

$

 0.23 

 

In computing diluted earnings per common share, the 84,000 shares of convertible preferred stock, which remained outstanding at March 31, 2013, with a conversion rate, subject to certain conditions, of 84.9798 shares of common stock per share, were included as average potential common shares from the date they were outstanding. Moreover, in computing diluted earnings per common share, the dividends declared during the quarter ended March 31, 2013 on the convertible preferred stock were added back as income available to common shareholders.

 

For the quarters ended March 31, 2013 and 2012, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 653,843 and 759,453, respectively.

50

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Treasury Stock

 

Repurchased common stock is held by the Company as treasury shares. The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

 

The activity in connection with common shares held in treasury by the Company for the quarters ended March 31, 2013 and 2012 is set forth below:

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

 

 

Dollar

 

 

 

Dollar

  

Shares

 

Amount

 

Shares

 

Amount

 

(In thousands, except shares data)

Beginning of period

 7,090,597 

 

$

 81,275 

 

 6,564,124 

 

$

 74,808 

Common shares used upon lapse of restricted stock units

 (33,600) 

 

 

 (351) 

 

 (3,333) 

 

 

 (35) 

Common shares repurchased as part of the stock repurchase program

 - 

 

 

 - 

 

 603,000 

 

 

 7,022 

Common shares used to match defined 

contribution plan, net

 (7,318) 

 

 

 (77) 

 

 (12,190) 

 

 

 (23) 

End of period

 7,049,679 

 

$

 80,847 

 

 7,151,601 

 

$

 81,772 

 

Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income, net of income tax, as of March 31, 2013 and December 31, 2012 consisted of:

 

 

March 31,

 

December 31,

  

2013 

 

2012 

 

(In thousands)

Unrealized gain on securities available-for-sale which are not

    other-than-temporarily impaired

$

 64,355 

 

$

 75,347 

Income tax effect of unrealized gain on securities available-for-sale

 

 (5,962) 

 

 

 (7,102) 

    Net unrealized gain on securities available-for-sale which are not

        other-than-temporarily impaired

 

 58,393 

 

 

 68,245 

Unrealized loss on cash flow hedges

 

 (16,202) 

 

 

 (17,664) 

Income tax effect of unrealized loss on cash flow hedges

 

 4,860 

 

 

 5,299 

    Net unrealized loss on cash flow hedges

 

 (11,342) 

 

 

 (12,365) 

 

$

 47,051 

 

$

 55,880 

51

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents changes in accumulated other comprehensive income by component, net of taxes, in the quarter ended March 31, 2013:

 

 

Quarter Ended March 31, 2013

 

Net unrealized

 

Net unrealized

 

Accumulated

 

gains on

 

loss on

 

other

 

securities

 

cash flow

 

comprehensive

  

available-for-sale

 

hedges

 

income

 

(In thousands)

Beginning balance

$

 68,245 

 

$

 (12,365) 

 

$

 55,880 

Other comprehensive income before reclassifications

 

 (9,899) 

 

 

 (313) 

 

 

 (10,212) 

Amounts reclassified out of accumulated other comprehensive income

 

 47 

 

 

 1,336 

 

 

 1,383 

Other comprehensive income

 

 (9,852) 

 

 

 1,023 

 

 

 (8,829) 

Ending balance

$

 58,393 

 

$

 (11,342) 

 

$

 47,051 

 

The following table presents reclassifications out of accumulated other comprehensive income in the quarter ended March 31, 2013:

 

  

 

 

 

 

Amount reclassified out of accumulated other comprehensive income

 

Affected Line Item in Consolidated Statement of Operations

 

(In thousands)

 

 

Cash flow hedges:

 

 

 

 

Interest-rate contracts

$

 1,336 

 

Net interest expense

Available-for-sale securities:

 

 

 

 

Residual tax effect from OIB's change in applicable tax rate

 

 47 

 

Income tax expense

 

$

 1,383 

 

 

 

At March 31, 2013 and December 31, 2012, OIB had $458 thousand and $504 thousand, respectively, in the income tax effect of unrecognized gain on available-for-sale securities included in other comprehensive income. Following the change in OIB’s applicable tax rate from 5% to 0% as a result of a new Puerto Rico law adopted in 2011, this remaining tax balance will flow through income as these securities are repaid or sold in future periods. During the quarters ended March 31, 2013 and 2012, $47 thousand and $558 thousand, respectively, related to this residual tax effect from OIB was reclassified from accumulated other comprehensive income into income tax provision.

52

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 14 —  COMMITMENTS

 

Loan Commitments

 

In the normal course of business, the Company becomes a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the unaudited consolidated statements of financial condition. The contract or notional amount of those instruments reflects the extent of the Company’s involvement in particular types of financial instruments.

The Company’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented by the contractual notional amount of those instruments, which do not necessarily represent the amounts potentially subject to risk. In addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are identified. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Summarized credit-related financial instruments at March 31, 2013 and December 31, 2012 were as follows:

 

 

March 31,

 

December 31,

  

2013 

 

2012 

 

(In thousands)

Commitments to extend credit

$

 555,659 

 

$

 591,679 

Commercial letters of credit

 

 2,408 

 

 

 2,918 

 

Commitments from loans acquired as part of the BBVAPR Acquisition amounted to $427.0 million and $461.6 million at March 31, 2013 and December 31, 2012, respectively. Commitments to extend credit represent agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the counterparty.

 

At March 31, 2013 and December 31, 2012, commitments to extend credit consisted mainly of undisbursed available amounts on commercial lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash requirements. These lines of credit had a reserve of $362 thousand at both March 31, 2013 and December 31, 2012.

 

Commercial letters of credit are issued or confirmed to guarantee payment of customers’ payables or receivables in short-term international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended. However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts.

 

53

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at March 31, 2013 and December 31, 2012, is as follows:

 

 

March 31,

 

December 31,

  

2013 

 

2012 

 

(In thousands)

Standby letters of credit and financial guarantees

$

 67,493 

 

$

 69,789 

Loans sold with recourse

 

 166,541 

 

 

 172,492 

Commitments to sell or securitize mortgage loans

 

 97,314 

 

 

 83,663 

 

Standby letters of credit and financial guarantees are written conditional commitments issued by the Company to guarantee the payment and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the beneficiary may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing letters of credit in the event of nonperformance is the face amount of the letter of credit or financial guarantee. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. As of March 31, 2013 and December 31, 2012, no performance was required on any financial guarantees. As part of the BBVAPR Acquisition, the Company assumed $65.9 million of standby letters of credit and $169.3 million of loans sold without recourse commitments at December 31, 2012. At March 31, 2013, assumed standby letters of credit and loans sold without recourse commitments amounted to $65.1 million and to $164.3 million, respectively.  The Company does not expect any significant losses under these obligations.

 

Lease Commitments

 

The Company has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for the quarters ended March 31, 2013 and 2012 amounted to $2.7 million and $1.6 million, respectively, and is included in the “occupancy and equipment” caption in the unaudited consolidated statements of operations. Future rental commitments under leases in effect at March 31, 2013, exclusive of taxes, insurance, and maintenance expenses payable by the Company, are summarized as follows:

 

Year Ending March 31,

Minimum Rent

 

(In thousands)

2013 

$

 6,980 

2014 

 

 8,720 

2015 

 

 8,375 

2016 

 

 7,516 

2017 

 

 7,923 

Thereafter

 

 24,051 

 

$

 63,565 

54

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 15 —  CONTINGENCIES

 

The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of business, the Company and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of the Company, including the Bank (and its subsidiary OIB), Oriental Financial Services, OFS Securities and Oriental Insurance, are subject to regulation by various U.S., Puerto Rico and other regulators.

 

The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.

 

Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of the Company’s management, based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not be likely to have a material adverse effect on the unaudited consolidated statements of financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material adverse effect on the Company’s unaudited consolidated results of operations or cash flows in particular quarterly or annual periods. The Company has evaluated all litigation and regulatory matters where the likelihood of a potential loss is deemed reasonably possible. The Company has determined that the estimate of the reasonably possible loss is not significant.

 

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company follows the fair value measurement framework under GAAP.

 

Fair Value Measurement

 

The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs previously described that may be used to measure fair value.

 

Money market investments

 

The fair value of money market investments is based on the carrying amounts reflected in the unaudited consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

 

Investment securities

 

The fair value of investment securities is based on quoted market prices, when available, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument. The Company holds two securities categorized as other debt that are classified as Level 3. The estimated fair value of the other debt securities is determined by using a third-party model to calculate the present value of projected future cash flows. The assumptions are highly uncertain and include primarily market discount rates, current spreads, and an indicative pricing. The assumptions used are drawn from similar securities that are actively traded in the market and have similar characteristics as the collateral underlying the debt securities being evaluated. The valuation is performed on a monthly basis.

 

55

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Derivative instruments

 

The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or the Company.

 

Certain other derivative instruments with limited market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3. The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P Index and uses equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value is obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its measurement tool for these options. The payoff of these options is linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology uses an average rate option or a cash-settled option whose payoff is based on the difference between the expected average value of the S&P Index during the remaining life of the option and the strike price at inception. The assumptions, which are uncertain and require a degree of judgment, include primarily S&P Index volatility, forward interest rate projections, estimated index dividend payout, and leverage.

 

Servicing assets

 

Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the servicing rights are classified as Level 3.

 

Loans receivable considered impaired that are collateral dependent

 

The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC 310-10-35. Currently, the associated loans considered impaired are classified as Level 3.

 

Foreclosed real estate

 

Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

56

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Assets and liabilities measured at fair value on a recurring and non-recurring basis, including financial liabilities for which the Company has elected the fair value option, are summarized below:

 

  

March 31, 2013

  

Fair Value Measurements

  

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Recurring fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

    Investment securities available-for-sale

$

 - 

 

$

 1,993,113 

 

$

 20,042 

 

$

 2,013,155 

    Securities purchased under agreements to resell

 

 - 

 

 

 60,000 

 

 

 - 

 

 

 60,000 

    Money market investments

 

 12,676 

 

 

 - 

 

 

 - 

 

 

 12,676 

    Derivative assets

 

 - 

 

 

 7,829 

 

 

 15,404 

 

 

 23,233 

    Servicing assets

 

 - 

 

 

 - 

 

 

 11,543 

 

 

 11,543 

    Derivative liabilities

 

 - 

 

 

 (24,024) 

 

 

 (14,839) 

 

 

 (38,863) 

 

$

 12,676 

 

$

 2,036,918 

 

$

 32,150 

 

$

 2,081,744 

Non-recurring fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

    Impaired commercial loans

$

 - 

 

$

 - 

 

$

 45,965 

 

$

 45,965 

    Foreclosed real estate

 

 - 

 

 

 - 

 

 

 81,338 

 

 

 81,338 

 

$

 - 

 

$

 - 

 

$

 127,303 

 

$

 127,303 

 

  

December 31, 2012

  

Fair Value Measurements

  

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Recurring fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

    Investment securities available-for-sale

$

 - 

 

$

 2,174,274 

 

$

 20,012 

 

$

 2,194,286 

    Securities purchased under agreements to resell

 

 - 

 

 

 80,000 

 

 

 - 

 

 

 80,000 

    Money market investments

 

 13,205 

 

 

 - 

 

 

 - 

 

 

 13,205 

    Derivative assets

 

 - 

 

 

 8,656 

 

 

 13,233 

 

 

 21,889 

    Servicing assets

 

 - 

 

 

 - 

 

 

 10,795 

 

 

 10,795 

    Derivative liabilities

 

 - 

 

 

 (26,260) 

 

 

 (12,707) 

 

 

 (38,967) 

 

$

 13,205 

 

$

 2,236,670 

 

$

 31,333 

 

$

 2,281,208 

Non-recurring fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

    Impaired commercial loans

$

 - 

 

$

 - 

 

$

 46,199 

 

$

 46,199 

    Foreclosed real estate

 

 - 

 

 

 - 

 

 

 75,447 

 

 

 75,447 

 

$

 - 

 

$

 - 

 

$

 121,646 

 

$

 121,646 

57

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2013 and 2012:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative

 

 

 

 

Derivative

 

 

 

 

 

 

 

asset

 

 

 

 

liability

 

 

 

 

 

Other

 

(S&P

 

 

 

 

(S&P

 

 

 

 

 

debt

 

Purchased

 

Servicing

 

Embedded

 

 

 

Level 3 Instruments Only

 

securities

 

Options)

 

assets

 

Options)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

 20,012 

 

$

 13,233 

 

$

 10,795 

 

$

 (12,707) 

 

$

 31,333 

    Gains (losses) included in earnings

 

 

 - 

 

 

 2,171 

 

 

 - 

 

 

 (2,407) 

 

 

 (236) 

    Changes in fair value of investment

        securities available for sale included

        in other comprehensive income

 

 

 30 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 30 

    New instruments acquired

 

 

 - 

 

 

 - 

 

 

 693 

 

 

 - 

 

 

 693 

    Principal repayments

 

 

 - 

 

 

 - 

 

 

 (68) 

 

 

 - 

 

 

 (68) 

    Amortization

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 275 

 

 

 275 

    Changes in fair value of servicing assets

 

 

 - 

 

 

 - 

 

 

 123 

 

 

 - 

 

 

 123 

Balance at end of period

 

$

 20,042 

 

$

 15,404 

 

$

 11,543 

 

$

 (14,839) 

 

$

 32,150 

 

  

Quarter Ended March 31, 2012

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative

 

 

 

 

Derivative

 

 

 

 

 

 

 

 

 

 

 

 

asset

 

 

 

 

liability

 

 

 

 

 

 

 

 

 

 

Other

 

(S&P

 

 

 

 

(S&P

 

 

 

 

 

 

 

 

 

 

debt

 

Purchased

 

Servicing

 

Embedded

 

 

 

Level 3 Instruments Only

CDOs

 

CLOs

 

securities

 

Options)

 

assets

 

Options)

 

Total

 

(In thousands)

Balance at beginning of period

$

 10,530 

 

$

 26,758 

 

$

 10,024 

 

$

 9,317 

 

$

 10,454 

 

$

 (9,362) 

 

$

 57,721 

    Gains (losses) included in earnings

 

 - 

 

 

 - 

 

 

 - 

 

 

 3,198 

 

 

 - 

 

 

 (3,154) 

 

 

 44 

    Changes in fair value of investment

        securities available for sale included

        in other comprehensive income

 

 - 

 

 

 2,869 

 

 

 (141) 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 2,728 

    New instruments acquired

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 420 

 

 

 - 

 

 

 420 

    Amortization

 

 - 

 

 

 16 

 

 

 (1) 

 

 

 - 

 

 

 (234) 

 

 

 378 

 

 

 159 

    Sales of instruments

 

 (10,530) 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (10,530) 

    Changes in fair value of servicing assets

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 85 

 

 

 - 

 

 

 85 

Balance at end of period

$

 - 

 

$

 29,643 

 

$

 9,882 

 

$

 12,515 

 

$

 10,725 

 

$

 (12,138) 

 

$

 50,627 

 

During the quarters ended March 31, 2013 and 2012, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis.  There were no transfers into and out of Level 1 and Level 2 fair value measurements during such quarters.

58

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2013:

 

 

 

March 31, 2013

 

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range

 

 

(In thousands)

 

 

 

 

 

 

Investment securities

    available-for-sale:

 

 

 

 

 

 

 

 

 

    Other debt securities

 

$

 20,042 

 

Market comparable bonds

 

Indicative pricing

 

99.25% - 99.43%

 

 

 

 

 

 

 

Option adjusted spread

 

363.6% - 407.0%

 

 

 

 

 

 

 

Yield to maturity

 

3.9% - 4.2%

 

 

 

 

 

 

 

Spread to maturity

 

364.8% - 407.3%

Derivative assets (S&P

    Purchased Options)

 

$

 15,404 

 

Option pricing model

 

Implied option volatility

 

21.0% - 33.6%

 

 

 

 

 

 

 

Counterparty credit risk

    (based on 5-year credit

    default swap ("CDS")

    spread)

 

89.4% - 164.4%

Servicing assets

 

$

 11,543 

 

Cash flow valuation

 

Constant prepayment rate

 

9.43% - 33.05%

 

 

 

 

 

 

 

Discount rate

 

10.50% - 13.50%

Derivative liability (S&P

    Embedded Options)

 

$

 (14,839) 

 

Option pricing model

 

Implied option volatility

 

21.0% - 33.6%

 

 

 

 

 

 

 

Counterparty credit risk (based on 5-year CDS spread)

 

89.4% - 164.4%

Collateral dependant

    impaired loans

 

$

 45,965 

 

Fair value of property

    or collateral

 

Appraised value

 

Not meaningful

 

 

 

 

 

 

 

 

 

 

 

Information about Sensitivity to Changes in Significant Unobservable Inputs

 

Other debt securities – The significant unobservable inputs used in the fair value measurement of one of the Company’s other debt securities are indicative comparable pricing, option adjusted spread (“OAS”), yield to maturity, and spread to maturity. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for indicative comparable pricing is accompanied by a directionally opposite change in the assumption used for OAS and a directionally, although not equally proportional, opposite change in the assumptions used for yield to maturity and spread to maturity.

Derivative asset (S&P Purchased Options) – The significant unobservable inputs used in the fair value measurement of Company’s derivative assets related to S&P purchased options are implied option volatility and counterparty credit risk. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for implied option volatility is not necessarily accompanied by directionally similar or opposite changes in the assumption used for counterparty credit risk.

Servicing assets – The significant unobservable inputs used in the fair value measurement of the Company’s servicing assets are constant prepayment rates and discount rates. Changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of total banking and financial service revenue in the unaudited consolidated statements of operations, include the changes from period to period in the fair value of the mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of expected cash flows.

59

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Derivative liability (S&P Embedded Options) – The significant unobservable inputs used in the fair value measurement of the Company’s derivative liability related to S&P purchased options are implied option volatility and counterparty credit risk. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for implied option volatility is not necessarily accompanied by directionally similar or opposite changes in the assumption used for counterparty credit risk.

 

The table below presents a detail of investment securities available-for-sale classified as Level 3 at March 31, 2013:

 

 

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Amortized

 

Unrealized

 

 

 

 

Average

 

Principal

Type

 

Cost

 

Gains (Losses)

 

Fair Value

 

Yield

 

Protection

 

 

(In thousands)

Other debt securities

 

$

 20,000 

 

$

 42 

 

$

 20,042 

 

3.50%

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 20,000 

 

$

 42 

 

$

 20,042 

 

3.50%

 

 

 

Fair Value of Financial Instruments

 

The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Company.

 

The estimated fair value is subjective in nature, involves uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of retail deposits, and premises and equipment.

60

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The estimated fair value and carrying value of the Company’s financial instruments at March 31, 2013 and December 31, 2012 is as follows:

 

 

March 31,

 

December 31,

  

2013

 

2012

  

Fair

 

Carrying

 

Fair

 

Carrying

  

Value

 

Value

 

Value

 

Value

 

(In thousands)

Level 1

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

 561,446 

 

$

 561,446 

 

$

 868,695 

 

$

 868,695 

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

    Securities purchased under agreements to resell

 

 60,000 

 

 

 60,000 

 

 

 80,000 

 

 

 80,000 

    Trading securities

 

 1,787 

 

 

 1,787 

 

 

 495 

 

 

 495 

    Investment securities available-for-sale

 

 1,993,113 

 

 

 1,993,113 

 

 

 2,174,274 

 

 

 2,174,274 

    Federal Home Loan Bank (FHLB) stock

 

 33,458 

 

 

 33,458 

 

 

 38,411 

 

 

 38,411 

    Derivative assets

 

 7,829 

 

 

 7,829 

 

 

 8,656 

 

 

 8,656 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Derivative liabilities

 

 24,024 

 

 

 24,024 

 

 

 26,260 

 

 

 26,260 

    Short term borrowings

 

 60,846 

 

 

 60,846 

 

 

 92,222 

 

 

 92,222 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

    Investment securities available-for-sale

 

 20,042 

 

 

 20,042 

 

 

 20,012 

 

 

 20,012 

    Total loans (including loans held-for-sale)

 

 

 

 

 

 

 

 

 

 

 

        Non-covered loans, net

 

 4,776,313 

 

 

 4,834,647 

 

 

 4,766,179 

 

 

 4,786,718 

        Covered loans, net

 

 467,987 

 

 

 379,734 

 

 

 489,885 

 

 

 395,307 

    Derivative assets

 

 15,404 

 

 

 15,404 

 

 

 13,233 

 

 

 13,233 

    FDIC shared-loss indemnification asset

 

 186,773 

 

 

 266,958 

 

 

 204,646 

 

 

 286,799 

    Accrued interest receivable

 

 20,231 

 

 

 20,231 

 

 

 17,554 

 

 

 17,554 

    Servicing assets

 

 11,543 

 

 

 11,543 

 

 

 10,795 

 

 

 10,795 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Deposits

 

 5,585,970 

 

 

 5,563,514 

 

 

 5,797,097 

 

 

 5,689,559 

    Securities sold under agreements to repurchase

 

 1,541,205 

 

 

 1,491,675 

 

 

 1,741,272 

 

 

 1,695,247 

    Advances from FHLB

 

 425,492 

 

 

 431,560 

 

 

 538,355 

 

 

 536,542 

    Federal funds purchased

 

 29,612 

 

 

 29,612 

 

 

 9,901 

 

 

 9,901 

    Term notes

 

 7,616 

 

 

 7,734 

 

 

 7,912 

 

 

 7,734 

    Subordinated capital notes

 

 97,616 

 

 

 98,436 

 

 

 146,415 

 

 

 146,038 

    Accrued expenses and other liabilities

 

 98,396 

 

 

 98,396 

 

 

 99,263 

 

 

 99,263 

61

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following methods and assumptions were used to estimate the fair values of significant financial instruments at March 31, 2013 and December 31, 2012:

 

•     Cash and cash equivalents (including money market investments and time deposits with other banks), accrued interest receivable, securities purchased under agreements to resell, accrued expenses and other liabilities have been valued at the carrying amounts reflected in the unaudited consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

 

•     Investments in FHLB stock are valued at their redemption value.

 

•     The fair value of investment securities, including trading securities, is based on quoted market prices, when available, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument. The estimated fair value of the structured credit investments is determined by using a third-party cash flow valuation model to calculate the present value of projected future cash flows. The assumptions used, which are highly uncertain and require a high degree of judgment, include primarily market discount rates, current spreads, duration, leverage, default, home price depreciation, and loss rates. The assumptions used are drawn from a wide array of data sources, including the performance of the collateral underlying each deal. The external-based valuation, which is obtained at least on a quarterly basis, is analyzed and its assumptions are evaluated and incorporated in either an internal-based valuation model when deemed necessary, or compared to counterparties’ prices and agreed by management.

 

•     The fair value of the FDIC shared-loss indemnification asset represents the present value of the estimated cash payments (net of amounts owed to the FDIC) expected to be received from the FDIC for future losses on covered assets based on the credit assumptions on estimated cash flows for each covered asset pool and the loss sharing percentages. The ultimate collectability of the FDIC shared-loss indemnification asset is dependent upon the performance of the underlying covered loans, the passage of time and claims paid by the FDIC which are impacted by the Bank’s adherence to certain guidelines established by the FDIC.

 

•     The fair value of servicing assets is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

 

•     The fair values of the derivative instruments are provided by valuation experts and counterparties. Certain derivatives with limited market activity are valued using externally developed models that consider unobservable market parameters. The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P Index, and uses equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value is obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its measurement tool for these options. The payoff of these options is linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology uses an average rate option or a cash-settled option whose payoff is based on the difference between the expected average value of the S&P Index during the remaining life of the option and the strike price at inception. The assumptions, which are uncertain and require a degree of judgment, include primarily S&P Index volatility, forward interest rate projections, estimated index dividend payout, and leverage.

 

•     Fair value of derivative liabilities, which include interest rate swaps and forward-settlement swaps, are based on the net discounted value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected cash flows are based on the forward yield curve, and discounted using current estimated market rates.

 

•     The fair value of the covered and non-covered loan portfolio (including loans held-for-sale) is estimated by segregating by type, such as mortgage, commercial, consumer, and leasing. Each loan segment is further segmented into fixed and adjustable interest rates and by performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan. This fair value is not currently an indication of an exit price as that type of assumption could result in a different fair value estimate.

 

•     The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities.

 

62

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•     For short term borrowings, the carrying amount is considered a reasonable estimate of fair value. The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB, FDIC-guaranteed term notes, other term notes, and subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount rates for borrowings with similar terms, remaining maturities and put dates.

 

•     The fair value of commitments to extend credit and unused lines of credit is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

 

NOTE 17 —  OFFSETTING ARRANGEMENTS  

 

The Company manages credit and counterparty risk by entering into enforceable netting agreements and other collateral arrangements with counterparties to derivative financial instruments and secured financing transactions, including resale and repurchase agreements, and principal securities borrowing and lending agreements. These netting agreements mitigate counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement. In limited cases, a netting agreement may also provide for the periodic netting of settlement payments with respect to multiple different transaction types in the normal course of business.

 

Certain of  the Company derivative contracts are executed under either standardized netting agreements or, for exchange-traded derivatives, the relevant contracts for a particular exchange which contain enforceable netting provisions. In certain cases, the Company may have cross-product netting arrangements which allow for netting and set-off of a variety of types of derivatives with a single counterparty. A derivative netting arrangement creates an enforceable right of set-off that becomes effective, and affects the realization or settlement of individual financial assets and liabilities, only following a specified event of default. Collateral requirements associated with the derivative contracts are determined after a review of the creditworthiness of each counterparty, and the requirements are monitored and adjusted daily, typically based on net exposure by counterparty. Collateral is generally in the form of cash or highly liquid U.S. government securities.

 

In connection with the Company’s secured financing activities, the Company enter into netting agreements and other collateral arrangements with counterparties, which provide for the right to liquidate collateral upon an event of default. Required collateral is generally in the form of cash, equities or fixed-income securities. Default events may include the failure to timely make payments or deliver securities, material adverse changes in financial condition or insolvency, the breach of minimum regulatory capital requirements, or loss of license, charter or other legal authorization necessary to perform under the contract.

  

In order for an arrangement to be eligible for netting, the Company must have a basis to conclude that such netting arrangements are legally enforceable. The analysis of the legal enforceability of an arrangement differs by jurisdiction, depending on the laws of that jurisdiction. In many jurisdictions, specific legislation exists that provides for the enforceability in bankruptcy of close-out netting under a netting agreement, typically by way of specific exception from more general prohibitions on the exercise of creditor rights.

 

Even though the Company has enforceable netting arrangements, they do not meet the applicable offsetting criteria, and therefore are not offset in the unaudited consolidated statements of financial condition. In addition, the Company does not offset secured financing assets and liabilities.

 

The following table presents derivative financial instruments and secured financing transactions that are subject to enforceable netting arrangements, but do not meet the applicable offsetting criteria and therefore were not offset in our unaudited consolidated statements of financial condition, as of the dates indicated:

63

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

March 31, 2013

 

 

Net amount of

 

 

 

 

 

 

 

 

Assets Presented

 

 

 

 

 

 

 

 

in Statement

 

 

 

Cash

 

 

 

 

of Financial

 

Financial

 

Collateral

 

Net

  

 

Condition

 

Instruments

 

Received

 

Amount

 

 

(In thousands)

Derivatives

 

$

 23,233 

 

$

 - 

 

$

 - 

 

$

 23,233 

Resale agreements and securities borrowings

(1)

 

 60,000 

 

 

 - 

 

 

 - 

 

 

 60,000 

Total

 

$

 83,233 

 

$

 - 

 

$

 - 

 

$

 83,233 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

Net amount of

 

 

 

 

 

 

 

 

Assets Presented

 

 

 

 

 

 

 

 

in Statement

 

 

 

Cash

 

 

 

 

of Financial

 

Financial

 

Collateral

 

Net

 

 

Condition

 

Instruments

 

Received

 

Amount

 

 

(In thousands)

Derivatives

 

$

 21,889 

 

$

 - 

 

$

 - 

 

$

 21,889 

Resale agreements and securities borrowings

(1)

 

 80,000 

 

 

 - 

 

 

 - 

 

 

 80,000 

Total

 

$

 101,889 

 

$

 - 

 

$

 - 

 

$

 101,889 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes the impact of non-cash collateral. These secured financing transactions are fully collateralized.

 

The following table presents derivative financial instruments and secured financing transactions subject to enforceable netting arrangements that do not meet the applicable offsetting criteria and therefore were not offset in our unaudited consolidated statements of financial condition, as of the dates indicated:

 

 

 

March 31, 2013

 

 

Net amount of

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 Presented 

 

 

 

 

 

 

 

 

 

 

 

in Statement

 

 

 

Cash

 

 

 

 

of Financial

 

Financial

 

Collateral

 

Net

  

 

Condition

 

Instruments

 

Provided

 

Amount

 

 

(In thousands)

Derivatives

 

$

 22,615 

 

$

 - 

 

$

 - 

 

$

 22,615 

Repurchase agreements and securities lending

(1)

 

 1,489,295 

 

 

 - 

 

 

 - 

 

 

 1,489,295 

Total

 

$

 1,511,910 

 

$

 - 

 

$

 - 

 

$

 1,511,910 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

Net amount of

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 Presented 

 

 

 

 

 

 

 

 

 

 

 

in Statement

 

 

 

Cash

 

 

 

 

of Financial

 

Financial

 

Collateral

 

Net

 

 

Condition

 

Instruments

 

Provided

 

Amount

 

 

(In thousands)

Derivatives

 

$

 21,302 

 

$

 - 

 

$

 - 

 

$

 21,302 

Repurchase agreements and securities lending

(1)

 

 1,692,931 

 

 

 - 

 

 

 - 

 

 

 1,692,931 

Total

 

$

 1,714,233 

 

$

 - 

 

$

 - 

 

$

 1,714,233 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes the impact of non-cash collateral. These secured financing transactions are fully collateralized.

64

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 18 –  BUSINESS SEGMENTS   

 

The Company segregates its businesses into the following major reportable segments of business: Banking, Financial Services, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Company’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Company measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. The Company’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. These factors are reviewed on a periodical basis and may change if the conditions warrant.  The operations and results of BBVAPR for the period from January 1, 2013 to March 31, 2013 are considered a separate segment from those reportable segments detailed above.  During that period, management evaluated the performance of this acquired business as a stand-alone segment rather than allocated to the aforementioned reportable segments.  The Company is in the process of assessing the distribution of said operations into existing or new reportable segments. The integration process is expected to occur during the year 2013 and will result in the distribution of said operations into the existing or new reportable segments, as deemed applicable.

 

 

Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for the Company’s own portfolio. As part of its mortgage banking activities, the Company may sell loans directly into the secondary market or securitize conforming loans into mortgage-backed securities.

 

Financial Services is comprised of the Bank’s trust division, Oriental Financial Services, OFS Securities, Oriental Insurance, and CPC. The core operations of this segment are financial planning, money management and investment banking, brokerage services, insurance sales activity, corporate and individual trust and retirement services, as well as pension plan administration services.

 

The Treasury segment encompasses all of the Company’s asset/liability management activities, such as purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices.

65

 


 

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Following are the results of operations and the selected financial information by operating segment as of and for the quarters ended March 31, 2013 and 2012:

 

 

Quarter Ended March 31, 2013

  

 

  

 

Financial

 

 

  

 

Total Major

 

 

  

 

Consolidated

  

Banking

 

Services

 

Treasury

 

Segments

 

Eliminations

 

Total

 

(In thousands)

Interest income

$

 101,524 

 

$

 86 

 

$

 12,018 

 

$

 113,628 

 

$

 - 

 

$

 113,628 

Interest expense

 

 (7,461) 

 

 

 (60) 

 

 

 (13,525) 

 

 

 (21,046) 

 

 

 - 

 

 

 (21,046) 

Net interest income

 

 94,063 

 

 

 26 

 

 

 (1,507) 

 

 

 92,582 

 

 

 - 

 

 

 92,582 

Provision for non-covered

   loan and lease losses

 

 (7,916) 

 

 

 - 

 

 

 - 

 

 

 (7,916) 

 

 

 - 

 

 

 (7,916) 

Provision for covered

   loan and lease losses

 

 (672) 

 

 

 - 

 

 

 - 

 

 

 (672) 

 

 

 - 

 

 

 (672) 

Non-interest income (loss)

 

 1,694 

 

 

 7,700 

 

 

 (138) 

 

 

 9,256 

 

 

 - 

 

 

 9,256 

Non-interest expenses

 

 (60,055) 

 

 

 (4,462) 

 

 

 (415) 

 

 

 (64,932) 

 

 

 - 

 

 

 (64,932) 

Intersegment revenue

 

 383 

 

 

 - 

 

 

 - 

 

 

 383 

 

 

 (383) 

 

 

 - 

Intersegment expenses

 

 - 

 

 

 (302) 

 

 

 (81) 

 

 

 (383) 

 

 

 383 

 

 

 - 

Income (loss) before income taxes

$

 27,497 

 

$

 2,962 

 

$

 (2,141) 

 

$

 28,318 

 

$

 - 

 

$

 28,318 

Total assets

$

 6,989,744 

 

$

 39,511 

 

$

 2,539,649 

 

$

 9,568,904 

 

$

 (866,353) 

 

$

 8,702,551 

 

 

Quarter Ended March 31, 2012

  

 

  

 

Financial

 

 

  

 

Total Major

 

 

  

 

Consolidated

  

Banking

 

Services

 

Treasury

 

Segments

 

Eliminations

 

Total

 

(In thousands)

Interest income

$

 39,665 

 

$

 - 

 

$

 30,254 

 

$

 69,919 

 

$

 - 

 

$

 69,919 

Interest expense

 

 (6,409) 

 

 

 - 

 

 

 (24,525) 

 

 

 (30,934) 

 

 

 - 

 

 

 (30,934) 

Net interest income

 

 33,256 

 

 

 - 

 

 

 5,729 

 

 

 38,985 

 

 

 - 

 

 

 38,985 

Provision for non-covered loan and lease losses

 

 (3,000) 

 

 

 - 

 

 

 - 

 

 

 (3,000) 

 

 

 - 

 

 

 (3,000) 

Provision for covered loan and lease losses, net

 

 (7,157) 

 

 

 - 

 

 

 - 

 

 

 (7,157) 

 

 

 - 

 

 

 (7,157) 

Non-interest income

 

 273 

 

 

 5,790 

 

 

 6,702 

 

 

 12,765 

 

 

 - 

 

 

 12,765 

Non-interest expenses

 

 (22,192) 

 

 

 (4,888) 

 

 

 (1,923) 

 

 

 (29,003) 

 

 

 - 

 

 

 (29,003) 

Intersegment revenue

 

 403 

 

 

 - 

 

 

 - 

 

 

 403 

 

 

 (403) 

 

 

 - 

Intersegment expenses

 

 - 

 

 

 (308) 

 

 

 (95) 

 

 

 (403) 

 

 

 403 

 

 

 - 

Income before income taxes

$

 1,583 

 

$

 594 

 

$

 10,413 

 

$

 12,590 

 

$

 - 

 

$

 12,590 

Total assets

$

 3,249,248 

 

$

 15,230 

 

$

 3,898,848 

 

$

 7,163,326 

 

$

 (701,164) 

 

$

 6,462,162 

66

 


 

       

ITEM 2.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SELECTED FINANCIAL DATA

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

 

 

 

 

 

 

 

Variance

 

2013 

 

2012 

 

%

EARNINGS DATA:

(In thousands, except per share data)

Interest income

$

 113,628 

 

$

 69,919 

 

62.5%

Interest expense

 

 21,046 

 

 

 30,934 

 

-32.0%

    Net interest income

 

 92,582 

 

 

 38,985 

 

137.5%

Provision for non-covered loan and lease losses

 

 7,916 

 

 

 3,000 

 

163.9%

Provision for covered loan and lease losses, net

 

 672 

 

 

 7,157 

 

-90.6%

    Total provision for loan and lease losses, net

 

 8,588 

 

 

 10,157 

 

-15.4%

        Net interest income after provision for loan

            and lease losses

 

 83,994 

 

 

 28,828 

 

191.4%

Non-interest income

 

 9,256 

 

 

 12,764 

 

-27.5%

Non-interest expenses

 

 64,932 

 

 

 29,002 

 

123.9%

    Income before taxes

 

 28,318 

 

 

 12,590 

 

124.9%

Income tax expense

 

 7,126 

 

 

 1,937 

 

267.9%

    Net income

 

 21,192 

 

 

 10,653 

 

98.9%

Less: dividends on preferred stock

 

 (3,465) 

 

 

 (1,201) 

 

153.0%

    Income available to common shareholders

$

 17,727 

 

$

 9,452 

 

87.5%

PER SHARE DATA:

 

 

 

 

 

 

 

Basic

$

 0.39 

 

$

 0.23 

 

68.8%

Diluted

$

 0.37 

 

$

 0.23 

 

61.1%

Average common shares outstanding

 

 45,595 

 

 

 41,043 

 

11.1%

Average common shares outstanding and equivalents

 

 52,892 

 

 

 41,162 

 

28.5%

Cash dividends declared per common share

$

 0.06 

 

$

 0.06 

 

20.0%

Cash dividends declared on common shares

$

 2,737 

 

$

 2,442 

 

12.0%

PERFORMANCE RATIOS:

 

 

 

 

 

 

 

Return on average assets (ROA)

 

0.95%

 

 

0.65%

 

45.9%

Return on average common equity (ROE)

 

10.14%

 

 

6.00%

 

69.0%

Equity-to-assets ratio

 

10.00%

 

 

10.67%

 

-6.3%

Efficiency ratio

 

56.08%

 

 

57.48%

 

-2.4%

Interest rate spread

 

4.63%

 

 

2.54%

 

82.3%

Interest rate margin

 

4.65%

 

 

2.60%

 

78.8%

67

 


 

       

 

SELECTED FINANCIAL DATA - (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

Variance

 

2013 

 

2012 

 

%

PERIOD END BALANCES AND CAPITAL RATIOS:

(In thousands, except per share data)

Investments and loans

 

 

 

 

 

 

 

    Investments securities

$

 2,048,466 

 

$

 2,233,265 

 

-8.3%

    Loans and leases not covered under shared-loss

        agreements with the FDIC, net

 

 4,834,646 

 

 

 4,786,718 

 

1.0%

    Loans and leases covered under shared-loss

        agreements with the FDIC, net

 

 379,734 

 

 

 395,307 

 

-3.9%

        Total investments and loans

$

 7,262,846 

 

$

 7,415,290 

 

-2.1%

Deposits and borrowings

 

 

 

 

 

 

 

    Deposits

$

 5,563,514 

 

$

 5,689,559 

 

-2.2%

    Securities sold under agreements to repurchase

 

 1,491,675 

 

 

 1,695,247 

 

-12.0%

    Other borrowings

 

 622,188 

 

 

 792,437 

 

-21.5%

        Total deposits and borrowings

$

 7,677,377 

 

$

 8,177,243 

 

-6.1%

Stockholders’ equity

 

 

 

 

 

 

 

    Preferred stock

$

 176,000 

 

$

 176,000 

 

0.0%

    Common stock

 

 52,671 

 

 

 52,671 

 

0.0%

    Additional paid-in capital

 

 537,500 

 

 

 537,453 

 

0.0%

    Legal surplus

 

 54,128 

 

 

 52,143 

 

3.8%

    Retained earnings

 

 83,739 

 

 

 70,734 

 

18.4%

    Treasury stock, at cost

 

 (80,847) 

 

 

 (81,275) 

 

0.5%

    Accumulated other comprehensive income

 

 47,051 

 

 

 55,880 

 

-15.8%

        Total stockholders' equity

$

 870,242 

 

$

 863,606 

 

0.8%

Per share data

 

 

 

 

 

 

 

    Book value per common share

$

 15.44 

 

$

 15.31 

 

0.8%

    Tangible book value per common share

$

 13.73 

 

$

 13.59 

 

1.0%

    Market price at end of period

$

 15.51 

 

$

 13.35 

 

16.2%

Capital ratios

 

 

 

 

 

 

 

    Leverage capital

 

8.07%

 

 

6.42%

 

25.7%

    Tier 1 risk-based capital

 

13.24%

 

 

12.94%

 

2.3%

    Total risk-based capital

 

15.26%

 

 

15.15%

 

0.7%

    Tier 1 common equity to risk-weighted assets

 

9.44%

 

 

9.11%

 

3.6%

Financial assets managed

 

 

 

 

 

 

 

    Trust assets managed

$

 2,594,560 

 

$

 2,514,401 

 

3.2%

    Broker-dealer assets gathered

 

 2,792,643 

 

 

 2,722,197 

 

2.6%

Total assets managed

$

 5,387,203 

 

$

 5,236,598 

 

2.9%

68

 


 

       

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies” of our annual report on 2012 Form 10-K (the “2012 Form 10-K”).

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” section of our annual report on Form 10-K, we identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition:

 

 

 

Business combination

 

 

 

Allowance for loan and lease losses

 

 

Financial instruments

 

 

           

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. Management has reviewed and approved these critical accounting policies and has discussed its judgments and assumptions with the Audit and Compliance Committee of our Board of Directors. There have been no material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2012 Form 10-K.

69

 


 

       

 

OVERVIEW OF FINANCIAL PERFORMANCE

 

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the foregoing “Selected Financial Data” and the Company’s unaudited consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements. Please see “Forward-Looking Statements” and the risk factors set forth in our 2012 Form 10-K for discussion of the uncertainties, risks and assumptions associated with these statements.

 

The Company is a publicly-owned financial holding company that provides a full range of banking and financial services through its subsidiaries, including commercial, consumer and mortgage lending; auto loans; checking and savings accounts; financial planning, insurance and securities brokerage services; and corporate and individual trust and retirement services. The Company operates through three major business segments: Banking, Financial Services, and Treasury, and distinguishes itself based on quality service.  The Company has 64 branches in Puerto Rico and a subsidiary in Boca Raton, Florida. The Company’s long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, maintaining effective asset-liability management, growing non-interest revenue from banking and financial services, and improving operating efficiencies.

 

The Company’s diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance agency, and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, the Company’s commitment is to continue producing a balanced and growing revenue stream.

 

The BBVAPR Acquisition, the deleveraging of the Company’s investment securities portfolio, and the continued organic growth of its banking operations have transformed the profitability of the Company in line with its strategic direction.  The Company has begun to realize the anticipated benefits of the BBVAPR Acquisition as reflected by its significantly larger and higher yielding loan assets, a significantly larger deposit base and balances, and a sharply reduced size of its investment securities portfolio.  It expects to continue to benefit from a more diverse business portfolio as well as increased scale and leadership in its market.

 

In the first quarter of 2013, the Company’s return on assets was 0.95%, return on equity was 10.14%, and the efficiency ratio stood at 56.1%, all of which represent improvements from the preceding quarter and the first quarter of 2012.  Income available to common shareholders increased to $17.7 million, or $0.37 per diluted share, and interest income from loans increased 153.4% from the first quarter of 2012 and 109.8% from the preceding quarter, while net interest margin expanded to 4.65% from 2.60% in the first quarter of 2012 and 2.95% in the preceding quarter.

 

 

70

 


 

       

 

Operating revenue for quarter ended March 31, 2013 increased 96.8%, or $50.1 million, to $101.8 million when compared to the same period in 2012.  The table below presents the Company’s operating revenue for the quarters ended March 31, 2013 and 2012:

 

 

Quarter Ended March 31,

 

2013 

 

2012 

 

(In thousands)

OPERATING REVENUE

 

 

 

 

 

    Net interest income

$

 92,582 

 

$

 38,985 

    Non-interest income, net

 

 9,256 

 

 

 12,764 

        Total operating revenue

$

 101,838 

 

$

 51,749 

 

Interest Income

 

Total interest income for the quarter ended March 31, 2013 increased 62.5% to $113.6 million, as compared to the same period in 2012.  This was a result of an increase in interest income from loans of $60.8 million or 153.4% when compared to 2012 partially offset by a decrease in interest income from investments of $17.1 million or 56.6% when compared to 2012.  The increase in interest income from loans is mainly related to the BBVAPR Acquisition in which the non-covered loans portfolio increased by approximately $3.6 billion.  In addition, the yield on non-covered loans increased from 6.05% in the quarter ended March 31, 2012 to 6.64% in the quarter ended March 31, 2013.  Interest income on covered loans decreased $1.3 million when compared to the quarter ended March 31, 2012, but the yield on covered loans increased from 17.52% in the quarter ended March 31, 2012 to 20.69% in the quarter ended March 31, 2013.  This increase in yield is the result of higher projected cash flows on certain pools of covered loans, as credit losses have been lower than initially estimated for these loan pools. The accretable yield amounted to $174.1 million at March 31, 2013 compared to $174.9 million at December 31, 2012. 

 

Interest income from investments reflects a 56.6% decrease for the quarter ended March 31, 2013, primarily related to the lower balance in the investment securities portfolio due to the sale of investments securities as part of the deleverage executed during the third and fourth quarters of 2012.

 

Interest Expense

 

Total interest expense for the quarter ended March 31, 2013 decreased 32.0% to $21.0 million as compared to the quarter ended March 31, 2012.  This reflects the lower cost of both, borrowings (1.87% vs. 2.48%) and deposits (0.75% vs. 1.58%) for the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012, which reflects continuing progress in the repricing of the Company’s core retail deposits and further reductions in its cost of funds.  During 2012, the Company either renewed or terminated approximately $1 billion in repurchase agreements, with an average cost between 2.86% and 4.72%.  The repurchase agreements that were renewed have an effective rate of less than 1%. 

 

 

 

71

 


 

       

Net Interest Income

 

Net interest income for the quarter ended March 31, 2013 was $92.6 million, an increase of 137.5% when compared with the same period for 2012.  The increase was mostly due to the net effect of a 342.9% increase in interest income from non-covered loans as a result of higher loan balances following the BBVAPR Acquisition and a 32.0% decrease in interest expense due to lower cost of funds, partially offset by a decrease of 56.6% on interest income from investments, related to lower yields and a lower balance in the investment securities portfolio.

 

Net interest margin of 4.65% for the quarter ended March 31, 2013 increased 205 basis points when compared to the quarter ended March 31,  2012.

 

Provision for Loan Losses

 

Provision for non-covered loans losses for the quarter ended March 31,  2013 increased $4.9 million when compared to the quarter ended March 31, 2012, mostly due to the related increase in loan average balances in 2013.  Provision for covered loans losses for the quarter ended March 31, 2013 decreased $6.5 million when compared to the quarter ended March 31, 2012, as some covered construction and development and commercial real estate loan pools underperformed during the first quarter of 2012, which required a provision amounting to $7.2 million, net of the estimated reimbursement from the FDIC.

 

Non-Interest Income

 

In the first quarter of 2013, core banking and financial services revenue increased 102.2% to $23.2 million as compared to the first quarter of 2012, primarily reflecting a $9.3 million increase in banking services revenue to $12.4 million, attributed to an increase of 140.0% in deposits, principally attributed to the BBVAPR Acquisition.

 

Net amortization of the FDIC shared-loss indemnification asset of $12.9 million for the first quarter of 2013 compared to a $4.8 million for the first quarter of 2012 resulted from the ongoing evaluation of expected cash flows of the loan portfolio acquired in the FDIC-assisted acquisition.  As a result of such evaluation, the Company expects a decrease in losses to be collected from the FDIC and improved expected cash flows on the covered loans.  This reduction in claimable losses amortizes the shared-loss indemnification asset through the life of the shared-loss agreements.  This amortization is net of the accretion of the discount recorded to reflect the expected claimable loss at its net present value.

 

There was no gain or loss on the sale of securities in the first quarter of 2013 as compared to a $7.4 million gain in the first quarter of 2012, as the Company sold investment securities with a book value of $202.8 million.

 

 

 

72

 


 

       

 

Non-Interest Expense

 

Non-interest expense increased to $64.9 million for the quarter ended March 31, 2013 compared to $29.0 million in the quarter ended March 31, 2012 due to the Company’s expanded operations as a result of the BBVAPR Acquisition.  Also included in the quarter ended March 31, 2013 is an accrual of $3.8 million towards the planned early termination of a contract with the third party servicer of certain loan portfolios acquired in the FDIC-assisted acquisition and $1.7 million of integration costs.

 

 

The efficiency ratio for the first quarter of 2013 was 56.08% compared to 57.48% for the first quarter of 2012.

 

Income Tax Expense

 

Income tax expense was $7.1 million for the first quarter of 2013 compared to $1.9 million for the first quarter of 2012.  The increase in income tax expense is attributed to lower tax-exempt income and that there were no sale of investment securities during the quarter ended March 31, 2013, whose gains are generally taxed at a special capital gains tax rate lower than the regular income tax rate.

 

Income Available to Common Shareholders

 

For the first quarter of 2013, the Company’s income available to common shareholders amounted to $17.7 million compared to $9.5 million for the first quarter of 2012.  Income per basic common share and fully diluted common share was $0.39 and $0.37, respectively, for the first quarter of 2013 compared to income per basic and fully diluted common share of $0.23 for the first quarter of 2012.  Dividends declared on preferred stock for the first quarter of 2013 amounted to $3.5 million as compared to $1.2 million for the first quarter of 2012.

Interest Earning Assets

 

The loan portfolio remained stable at $5.214 billion at March 31, 2013 compared to $5.182 billion at December 31, 2012.  The investment portfolio of $2.048 billion at March 31, 2013 decreased 8.27% compared to $2.233 billion at December 31, 2012.  The decrease in the investment portfolio is mainly due to redemptions and maturities of investments securities available for sale.

 

Interest Bearing Liabilities

 

Total deposits amounted to $5.564 billion at March 31, 2013, a decrease of 2.2% compared to $5.690 billion at December 31, 2012. Core retail deposits, which exclude institutional and brokered deposits, remained approximately level compared to December 31, 2012, while wholesale deposits decreased 11.0%.  Securities sold under agreements to repurchase decreased 12% or $203 million as the Company used available cash to pay off a $200 million repurchase agreement at maturity. During this quarter, the Company also repurchased and cancelled, prior to maturity, a former BBVAPR subordinated note of $50 million.

 

Stockholders’ Equity

 

Stockholders’ equity at March 31, 2013 was $870.2 million compared to $863.6 million at December 31, 2012, an increase of 0.77%. This increase reflects the net income for the quarter, partially offset by  the change in other comprehensive income for the quarter.

 

Book value per share was $15.44 at March 31, 2013 compared to $15.31 at December 31, 2012.

 

The Company maintains capital ratios in excess of regulatory requirements. At March 31, 2013, Tier 1 Leverage Capital Ratio was 8.07% (2.02 times the requirement of 4.00%), Tier 1 Risk-Based Capital Ratio was 13.24% (3.31 times the requirement of 4.00%), and Total Risk-Based Capital Ratio was 15.26% (1.91 times the requirement of 8.00%).

 

73

 


 

       

 

Return on Average Assets and Common Equity

 

Return on average common equity (“ROE”) for the quarter ended March 31, 2013 was 10.14%, up from 6.00% for the quarter ended March 31, 2012.  Return on average assets (“ROA”) for the quarter ended March 31, 2013 increased to 0.95% from 0.65% for the same period in 2012.  The increase in both is mostly due to a 98.9% increase in net income from $10.7 million in the quarter ended March 31, 2012 to $21.2 million in the quarter ended March 31, 2013.

 

Assets under Management

 

Assets managed by the Company’s trust division, the retirement plan administration subsidiary (CPC), and the broker-dealer subsidiaries increased from $5.237 billion as of December 31, 2012 to $5.387 billion as of March 31, 2013. The trust division offers various types of individual retirement accounts (“IRA”) and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while CPC manages the administration of private retirement plans.  At March 31, 2013, total assets managed by the Company’s trust division and CPC increased to $2.594 billion, compared to $2.514 billion at December 31, 2012, mainly related to employer and employee account contributions and capital market appreciation. At March 31, 2013, total assets managed by the broker-dealer subsidiaries from its customer investment accounts increased to $2.793 billion, compared to $2.722 billion at December 31, 2012.

 

Lending

 

Total loan production of $275.1 million for the quarter ended March 31, 2013 increased 149.7% over the quarter ended March 31, 2012.  Total auto loan production of $101.0 million for the quarter ended March 31, 2013 increased 2,113% from the quarter ended March 31, 2012.  Both increases are directly related to BBVAPR Acquisition.

 

Mortgage loan production of $77.1 million for the quarter ended March 31 2013 increased 71.3% from the quarter ended March 31, 2012.  The Company sells most of its conforming mortgages in the secondary market and retains servicing rights. As a result, mortgage banking activities reflect originations as well as a growing servicing portfolio, which is a source of recurring revenue.

 

Commercial loans production for the quarter ended March 31, 2013 totalled $74.0 million, an increase of 33.6% from the quarter ended March 31, 2012. 

 

Consumer loans production for the quarter ended March 31, 2013 totalled $22.9 million, up 343.8% from the quarter ended March 31, 2012.

 

Credit Quality on Non-Covered Loans

 

Net credit losses increased $733 thousand to $3.4 million for the quarter ended  March 31, 2013, representing 0.98% of average non-covered loans originated, versus 0.88% for the quarter ended March 31, 2012.  Our allowance coverage however, remained stable compared to December 31, 2012.  The allowance for loan and lease losses on non-covered loans increased to $42.7 million, $42.3 on non-covered originated loans (2.91% of total non-covered originated loans) at March 31, 2013 compared to $39.9 million (3.17% of total non-covered loans) at December 31, 2012.

 

Non-performing loans (“NPLs”), which exclude loans covered under shared-loss agreements with the FDIC and loans acquired in the BBVAPR Acquisition accounted under ASC 310-30, remained stable at March 31, 2013 compared to December 31, 2012. 

 

74

 


 

       

 

Non-GAAP Measures

 

The Company uses certain non-GAAP measures of financial performance to supplement the consolidated financial statements presented in accordance with GAAP.  The Company presents non-GAAP measures that management believes are useful and meaningful to investors. Non-GAAP measures do not have any standardized meaning, are not required to be uniformly applied, and are not audited.  Therefore, they are unlikely to be comparable to similar measures presented by other companies. The presentation of non-GAAP measures is not intended to be a substitute for, and should not be considered in isolation from, the financial measures reported in accordance with GAAP.

 

The Company’s management has reported and discussed the results of operations herein both on a GAAP basis and on a pre-tax pre-provision operating income basis (defined as net interest income, plus banking and financial services revenue, less non-interest expenses, as calculated on the table below). The Company’s management believes that, given the nature of the items excluded from the definition of pre-tax pre-provision operating income, it is useful to state what the results of operations would have been without them so that investors can see the financial trends from the Company’s continuing business.

 

During the quarter ended March 31, 2013, the Company’s pre-tax pre-provision operating income was approximately $56.4 million, an increase of 162.8% from $21.5 million in the same quarter last year. Pre-tax pre-provision operating income is calculated as follows:

 

 

Quarter Ended March 31,

 

2013 

 

2012 

 

(In thousands)

PRE-TAX PRE-PROVISION OPERATING INCOME

 

 

 

 

 

    Net interest income

$

 92,582 

 

$

 38,985 

    Core non-interest income:

 

 

 

 

 

        Financial service revenue

 

 7,660 

 

 

 5,889 

        Banking service revenue

 

 12,382 

 

 

 3,080 

        Mortgage banking activities

 

 3,153 

 

 

 2,502 

            Total core non-interest income

 

 23,195 

 

 

 11,471 

        Non-interest expenses

 

 (64,932) 

 

 

 (29,002) 

        Less merger and restructuring charges

 

 5,534 

 

 

 - 

 

 

 (59,398) 

 

 

 (29,002) 

                Total pre-tax pre-provision operating income

$

 56,379 

 

$

 21,454 

 

Tangible common equity consists of common equity less goodwill and core deposit intangibles. Tier 1 common equity consists of common equity less goodwill, core deposit intangibles, net unrealized gains on available for sale securities, net unrealized losses on cash flow hedges, and disallowed deferred tax asset and servicing assets.  Ratios of tangible common equity to total assets, tangible common equity to risk-weighted assets, total equity to risk-weighted assets and Tier 1 common equity to risk-weighted assets are non-GAAP measures.

 

Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing the Company’s capital position.  Furthermore, management and many stock analysts use tangible common equity in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither Tier 1 common equity nor tangible common equity or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP.

 

At March 31, 2013, tangible common equity to total assets and tangible common equity to risk-weighted assets increased to 7.20% and 11.87%, respectively, from 6.74% and 11.82% at December 31, 2012.  Total equity to risk-weighted assets and Tier 1 common equity to risk-weighted assets at March 31, 2013 increased to 16.49% and 9.44%, respectively, from 16.48% and 9.11% at December 31, 2012.

75

 


 

       

 

ANALYSIS OF RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE

FOR THE QUARTERS ENDED MARCH 31, 2013 AND 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Interest

 

Average rate

 

Average balance

 

March

 

March

 

March

 

March

 

March

 

March

 

2013 

 

2012 

 

2013 

 

2012 

 

2013 

 

2012 

 

(Dollars in thousands)

A - TAX EQUIVALENT SPREAD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

$

 113,628 

 

$

 69,919 

 

5.76%

 

4.66%

 

$

 7,884,195 

 

$

 6,006,728 

    Tax equivalent adjustment

 

 7,618 

 

 

 19,257 

 

0.39%

 

1.28%

 

 

 - 

 

 

 - 

Interest-earning assets - tax equivalent

 

 121,246 

 

 

 89,176 

 

6.15%

 

5.94%

 

 

 7,884,195 

 

 

 6,006,728 

    Interest-bearing liabilities

 

 21,046 

 

 

 30,934 

 

1.08%

 

2.12%

 

 

 7,801,223 

 

 

 5,823,296 

Tax equivalent net interest income / spread

 

 100,200 

 

 

 58,242 

 

5.07%

 

3.82%

 

 

 82,972 

 

 

 183,432 

Tax equivalent interest rate margin

 

 

 

 

 

 

5.08%

 

3.88%

 

 

 

 

 

 

B - NORMAL SPREAD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Investment securities

 

 12,809 

 

 

 29,853 

 

2.43%

 

3.21%

 

 

 2,107,295 

 

 

 3,722,006 

    Trading securities

 

 19 

 

 

 - 

 

9.79%

 

 - 

 

 

 776 

 

 

 - 

    Money market investments

 

 308 

 

 

 402 

 

0.22%

 

0.27%

 

 

 550,084 

 

 

 594,326 

        Total investments

 

 13,136 

 

 

 30,255 

 

1.98%

 

2.80%

 

 

 2,658,155 

 

 

 4,316,332 

Loans not covered under shared-loss agreements

    with the FDIC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Mortgage

 

 11,442 

 

 

 12,713 

 

5.56%

 

6.09%

 

 

 823,356 

 

 

 835,592 

    Commercial

 

 4,896 

 

 

 4,096 

 

5.20%

 

5.55%

 

 

 376,676 

 

 

 295,043 

    Consumer

 

 1,197 

 

 

 766 

 

8.70%

 

7.44%

 

 

 55,047 

 

 

 41,194 

    Auto

 

 2,845 

 

 

 548 

 

11.52%

 

8.16%

 

 

 98,752 

 

 

 26,878 

        Total originated non-covered loans

 

 20,380 

 

 

 18,123 

 

6.02%

 

6.05%

 

 

 1,353,831 

 

 

 1,198,707 

Acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Mortgage

 

 11,170 

 

 

 - 

 

5.34%

 

 - 

 

 

 836,052 

 

 

 - 

    Commercial

 

 26,371 

 

 

 - 

 

7.06%

 

 - 

 

 

 1,494,688 

 

 

 - 

    Consumer

 

 5,548 

 

 

 - 

 

12.37%

 

 - 

 

 

 179,378 

 

 

 - 

    Auto

 

 16,794 

 

 

 - 

 

6.92%

 

 - 

 

 

 970,937 

 

 

 - 

        Total acquired non-covered loans

 

 59,883 

 

 

 - 

 

6.88%

 

 - 

 

 

 3,481,055 

 

 

 - 

        Total non-covered loans

 

 80,263 

 

 

 18,123 

 

6.64%

 

6.05%

 

 

 4,834,886 

 

 

 1,198,707 

Loans covered under shared-loss agreements

    with the FDIC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Loans secured by residential properties

 

 5,930 

 

 

 6,197 

 

18.01%

 

15.76%

 

 

 131,696 

 

 

 157,278 

    Commercial and construction

 

 12,018 

 

 

 12,668 

 

19.52%

 

17.53%

 

 

 246,259 

 

 

 289,054 

    Leasing

 

 1,998 

 

 

 2,372 

 

145.89%

 

28.81%

 

 

 5,478 

 

 

 32,931 

    Consumer

 

 283 

 

 

 304 

 

14.66%

 

9.79%

 

 

 7,721 

 

 

 12,426 

        Total covered loans

 

 20,229 

 

 

 21,541 

 

20.69%

 

17.52%

 

 

 391,154 

 

 

 491,689 

            Total loans

 

 100,492 

 

 

 39,664 

 

7.69%

 

9.39%

 

 

 5,226,040 

 

 

 1,690,396 

                Total interest earning assets

 

 113,628 

 

 

 69,919 

 

5.76%

 

4.66%

 

 

 7,884,195 

 

 

 6,006,728 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Non-interest bearing deposits

 

 - 

 

 

 - 

 

0.00%

 

0.00%

 

 

 766,628 

 

 

 175,224 

    NOW accounts

 

 3,741 

 

 

 2,549 

 

1.03%

 

1.25%

 

 

 1,454,274 

 

 

 815,277 

    Savings and money market

 

 1,807 

 

 

 591 

 

0.84%

 

1.00%

 

 

 858,842 

 

 

 235,275 

    Individual retirement accounts

 

 1,857 

 

 

 2,340 

 

2.00%

 

2.57%

 

 

 372,140 

 

 

 364,499 

    Retail certificates of deposit

 

 3,242 

 

 

 2,127 

 

1.87%

 

2.35%

 

 

 693,107 

 

 

 361,799 

        Total core deposits

 

 10,647 

 

 

 7,607 

 

1.03%

 

1.56%

 

 

 4,144,991 

 

 

 1,952,074 

    Institutional certificates of deposit

 

 2,695 

 

 

 598 

 

1.79%

 

2.10%

 

 

 601,044 

 

 

 113,913 

    Brokered deposits

 

 1,989 

 

 

 1,041 

 

0.93%

 

1.70%

 

 

 856,139 

 

 

 244,891 

 

 

 4,684 

 

 

 1,639 

 

1.29%

 

1.83%

 

 

 1,457,183 

 

 

 358,804 

    Deposits fair value premium amortization

 

(5,267)

 

 

(160)

 

 - 

 

 - 

 

 

 - 

 

 

 - 

    Core deposit intangible amortization

 

 414 

 

 

 36 

 

 - 

 

 - 

 

 

 - 

 

 

 - 

            Total deposits

 

 10,478 

 

 

 9,122 

 

0.75%

 

1.58%

 

 

 5,602,174 

 

 

 2,310,878 

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Securities sold under agreements to repurchase

 

 7,263 

 

 

 17,570 

 

1.91%

 

2.30%

 

 

 1,524,876 

 

 

 3,058,119 

    Advances from FHLB and other borrowings

 

 1,645 

 

 

 3,614 

 

1.24%

 

4.38%

 

 

 529,499 

 

 

 329,855 

    FDIC-guaranteed term notes

 

 - 

 

 

 299 

 

 - 

 

1.35%

 

 

 - 

 

 

 88,361 

    Subordinated capital notes

 

 1,660 

 

 

 328 

 

4.59%

 

3.64%

 

 

 144,674 

 

 

 36,083 

        Total borrowings

 

 10,568 

 

 

 21,811 

 

1.92%

 

2.48%

 

 

 2,199,049 

 

 

 3,512,418 

            Total interest bearing liabilities

 

 21,046 

 

 

 30,933 

 

1.08%

 

2.12%

 

 

 7,801,223 

 

 

 5,823,296 

Net interest income / spread

$

 92,582 

 

$

 38,986 

 

4.69%

 

2.54%

 

 

 

 

 

 

Interest rate margin

 

 

 

 

 

 

4.70%

 

2.60%

 

 

 

 

 

 

Excess of average interest-earning assets over

    average interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

$

 82,972 

 

$

 183,432 

Average interest-earning assets to average

    interest-bearing liabilities ratio

 

 

 

 

 

 

 

 

 

 

 

101.06%

 

 

103.15%

76

 


 

       

 

C - CHANGES IN NET INTEREST INCOME DUE TO:

 

Volume

 

Rate

 

Total

 

(In thousands)

Interest Income:

 

 

 

 

 

 

 

 

    Investments

$

 (11,623) 

 

$

 (5,496) 

 

$

 (17,119) 

    Loans

 

 50,570 

 

 

 10,258 

 

 

 60,828 

        Total interest income

 

 38,947 

 

 

 4,762 

 

 

 43,709 

Interest Expense:

 

 

 

 

 

 

 

 

    Deposits

 

 12,996 

 

 

 (11,640) 

 

 

 1,356 

    Securities sold under agreements to repurchase

 

 (8,809) 

 

 

 (1,513) 

 

 

 (10,322) 

    Other borrowings

 

 2,052 

 

 

 (2,974) 

 

 

 (922) 

        Total interest  expense

 

 6,239 

 

 

 (16,127) 

 

 

 (9,888) 

Net Interest Income

$

 32,708 

 

$

 20,889 

 

$

 53,597 

77

 


 

       

 

Net Interest Income

 

 

Net interest income is a function of the difference between rates earned on the Company’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities (interest rate margin). Table 1 above show the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2013 and 2012.

 

Net interest income amounted to $92.6 million for the first quarter of 2013, a 137.5% increase from $39.0 million in the first quarter of 2012. These changes reflect a decrease of 32.0% in interest expense and an increase of 153.4% in interest income from loans, partially offset by a 56.6% decrease in interest income from investments.

 

Interest rate spread for the first quarter of 2013 increased 215 basis points to 4.69% from 2.54% in the first quarter of 2012. This increase is mainly due to the net effect of a 104 basis points decrease in the average cost of funds from 2.12% to 1.08%, and a 110 basis points increase in the average yield of interest-earning assets from 4.66% to 5.76%.

 

The increase in interest income was primarily the result of an increase of $38.9 million in interest-earning assets volume variance, and a $4.8 million increase in interest rate variance.   Interest income from loans increased 153.4% to $100.5 million for the quarter ended March 31, 2013 mainly due to the loan portfolio acquired as part of the BBVAPR Acquisition.  This was mitigated by the fact that interest income from covered loans during the quarter ended March 31, 2013 decreased 6.1% to $20.2 million.  Interest income on investments decreased 56.6% to $13.1 million in the first quarter of 2013, compared to the first quarter of 2012, reflecting a lower balance in the investment securities portfolio, a lower yield on investment securities, and an increase in premium amortization due to increased prepayment speeds. 

 

Interest expense decreased 32.0% to $21.0 million for the quarter ended March 31, 2013. This decrease was primarily the result of a $16.1 million decrease in interest rate variance, and a $6.2 million increase in interest-bearing liabilities volume variance.  The decrease in interest rate variance is due to a reduction in the cost of funds and the increase in the volume variance is due to the increase in the balance of deposits.  The interest rate spread on interest-bearing liabilities decreased 104 basis points to 1.08% for the quarter ended March 31, 2013, compared to the same period in 2012.  The cost of deposits decreased 83 basis points to 0.75% for the first quarter of 2013, compared to 1.58% for the first quarter of 2012, primarily due to continuing progress in repricing core deposits and to the maturity of higher cost wholesale deposits during the period.  The cost of borrowings decreased by 56 basis points to 1.92% in the first quarter of 2013, compared to 2.48% for the first quarter of 2012. 

 

For the quarter ended March 31, 2013, the average balance of total interest-earning assets was $7.884 billion, an increase of 31.3% from the quarter ended March 31, 2012.  The increase in average balance of interest-earning assets was mainly attributable to an increase in average loans for the quarter ended March 31, 2013 of 209.2%, resulting from the loan portfolio acquired from BBVAPR, mitigated by a reduction of 38.4% in average investments for the quarter ended March 31, 2013 as a result of the sale of investments made during 2012 as part of the deleverage plan in connection with the BBVAPR Acquisition.

 

For the quarter ended March 31, 2013, the average yield on interest-earning assets was 5.76% compared to 4.66% for the same period in 2012. This was mainly due to the increase in average balance and higher average yields in the non-covered loan portfolio as a result of the BBVAPR Acquisition, which portfolio had an average yield of 6.64% for quarter ended March 31, 2013, compared to 6.05% for the quarter ended March 31, 2012.

78

 


 

       

 

TABLE 2 - NON-INTEREST INCOME SUMMARY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

Variance

 

 

 

 

 

 

 

 

Financial service revenue

$

 7,660 

 

$

 5,889 

 

30.1%

Banking service revenue

 

 12,382 

 

 

 3,080 

 

302.0%

Mortgage banking activities

 

 3,153 

 

 

 2,502 

 

26.0%

    Total banking and financial service revenue

 

 23,195 

 

 

 11,471 

 

102.2%

Net (amortization) accretion of FDIC shared-loss

    indemnification asset

 

 (12,871) 

 

 

 (4,827) 

 

-166.6%

Net gain (loss) on:

 

 

 

 

 

 

 

    Sale of securities available for sale

 

 - 

 

 

 7,360 

 

-100.0%

    Derivatives

 

 (298) 

 

 

 - 

 

-100.0%

    Foreclosed real estate

 

 (1,793) 

 

 

 (398) 

 

-350.5%

    Early extinguishment of subordinated capital notes

 

 1,061 

 

 

 - 

 

100.0%

Other

 

 (38) 

 

 

 (842) 

 

95.5%

 

 

 (13,939) 

 

 

 1,293 

 

-1178.0%

Total non-interest income, net

$

 9,256 

 

$

 12,764 

 

-27.5%

 

Non-Interest Income

 

Non-interest income is affected by the amount of securities, derivatives and trading transactions, the level of trust assets under management, transactions generated by clients’ financial assets serviced by the securities broker-dealer and insurance subsidiaries, the level of mortgage banking activities, and the fees generated from loans and deposit accounts. It is also affected by the net amortization of the FDIC shared-loss indemnification asset, which varies depending on the results of the on-going evaluation of expected cash flows of the loan portfolio acquired in the FDIC-assisted acquisition.

 

As shown in Table 2 above, the Company recorded non-interest income in the amount of $9.3 million for the quarter ended March 31, 2013, compared to $12.8 million for the quarter ended March 31, 2012, a decrease of $3.5 million.

 

During the quarter ended March 31, 2013, the Company did not have a gain or loss on sale of securities as compared to the quarter ended March 31, 2012, in which the Company had $7.4 million gain on sale of securities.

 

Also, the increase in the net amortization of the FDIC shared-loss indemnification asset to $12.9 million for the quarter ended March 31, 2013, compared to $4.8 million for the quarter ended March 31, 2012, resulted from the ongoing evaluation of expected cash flows of the covered loan portfolio, which resulted in reduced losses expected to be collected from the FDIC and the improved re-yielding of the accretable yield on the covered loans. The reduction in claimable losses amortizes the share-loss indemnification asset through the life of the shared loss agreement.  This amortization is net of the accretion of the discount recorded to reflect the expected claimable loss at its net present value.

 

Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer services, increased 302% to $12.4 million in the quarter ended March 31, 2013, from $3.0 million in the quarter ended March 31, 2012.  This increase for the quarter ended March 31, 2013 is attributable to an increase in transaction volume due to increase in the deposit portfolio as a result of the BBVAPR Acquisition.

 

Financial service revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, increased 30% to $7.7 million in the quarter ended March 31, 2013, from $5.9 million for the quarter ended March 31, 2012, due to increased brokerage, trust and insurance business and transactions as a result of the BBVAPR Acquisition.

 

Income generated from mortgage banking activities increased 26% to $3.2 million for the quarter ended March 31, 2013, compared to $2.5 million for the quarter ended March 31, 2012. Such increase is mainly a result of an increase in mortgage loan production for the first quarter of 2013 when compared to the first quarter of 2012.

 

 

79

 


 

       

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

Variance %

 

(Dollars in thousands)

Compensation and employee benefits

$

 23,249 

 

$

 10,365 

 

124.3%

Professional and service fees

 

 9,122 

 

 

 5,420 

 

68.3%

Occupancy and equipment

 

 9,216 

 

 

 4,209 

 

119.0%

Insurance

 

 2,678 

 

 

 1,820 

 

47.1%

Electronic banking charges

 

 3,728 

 

 

 1,558 

 

139.3%

Advertising, business promotion,

    and strategic initiatives

 

 1,409 

 

 

 848 

 

66.2%

Merger and restructuring charges

 

 5,534 

 

 

 - 

 

100.0%

Foreclosure, repossession and other real estate expenses

 

 1,505 

 

 

 749 

 

100.9%

Loan servicing and clearing expenses

 

 1,475 

 

 

 967 

 

52.5%

Taxes, other than payroll and income taxes

 

 2,622 

 

 

 1,174 

 

123.3%

Communication

 

 864 

 

 

 389 

 

122.1%

Printing, postage, stationery and supplies

 

 1,166 

 

 

 308 

 

278.6%

Director and investors relations

 

 236 

 

 

 309 

 

-23.6%

Other operating expenses

 

 2,128 

 

 

 886 

 

140.2%

Total non-interest expenses

$

 64,932 

 

$

 29,002 

 

123.9%

Relevant ratios and data:

 

 

 

 

 

 

 

    Efficiency ratio

 

56.08%

 

 

57.48%

 

 

    Compensation and benefits to

        non-interest expense

 

35.81%

 

 

35.74%

 

 

    Compensation to total assets owned

 

1.07%

 

 

0.64%

 

 

    Average number of employees

 

 1,587 

 

 

 745 

 

 

    Average compensation per employee

$

 58.6 

 

$

 55.7 

 

 

    Assets owned per average employee

$

 5,483 

 

$

 8,674 

 

 

80

 


 

       

 

Non-Interest Expenses

 

Non-interest expense for the quarter ended March 31, 2013 reached $64.9 million, representing an increase of 124% compared to $29.0 million for the quarter ended March 31, 2012.

Compensation and employee benefits for the quarter ended March 31, 2013 increased 124% to $23.2 million from $10.4 million for the quarter ended March 31, 2012.  The increase is mainly driven by the integration of the employees of BBVAPR.  This represented an increase of approximately $11.6 million for the quarter ended March 31, 2013.

Professional and service fees increased 68.3% to $9.1 million for the quarter ended March 31, 2013 from $5.4 million for the quarter ended March 31, 2012 mainly due to non-recurring professional expenses related to the BBVAPR integration.

Occupancy and equipment increased 119% to $9.2 million for the quarter ended March 31, 2013 from $4.2 million for the first quarter of 2012 as a result of the BBVAPR Acquisition in which the branch network increased by approximately 30 branches when compared to the same period a year ago and the building where our new headquarters are located was also acquired.

Electronic banking charges increased 139.3% to $3.7 million in the quarter ended March 31, 2013 from $1.6 million in 2012, mostly due to the increase in expenses related to merchant business and card interchange transactions due to our banking business growth.

During the first quarter of 2013, the Company incurred $5.5 million in expenses related to the merger and restructuring charges.  This amount includes a $3.8 million charge related to an early termination of a contract with a third party servicer of certain loan portfolios acquired in the FDIC-assisted transaction and $950 thousand related to systems integration.  These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. 

 

Taxes, other than payroll and income taxes, for the quarter ended March 31, 2013 increased 123.3% to $2.6 million as compared to the quarter ended March 31, 2012.

Foreclosure, repossession and other real estate expenses for the quarter ended March 31, 2013 increased 100.9% to $1.5 million as compared to the same quarter in 2012, principally due to an increase in foreclosures during the first quarter of 2013 as compared to the same quarter in 2012.

Advertising, business promotion, and strategic initiatives for the quarter ended March 31, 2013 increased 66.2% as compared to the same period in 2012, primarily to support the expansion of commercial banking and the Company’s rebranding.

                                                                                 

The increase in the Company’s net-interest income resulted in a decrease in the efficiency ratio to 56.08% for the quarter ended March 31, 2013 from 57.48% in the same quarter last year. The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. The Company computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on sale of investments securities, derivatives gains or losses, credit-related other-than-temporary impairment losses, net accretion or amortization of FDIC shared-loss indemnification assets, losses on early extinguishment of repurchase agreements, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits greater comparability. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation amounted to losses of $13.9 million for the quarter ended March 31, 2013 compared to gains of $1.3 million for the quarter ended March 31, 2012. Revenue for purposes of the efficiency ratio for the quarter ended March 31, 2013 amounted to $115.8 million compared to $50.4 million for the same quarter in 2012.

 

 

Provision for Loan and Lease Losses

 

The provision for non-covered loan and lease losses for the quarter ended March 31, 2013 totaled $7.9 million. Provision for originated loan and lease losses for the quarter ended March 31, 2013 was $5.8 million, a 93.2% increase when compared to the quarter ended March 31, 2012, mainly related to the increase in loan average balance. Based on an analysis of the credit quality and the composition of the Company’s loan portfolio, management determined that the provision for the quarter ended March 31, 2013 was adequate in order to maintain the allowance for loan and lease losses at an adequate level to provide for probable losses based upon an evaluation of known and inherent risks. The increase in the provision for non-covered loan and lease losses on originated loans for the quarter ended March 31, 2013 is supported by the following observed trends:

 

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  • Originated loans and leases that are 90 days past due to total gross loans decreased from 11.0% at December 31, 2012 to 8.6% at March 31, 2013.

  • Non-accruing originated loans and leases decreased from $145.1 million at December 31, 2012 to $130.5 million at March 31, 2013.

 

During the first quarter of 2013, net credit losses amounted to $3.4 million, an increase of 27.7% when compared to $2.7 million for the quarter ended March 31, 2012.  The increase was primarily due to an increase in net credit losses for mortgage loans of $1.6 million. 

 

Total charge-offs on originated loans increased 25.6% to $3.5 million in for the first quarter of 2013 as compared to the first quarter of 2012, and total recoveries slightly increased from $123 thousand in first quarter of 2012 to $100 thousand in the same period for 2013. As a result, the recoveries to charge-offs ratio decreased from 4.44% in the first quarter of 2012 to 2.87% in the first quarter of 2013.

 

The loans acquired in the BBVAPR Acquisition accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium) were recognized at fair value as of December 18, 2012, which included the impact of expected credit losses. Provision for loan and lease losses on these loans for the quarter ended March 31, 2013 was $2.1 million. Loans acquired in the BBVAPR.  Acquisition accounted for under ASC 310-30 (loans acquired with deteriorated credit quality, including those by analogy) were also recognized at fair value as of December 18, 2012, which included the impact of expected credit losses. They had no provision for loan and lease losses at March 31, 2013 and December 31, 2012.

 

The loans covered by the FDIC shared-loss agreement were recognized at fair value as of April 30, 2010, which included the impact of expected credit losses. To the extent credit deterioration occurs in covered loans after the date of acquisition, the Company records an allowance for loan and lease losses. Also, the Company records an increase in the FDIC shared-loss indemnification asset for the expected reimbursement from the FDIC under the shared-loss agreements.  Provision for covered loans and lease losses for the first quarter of 2013 was $672 thousand, reflecting the Company’s revision to the expected cash flows in the covered loan portfolio considering actual experiences and changes in the Company’s expectations for the remaining terms of the loan pools. During the first quarter of 2012, some covered construction and development and commercial real estate loan pools underperformed, which required a provision amounting to $7.2 million, net of the estimated reimbursement from the FDIC. 

 

Please refer to the “Allowance for Loan and Lease Losses and Non-Performing Assets” section in this MD&A and Table 8 through Table 13 below for more detailed information concerning the allowances for loan and lease losses, net credit losses and credit quality statistics.

 

 

Income Taxes

 

Income tax expense was $7.1 million for the quarter ended March 31, 2013 compared to $1.9 million for the same quarter in 2012.  The increase was mainly due to the 125% increase in income before taxes when compared to the quarter ended March 31, 2012. The effective income tax rate increased from 15% at March 31, 2012 to 25% at March 31, 2013 because of lower exempt income and the fact that there were no sales of securities during the quarter ended March 31, 2013, whose gains are taxed at a special rate lower than the regular income tax rate. 

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ANALYSIS OF FINANCIAL CONDITION

 

TABLE 4 - ASSETS SUMMARY AND COMPOSITION

 

 

 

 

 

 

 

 

  

March 31,

 

December 31,

 

 

  

2013 

 

2012 

 

Variance %

 

(Dollars in thousands)

Investments:

 

 

 

 

 

 

 

    FNMA and FHLMC certificates

$

 1,553,110 

 

$

 1,693,448 

 

-8.3%

    Obligations of US Government sponsored agencies

 

 18,536 

 

 

 21,847 

 

-15.2%

    US Treasury securities

 

 11,500 

 

 

 26,496 

 

-56.6%

    CMOs issued by US Government sponsored agencies

 

 271,608 

 

 

 291,400 

 

-6.8%

    GNMA certificates

 

 12,897 

 

 

 15,165 

 

-15.0%

    Puerto Rico Government and agency obligations

 

 120,396 

 

 

 120,520 

 

-0.1%

    FHLB stock

 

 33,458 

 

 

 38,411 

 

-12.9%

    Other debt securities

 

 25,108 

 

 

 25,410 

 

-1.2%

    Other investments

 

 1,853 

 

 

 568 

 

226.2%

        Total investments

 

 2,048,466 

 

 

 2,233,265 

 

-8.3%

Loans:

 

 

 

 

 

 

 

    Loans not covered under shared-loss agreements with the FDIC

 

 4,799,724 

 

 

 4,762,095 

 

0.8%

    Allowance for loan and lease losses on non covered loans

 

 (42,721) 

 

 

 (39,921) 

 

-7.0%

        Non covered loans receivable, net

 

 4,757,003 

 

 

 4,722,174 

 

0.7%

    Mortgage loans held for sale

 

 77,644 

 

 

 64,544 

 

20.3%

            Total loans not covered under shared-loss agreements with the FDIC, net

 

 4,834,647 

 

 

 4,786,718 

 

1.0%

    Loans covered under shared-loss agreements with the FDIC

 

 432,708 

 

 

 449,431 

 

-3.7%

    Allowance for loan and lease losses on covered loans

 

 (52,974) 

 

 

 (54,124) 

 

2.1%

            Total loans covered under shared-loss agreements with the FDIC, net

 

 379,734 

 

 

 395,307 

 

-3.9%

                Total loans, net

 

 5,214,381 

 

 

 5,182,025 

 

0.6%

Securities purchased under agreements to resell

 

 60,000 

 

 

 80,000 

 

-25.0%

Total securities and loans

 

 7,322,847 

 

 

 7,495,290 

 

-2.3%

Other assets:

 

 

 

 

 

 

 

    Cash and due from banks

 

 548,770 

 

 

 855,490 

 

-35.9%

    Money market investments

 

 12,676 

 

 

 13,205 

 

-4.0%

    FDIC shared-loss indemnification asset

 

 266,958 

 

 

 286,799 

 

-6.9%

    Foreclosed real estate

 

 81,338 

 

 

 75,447 

 

7.8%

    Accrued interest receivable

 

 20,231 

 

 

 17,554 

 

15.3%

    Deferred tax asset, net

 

 112,575 

 

 

 117,201 

 

-3.9%

    Premises and equipment, net

 

 83,461 

 

 

 84,997 

 

-1.8%

    Servicing assets

 

 11,543 

 

 

 10,795 

 

6.9%

    Derivative assets

 

 23,233 

 

 

 21,889 

 

6.1%

    Goodwill

 

 64,021 

 

 

 64,021 

 

0.0%

    Other assets

 

 154,900 

 

 

 150,680 

 

2.8%

        Total other assets

 

 1,379,705 

 

 

 1,698,078 

 

-18.7%

        Total assets

$

 8,702,552 

 

$

 9,193,368 

 

-5.3%

Investments portfolio composition:

 

 

 

 

 

 

 

    FNMA and FHLMC certificates

 

75.8%

 

 

75.8%

 

 

    Obligations of US Government sponsored agencies

 

0.9%

 

 

1.0%

 

 

    US Treasury securities

 

0.6%

 

 

1.2%

 

 

    CMOs issued by US Government sponsored agencies

 

13.3%

 

 

13.0%

 

 

    GNMA certificates

 

0.6%

 

 

0.7%

 

 

    Puerto Rico Government and agency obligations

 

5.9%

 

 

5.4%

 

 

    FHLB stock

 

1.6%

 

 

1.7%

 

 

    Other debt securities and other investments

 

1.3%

 

 

1.2%

 

 

 

 

100.0%

 

 

100.0%

 

 

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Assets Owned

 

At March 31, 2013, the Company’s total assets amounted to $8.703 billion, a decrease of 5.3% when compared to $9.193 billion at December 31, 2012, and interest-earning assets decreased 2.3% from $7.495 billion at December 31, 2012 to $7.323 billion at March 31, 2013.

 

At March 31, 2013, investments represented 29% of total interest earning assets while loans represented 71%, compared to 31% and 69%, respectively, at December 31, 2012.

 

Investments principally consist of U.S. treasury securities, U.S. government and agency bonds, mortgage-backed securities and Puerto Rico government and agency bonds.  At March 31, 2013, the investment portfolio decreased 8.3% to $2.049 billion from $2.233 billion at December 31, 2012.  This decrease is mostly due to the effect of a decrease of $140.3 million in FNMA and FHLMC certificates.  During the quarter ended March 31, 2013, the Company did not have realized gains or losses due to the sale of securities.

 

The Company’s loan portfolio is comprised of residential loans, home equity loans, commercial loans collateralized by mortgages on real estate located in Puerto Rico, other commercial and industrial loans, consumer loans, leases, and auto loans.  Auto loans were added as part of the recent BBVAPR Acquisition.  At March 31, 2013, the Company’s loan portfolio, the largest category of the Company’s interest-earning assets increased 0.6% to $5.214 billion compared to the loan portfolio of $5.182 billion at December 31, 2012. The covered loan portfolio decreased $15.6 million, or 3.9%, for the first quarter of 2013. The non-covered loan portfolio increased $47.9 million, or 1%.

 

At March 31, 2013, the Company’s originated loan portfolio composition and trends were as follows:

 

·         Mortgage loan portfolio amounted to $792.8 million (54.5% of the gross originated loan portfolio) compared to $804.9 million (64.1% of the gross originated loan portfolio) at December 31, 2012. Mortgage loan production totaled $77.1 million for the quarter ended March 31, 2013, an increase of 71.3% from $45.0 million in the quarter ended March 31, 2012.

 

·         Commercial loan portfolio amounted to $450.3 million (30.9% of the gross originated loan portfolio) compared to $353.9 million (28.1% of the gross originated loan portfolio) at December 31, 2012. Commercial loan production increased 33.6% to $74.0 million for the first quarter of 2013 from $55.4 million for the first quarter of 2012.

 

·         Consumer loan portfolio amounted to $65.4 million (4.5% of the gross originated loan portfolio) compared to $48.1 million (3.8% of the gross originated loan portfolio) at December 31, 2012. Consumer loan production increased 343.8% to $23.0 million for the quarter ended March 31, 2013 from $5.2 million for the same period in 2012.

 

·         Auto and leasing portfolio amounted to $146.7 million (10.1% of the gross originated loan portfolio) compared to $50.7 million (4.0% of the gross originated loan portfolio) at December 31, 2012. Auto and leasing production increased 2112.6% to $101.0 million for the quarter ended March 31, 2013 from $4.6 million for the same period in 2012. The auto business line was added as part of the BBVAPR Acquisition on December 18, 2012. Auto loan production for the quarter ended March 31, 2013 was $97.7 million.

 

At March 31, 2013, the Company’s non-covered acquired loan portfolio composition were as follows:

 

·         Mortgage loan portfolio amounted to $791.5 million (23.6% of the gross non-covered acquired loan portfolio).

 

·         Commercial loan portfolio amounted to $1.461 billion (43.7% of the gross non-covered acquired loan portfolio).

 

·         Consumer loan portfolio amounted to $169.6 million (5.1% of the gross non-covered acquired loan portfolio).

 

·         Auto loan portfolio amounted to $924.3 million (27.6% of the gross non-covered acquired loan portfolio).

 

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The FDIC shared-loss indemnification asset amounted to $267.0 million as of March 31, 2013 and $286.8 million as of December 31, 2012. The FDIC shared-loss indemnification asset is reduced as claims over losses recognized on covered loans are collected from the FDIC. Realized credit losses in excess of previously forecasted estimates result in an increase in the FDIC shared-loss indemnification asset. Conversely, if realized credit losses are less than previously forecasted estimates, the FDIC shared-loss indemnification asset is amortized through the term of the shared-loss agreements. The decrease in the FDIC shared-loss indemnification asset is mainly related to reimbursements of $6.7 million received from the FDIC during the current quarter, net amortization of $12.9 million and a decrease of $1.8 million in expected net credit impairment losses to be covered under shared-loss agreements, which was partially offset by $1.5 million in incurred expenses to be reimbursed under the shared-loss agreements.

 

Under the terms of the shared-loss agreements, the FDIC absorbs 80% of losses and shares in 80% of loss recoveries on covered assets. The term for loss share on single family residential mortgage loans is ten years with respect to losses and loss recoveries, while the term for loss share on commercial loans is five years with respect to losses and eight years with respect to loss recoveries, from the April 30, 2010 acquisition date. The shared-loss agreements also provide for certain costs directly related to the collection and preservation of covered assets to be reimbursed at an 80% level.

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TABLE 5 — LOANS RECEIVABLE COMPOSITION

 

 

 

March 31,

 

December 31,

 

Variance

 

2013 

 

2012 

 

%

 

(In thousands)

Loans not covered under shared-loss agreements with FDIC:

 

 

 

 

 

 

 

    Originated loans and leases:

 

 

 

 

 

 

 

       Mortgage

$

 792,830 

 

$

 804,942 

 

-1.5%

        Commercial

 

 450,312 

 

 

 353,930 

 

27.2%

        Auto and leasing

 

 146,689 

 

 

 50,720 

 

189.2%

        Consumer

 

 65,363 

 

 

 48,136 

 

35.8%

            Total originated loans and leases

 

 1,455,194 

 

 

 1,257,728 

 

15.7%

Acquired loans:

 

 

 

 

 

 

 

Accounted for under ASC 310-20

 

 

 

 

 

 

 

        Commercial and industrial

 

 315,706 

 

 

 317,632 

 

-0.6%

        Construction and commercial real estate

 

 19,153 

 

 

 20,337 

 

-5.8%

        Auto

 

 417,649 

 

 

 457,894 

 

-8.8%

        Consumer

 

 65,388 

 

 

 68,878 

 

-5.1%

 

 

 817,896 

 

 

 864,741 

 

-5.4%

Accounted for under ASC 310-30

 

 

 

 

 

 

 

        Commercial and industrial

 

 934,843 

 

 

 960,502 

 

-2.7%

        Construction and commercial real estate

 

 191,521 

 

 

 198,560 

 

-3.5%

        Mortgage

 

 791,537 

 

 

 810,235 

 

-2.3%

        Auto

 

 506,613 

 

 

 555,510 

 

-8.8%

        Consumer

 

 104,257 

 

 

 118,282 

 

-11.9%

 

 

 2,528,771 

 

 

 2,643,089 

 

-4.3%

 

 

 3,346,667 

 

 

 3,507,830 

 

-4.6%

 

 

 4,801,861 

 

 

 4,765,558 

 

0.8%

        Deferred loans fees, net

 

 (2,138) 

 

 

 (3,463) 

 

38.3%

    Loans receivable

 

 4,799,723 

 

 

 4,762,095 

 

0.8%

        Allowance for loan and lease losses on non-covered loans

 

 (42,720) 

 

 

 (39,921) 

 

-7.0%

    Loans receivable, net

 

 4,757,003 

 

 

 4,722,174 

 

0.7%

        Mortgage loans held-for-sale

 

 77,644 

 

 

 64,544 

 

20.3%

    Total loans not covered under shared-loss agreements with FDIC, net

 

 4,834,647 

 

 

 4,786,718 

 

1.0%

Loans covered under shared-loss agreements with FDIC:

 

 

 

 

 

 

 

    Loans secured by 1-4 family residential properties

 

 129,472 

 

 

 128,811 

 

0.5%

    Construction and development secured by 1-4 family residential properties

 

 13,971 

 

 

 15,969 

 

-12.5%

    Commercial and other construction

 

 278,500 

 

 

 289,070 

 

-3.7%

    Leasing

 

 2,640 

 

 

 7,088 

 

-62.8%

    Consumer

 

 8,125 

 

 

 8,493 

 

-4.3%

    Total loans covered under shared-loss agreements with FDIC

 

 432,708 

 

 

 449,431 

 

-3.7%

        Allowance for loan and lease losses on covered loans

 

 (52,974) 

 

 

 (54,124) 

 

2.1%

    Total loans covered under shared-loss agreements with FDIC, net

 

 379,734 

 

 

 395,307 

 

-3.9%

Total loans receivable, net

$

 5,214,381 

 

$

 5,182,025 

 

0.6%

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TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION

 

 

  

March 31,

 

December 31,

 

Variance

  

2013 

 

2012 

 

%

 

(Dollars in thousands)

Deposits:

 

 

 

 

 

 

 

    Non-interest bearing deposits

$

 753,291 

 

$

 799,667 

 

-5.8%

    NOW accounts

 

 1,430,091 

 

 

 1,647,072 

 

-13.2%

    Savings and money market accounts

 

 891,957 

 

 

 634,133 

 

40.7%

    Certificates of deposit

 

 2,483,844 

 

 

 2,603,693 

 

-4.6%

        Total deposits

 

 5,559,183 

 

 

 5,684,565 

 

-2.2%

    Accrued interest payable

 

 4,331 

 

 

 4,994 

 

-13.3%

        Total deposits and accrued interest payable

 

 5,563,514 

 

 

 5,689,559 

 

-2.2%

Borrowings:

 

 

 

 

 

 

 

    Short term borrowings

 

 60,846 

 

 

 92,222 

 

-34.0%

    Securities sold under agreements to repurchase

 

 1,491,675 

 

 

 1,695,247 

 

-12.0%

    Advances from FHLB

 

 425,560 

 

 

 536,542 

 

-20.7%

    Federal funds purchased

 

 29,612 

 

 

 9,901 

 

199.1%

    Other term notes

 

 7,734 

 

 

 7,734 

 

0.0%

    Subordinated capital notes

 

 98,436 

 

 

 146,038 

 

-32.6%

        Total borrowings

 

 2,113,863 

 

 

 2,487,684 

 

-15.0%

            Total deposits and borrowings

 

 7,677,377 

 

 

 8,177,243 

 

-6.1%

 

 

 

 

 

 

 

 

Derivative liabilities

 

 24,024 

 

 

 26,260 

 

-8.5%

Acceptances outstanding

 

 32,512 

 

 

 26,996 

 

20.4%

Other liabilities

 

 98,396 

 

 

 99,263 

 

-0.9%

            Total liabilities

$

 7,832,309 

 

$

 8,329,762 

 

-6.0%

Deposits portfolio composition percentages:

 

 

 

 

 

 

 

    Non-interest bearing deposits

 

13.6%

 

 

14.1%

 

 

    NOW accounts

 

25.7%

 

 

29.0%

 

 

    Savings and money market accounts

 

16.0%

 

 

11.2%

 

 

    Certificates of deposit

 

44.7%

 

 

45.7%

 

 

 

 

100.0%

 

 

100.0%

 

 

Borrowings portfolio composition percentages:

 

 

 

 

 

 

 

    Short term borrowings

 

2.9%

 

 

3.7%

 

 

    Securities sold under agreements to repurchase

 

70.6%

 

 

68.1%

 

 

    Advances from FHLB

 

20.1%

 

 

21.6%

 

 

    Federal funds purchased

 

1.4%

 

 

0.4%

 

 

    Other term notes

 

0.4%

 

 

0.3%

 

 

    Subordinated capital notes

 

4.6%

 

 

5.9%

 

 

 

 

100.0%

 

 

100.0%

 

 

Securities sold under agreements to repurchase

 

 

 

 

 

 

 

    Amount outstanding at period-end

$

 1,491,675 

 

$

 1,695,247 

 

 

    Daily average outstanding balance

$

 1,565,424 

 

$

 2,888,558 

 

 

    Maximum outstanding balance at any month-end

$

 1,556,962 

 

$

 3,060,578 

 

 

 

Liabilities and Funding Sources

 

As shown in Table 6 above, at March 31, 2013, the Company’s total liabilities were $7.832 billion, 6.0% less than the $8.330 billion reported at December 31, 2012.  Deposits and borrowings, the Company’s funding sources, amounted to $7.677 billion at March 31, 2013 versus $8.177 billion at December 31, 2012, a 6.1% decrease.

 

At March 31, 2013, deposits represented 72% and borrowings represented 28% of interest-bearing liabilities, compared to 70% and 30%, respectively, at December 31, 2012. At March 31, 2013, deposits and accrued interest payable, the largest category of the Company’s interest-bearing liabilities, were $5.564 billion, down 2.2% from $5.690 billion at December 31, 2012. On December 18,

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2012, the Company assumed $3.494 billion in deposits of BBVAPR Bank. Core deposits remained stable at $4.130 billion at March 31, 2013 from December 31, 2012, and institutional and brokered deposits decreased 11% to $1.434 billion as of March 31, 2013 from $1.531 billion at December 31, 2012.

 

Borrowings consist mainly of funding sources through the use of repurchase agreements, FHLB advances, subordinated capital notes, and short-term borrowings. At March 31, 2013, borrowings amounted to $2.114 billion, 15.0% lower than the $2.488 billion reported at December 31, 2012. Repurchase agreements as of March 31, 2013 decreased approximately $203.6 million to $1.492 billion from $1.695 billion at December 31, 2012, as the Company used available cash to pay off a $200 million repurchase agreement at maturity.

 

As a member of the FHLB, the Bank can obtain advances from the FHLB, secured by the FHLB stock owned by the Bank, as well as by certain of the Bank’s mortgage loans and investment securities. Advances from FHLB amounted to $425.6 million and $536.5 million as of March 31, 2013 and December 31, 2012, respectively. These advances mature from April 2013 through April 2017.

 

                 

Stockholders’ Equity

 

At March 31, 2013, the Company’s total stockholders’ equity was $870.2 million, a 0.8% increase when compared to $863.6 million at December 31, 2012.  Increase in stockholders’ equity was mainly driven by the income for the quarter, partially offset by changes to other comprehensive income during the quarter.

 

Tangible common equity to total assets increased to 7.20% from 6.74% at the end of the last year. Tier 1 Leverage Capital Ratio increased to 8.07% from 6.42%, Tier 1 Risk-Based Capital Ratio increased to 13.24% from 12.94%, and Total Risk-Based Capital Ratio increased to 15.26% from 15.15% on December 31, 2012.

 

The Company maintains capital ratios in excess of regulatory requirements. At March 31, 2013, Tier 1 Leverage Capital Ratio was 2.02 times the minimum requirement of 4.00%, Tier 1 Risk-Based Capital Ratio was 3.31 times the minimum requirement of 4.00%, and Total Risk-Based Capital Ratio was 1.91 times the minimum requirement of 8.00%.

 

 

 

 

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The following are the consolidated capital ratios of the Company at March 31, 2013 and December 31, 2012:

 

TABLE 7 — CAPITAL, DIVIDENDS AND STOCK DATA

 

 

 

March 31,

 

December 31,

 

Variance

  

2013 

 

2012 

 

%

 

(Dollars in thousands, except per share data)

Capital data:

 

 

 

 

 

 

 

    Stockholders’ equity

$

 870,242 

 

$

 863,606 

 

0.8%

Regulatory Capital Ratios data:

 

 

 

 

 

 

 

    Leverage capital ratio

 

8.07%

 

 

6.42%

 

25.7%

    Minimum leverage capital ratio required

 

4.00%

 

 

4.00%

 

 

    Actual tier 1 capital

$

 698,786 

 

$

 678,127 

 

3.0%

    Minimum tier 1 capital required

$

 346,284 

 

$

 422,307 

 

-18.0%

    Excess over regulatory requirement

$

 352,503 

 

$

 255,820 

 

37.8%

    Tier 1 risk-based capital ratio

 

13.24%

 

 

12.94%

 

2.3%

    Minimum tier 1 risk-based capital ratio required

 

4.00%

 

 

4.00%

 

 

    Actual tier 1 risk-based capital

$

 698,786 

 

$

 678,127 

 

3.0%

    Minimum tier 1 risk-based capital required

$

 211,080 

 

$

 209,634 

 

0.7%

    Excess over regulatory requirement

$

 487,707 

 

$

 468,493 

 

4.1%

    Risk-weighted assets

$

 5,276,992 

 

$

 5,240,861 

 

0.7%

    Total risk-based capital ratio

 

15.26%

 

 

15.15%

 

0.7%

    Minimum total risk-based capital ratio required

 

8.00%

 

 

8.00%

 

 

    Actual total risk-based capital

$

 805,320 

 

$

 794,195 

 

1.4%

    Minimum total risk-based capital required

$

 422,159 

 

$

 419,269 

 

0.7%

    Excess over regulatory requirement

$

 383,161 

 

$

 374,926 

 

2.2%

    Risk-weighted assets

$

 5,276,992 

 

$

 5,240,861 

 

0.7%

    Tangible common equity to total assets

 

7.20%

 

 

6.74%

 

6.8%

    Tangible common equity to risk-weighted assets

 

11.87%

 

 

11.82%

 

0.4%

    Total equity to total assets

 

10.00%

 

 

9.39%

 

6.5%

    Total equity to risk-weighted assets

 

16.49%

 

 

16.48%

 

0.1%

    Tier 1 common equity to risk-weighted assets

 

9.44%

 

 

9.11%

 

3.6%

    Tier 1 common equity capital

$

 497,916 

 

$

 477,241 

 

4.3%

Stock data:

 

 

 

 

 

 

 

    Outstanding common shares

 

 45,621,199 

 

 

 45,580,281 

 

0.1%

    Book value per common share

$

 15.44 

 

$

 15.31 

 

0.9%

    Market price at end of period

$

 15.51 

 

$

 13.35 

 

16.2%

    Market capitalization at end of period

$

 707,585 

 

$

 608,497 

 

16.3%

 

  

 

 

 

 

 

 

Variance

  

2013 

 

2012 

 

%

 

(Dollars in thousands, except per share data)

Common dividend data:

 

 

 

 

 

 

 

    Cash dividends declared

$

 2,737 

 

$

 2,442 

 

12.1%

    Cash dividends declared per share

$

 0.06 

 

$

 0.06 

 

0.0%

    Payout ratio

 

16.22%

 

 

26.14%

 

-37.9%

    Dividend yield

 

1.55%

 

 

1.98%

 

-22.0%

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The table that follows presents a reconciliation of the Company’s total stockholders’ equity to tangible common equity and total assets to tangible assets at March 31, 2013 and December 31, 2012:

 

 

March 31,

 

December 31,

 

2013

 

2012

 

(In thousands, except share or per

share information)

Total stockholders' equity

$

 870,242 

 

$

 863,606 

Preferred stock

 

 (176,000) 

 

 

 (176,000) 

Preferred stock issuance costs

 

 10,131 

 

 

 10,115 

Goodwill

 

 (64,021) 

 

 

 (64,021) 

Core deposit intangible

 

 (9,048) 

 

 

 (9,463) 

Customer relationship intangible

 

 (4,798) 

 

 

 (5,027) 

Total tangible common equity

$

 626,507 

 

$

 619,210 

Total assets

 

 8,702,551 

 

 

 9,193,368 

Goodwill

 

 (64,021) 

 

 

 (64,021) 

Core deposit intangible

 

 (9,048) 

 

 

 (9,463) 

Customer relationship intangible

 

 (4,798) 

 

 

 (5,027) 

Total tangible assets

$

 8,624,685 

 

$

 9,114,857 

Tangible common equity to tangible assets

 

7.26%

 

 

6.79%

Common shares outstanding at end of period

 

 45,621,199 

 

 

 45,580,281 

Tangible book value per common share

$

 13.73 

 

$

 13.59 

 

The tangible common equity ratio and tangible book value per common share are non-GAAP measures. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

 

The Tier 1 common equity to risk-weighted assets ratio is another non-GAAP measure. Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing the Company’s capital position. In connection with the Supervisory Capital Assessment Program, the Federal Reserve Board began supplementing its assessment of the capital adequacy of a large bank holding company based on a variation of Tier 1 capital, known as Tier 1 common equity.

 

Because Tier 1 common equity is not formally defined by GAAP or, unlike Tier 1 capital, codified in the federal banking regulations, this measure is considered to be a non-GAAP financial measure. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, the Company has procedures in place to calculate these measures using the appropriate GAAP or regulatory components. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

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The table below presents a reconciliation of the Company’s total common equity (GAAP) at March 31, 2013 and December 31, 2012 to Tier 1 common equity (non-GAAP):

 

 

March 31,

 

December 31

 

2013 

 

2012 

 

(In thousands)

Common stockholders' equity

$

 704,373 

 

$

 697,721 

Unrealized gains on available-for-sale securities, net of income tax

 

 (58,393) 

 

 

 (68,245) 

Unrealized losses on cash flow hedges, net of income tax

 

 11,342 

 

 

 12,365 

Disallowed deferred tax assets

 

 (80,384) 

 

 

 (85,010) 

Disallowed servicing assets

 

 (1,155) 

 

 

 (1,079) 

Intangible assets:

 

 

 

 

 

    Goodwill

 

 (64,021) 

 

 

 (64,021) 

    Other disallowed intangibles

 

 (13,846) 

 

 

 (14,490) 

Total Tier 1 common equity

$

 497,916 

 

$

 477,241 

Tier 1 common equity to risk-weighted assets

 

9.44%

 

 

9.11%

 

The following table presents the Company’s capital adequacy information at March 31, 2013 and December 31, 2012:

 

 

March 31,

 

December 31,

 

2013 

 

2012 

 

(In thousands)

Risk-based capital:

 

 

 

 

 

    Tier 1 capital

$

 698,786 

 

$

 678,127 

    Supplementary (Tier 2) capital

 

 106,544 

 

 

 116,068 

        Total risk-based capital

$

 805,330 

 

$

 794,195 

Risk-weighted assets:

 

 

 

 

 

    Balance sheet items

$

 4,970,561 

 

$

 4,927,919 

    Off-balance sheet items

 

 306,431 

 

 

 312,942 

        Total risk-weighted assets

$

 5,276,992 

 

$

 5,240,861 

Ratios:

 

 

 

 

 

    Tier 1 capital (minimum required - 4%)

 

13.24%

 

 

12.94%

    Total capital (minimum required - 8%)

 

15.26%

 

 

15.15%

    Leverage ratio

 

8.07%

 

 

6.42%

    Equity to assets

 

10.00%

 

 

9.39%

    Tangible common equity to assets

 

7.20%

 

 

6.74%

 

The Federal Reserve Board has risk-based capital guidelines for bank holding companies. Under the guidelines, the minimum ratio of qualifying total capital to risk-weighted assets is 8%. At least half of the total capital is to be comprised of qualifying common stockholders’ equity, qualifying noncumulative perpetual preferred stock (including related surplus), minority interests related to qualifying common or noncumulative perpetual preferred stock directly issued by a consolidated U.S. depository institution or foreign bank subsidiary, and restricted core capital elements (collectively, “Tier 1 Capital”). Banking organizations are expected to maintain at least 50% of their Tier 1 Capital as common equity. Except as otherwise discussed below in light of the Dodd-Frank Act in connection with certain debt or equity instruments issued on or after May 19, 2010, not more than 25% of qualifying Tier 1 Capital may consist of qualifying cumulative perpetual preferred stock, trust preferred securities or other so-called restricted core capital elements. “Tier 2 Capital” may consist, subject to certain limitations, of allowance for loan and lease losses; perpetual preferred stock and related surplus; hybrid capital instruments, perpetual debt, and mandatory convertible debt securities; term subordinated debt and intermediate-term preferred stock, including related surplus; and unrealized holding gains on equity securities. “Tier 3 Capital” consists of qualifying unsecured subordinated debt.

 

The sum of Tier 2 and Tier 3 Capital may not exceed the amount of Tier 1 Capital. At March 31, 2013 and December 31, 2012, the Company was a “well capitalized” institution for regulatory purposes.

 

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The Federal Reserve Board has regulations with respect to risk-based and leverage capital ratios that require most intangibles, including goodwill and core deposit intangibles, to be deducted from Tier 1 Capital. The only types of identifiable intangible assets that may be included in, that is, not deducted from, an organization’s capital are readily marketable mortgage servicing assets, nonmortgage servicing assets, and purchased credit card relationships.

 

In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to total assets) guidelines for bank holding companies and member banks. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies and member banks that meet certain specified criteria, including that they have the highest regulatory rating.  All other bank holding companies and member banks are required to maintain a minimum ratio of Tier 1 Capital to total assets of 4%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines state that the Federal Reserve Board will continue to consider a “tangible Tier 1 leverage ratio” and other indicators of capital strength in evaluating proposals for expansion or new activities.

 

Under the Dodd-Frank Act, federal banking regulators are required to establish minimum leverage and risk-based capital requirements on a consolidated basis for insured institutions, depository institution holding companies, and non-bank financial companies supervised by the Federal Reserve Board. The minimum leverage and risk-based capital requirements are to be determined based on the minimum ratios established for insured depository institutions under prompt corrective action regulations. In effect, such provision of the Dodd-Frank Act (i.e., Section 171), which is commonly known as the Collins Amendment, applies to bank holding companies the same leverage and risk based capital requirements that apply to insured depository institutions. Because the capital requirements must be the same for insured depository institutions and their holding companies, the Collins Amendment generally excludes certain debt or equity instruments, such as cumulative perpetual preferred stock and trust preferred securities, from Tier 1 Capital, subject to a three-year phase-out from Tier 1 qualification for such instruments issued before May 19, 2010, with the phase-out commencing on January 1, 2013. However, such instruments issued before May 19, 2010 by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion as of December 31, 2009, are not affected by the Collins Amendment and may continue to be included in Tier 1 Capital as a restricted core capital element.

 

On June 12, 2012, the Office of the Comptroller of the Currency (the “OCC”), the Federal Reserve Board, and the FDIC issued three notices of proposed rulemaking (“NPRs”) that would revise and replace the agencies’ current capital rules.  The agencies also announced the finalization of the market risk capital rule that was proposed in 2011.

 

In the first Basel III NPR, “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions” (the “Basel III NPR”), the agencies are proposing to revise their risk-based and leverage capital requirements consistent with agreements reached by the Basel Committee on Banking Supervision (“Basel III”).  The Basel III NPR would apply to all insured banks and savings associations, top-tier bank holding companies domiciled in the United States with more than $500 million in assets, and savings and loan holding companies that are domiciled in the United States.  Provisions of the Basel III NPR that would apply to such banking organizations include implementation of a new common equity Tier 1 minimum capital requirement, a higher minimum Tier 1 capital requirement, and, for banking organizations subject to the advanced approaches capital rules, a supplementary leverage ratio that incorporates a broader set of exposures.  Additionally, consistent with Basel III, the agencies propose to apply limits on a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified “buffer” of common equity Tier 1 capital in addition to the minimum risk-based capital requirements.  The revisions set forth in the Basel III NPR are consistent with Section 171 of the Dodd-Frank Act, which requires the agencies to establish minimum risk-based and leverage capital requirements.

 

The Basel III NPR also would revise the agencies’ prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of tangible common equity.  Prompt corrective action is an enforcement framework that constrains the activities of insured depository institutions based on their level of regulatory capital.

 

The second Basel III NPR, “Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rules; Market Risk Capital Rule” (the “Advanced Approaches and Market Risk NPR”), would revise the advanced approaches risk-based capital rules consistent with Basel III and other changes to the Basel Committee’s capital standards.  The agencies also propose revising the advanced approaches risk-based capital rules to be consistent with Section 939A and Section 171 of the Dodd-Frank Act.  Additionally in the Advanced Approaches and Market Risk NPR, the OCC and the FDIC propose that the market risk capital rules apply to federal and state savings associations, and the Federal Reserve Board proposes that the advanced approaches and market risk capital rules apply to top-tier savings and loan holding companies domiciled in the United States, if stated thresholds for trading activity are met.  Generally, the

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advanced approaches rules would apply to such institutions with $250 billion or more in consolidated assets or $10 billion or more in foreign exposure, and the market risk rule would apply to savings and loan holding companies with significant trading activity.

 

In the third capital NPR, “Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements” (the “Standardized Approach NPR”), the agencies propose to revise and harmonize rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, including by incorporating aspects of the Basel II standardized framework, and alternatives to credit ratings, consistent with Section 939A of the Dodd-Frank Act.  The revisions include methods for determining risk-weighted assets for residential mortgages, securitization exposures, and counterparty credit risk.  The Standardized Approach NPR also would introduce disclosure requirements that would apply to U.S. banking organizations with $50 billion or more in total assets.  The Standardized Approach NPR would apply to the same set of institutions as the Basel III NPR.

 

The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.”  At March 31, 2013 and December 31, 2012, the Company’s market capitalization for its outstanding common stock was $707.6 million ($15.51 per share) and $608.5 million ($13.35 per share), respectively.

 

The following table provides the high and low prices and dividends per share of the Company’s common stock for each quarter in 2013, 2012 and 2011:

 

  

 

 

 

 

 

 

Cash

 

Price

 

Dividend

  

High

 

Low

 

Per share

2013 

 

 

 

 

 

 

 

 

    March 31, 2013

$

 15.83 

 

$

 13.85 

 

$

 0.06 

2012 

 

 

 

 

 

 

 

 

    December 31, 2012

$

 13.35 

 

$

 9.98 

 

$

 0.06 

    September 30, 2012

$

 11.49 

 

$

 10.02 

 

$

 0.06 

    June 30, 2012

$

 12.37 

 

$

 9.87 

 

$

 0.06 

    March 31, 2012

$

 12.69 

 

$

 11.25 

 

$

 0.06 

2011 

 

 

 

 

 

 

 

 

    December 31, 2011

$

 12.35 

 

$

 9.19 

 

$

 0.06 

    September 30, 2011

$

 13.20 

 

$

 9.18 

 

$

 0.05 

    June 30, 2011

$

 13.07 

 

$

 11.26 

 

$

 0.05 

    March 31, 2011

$

 12.84 

 

$

 11.40 

 

$

 0.05 

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The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the Bank’s regulatory capital ratios at March 31, 2013 and at December 31, 2012:

 

 

 

 

March 31,

 

December 31,

 

Variance

 

2013 

 

2012 

 

%

 

(Dollars in thousands)

Oriental Bank Regulatory Capital Ratios:

 

 

 

 

 

 

 

    Total Tier 1 Capital to Total Assets

 

7.34%

 

 

5.75%

 

27.6%

    Actual tier 1 capital

$

 630,498 

 

$

 604,997 

 

4.2%

    Minimum capital requirement (4%)

$

 343,805 

 

$

 420,298 

 

-18.2%

    Minimum to be well capitalized (5%)

$

 429,756 

 

$

 525,373 

 

-18.2%

    Tier 1 Capital to Risk-Weighted Assets

 

12.19%

 

 

11.80%

 

3.4%

    Actual tier 1 risk-based capital

$

 630,498 

 

$

 604,997 

 

4.2%

    Minimum capital requirement (4%)

$

 206,808 

 

$

 205,134 

 

0.8%

    Minimum to be well capitalized (6%)

$

 310,212 

 

$

 307,701 

 

0.8%

    Total Capital to Risk-Weighted Assets

 

14.23%

 

 

14.03%

 

1.4%

    Actual total risk-based capital

$

 735,713 

 

$

 719,675 

 

2.2%

    Minimum capital requirement (8%)

$

 413,616 

 

$

 410,268 

 

0.8%

    Minimum to be well capitalized (10%)

$

 517,020 

 

$

 512,835 

 

0.8%

 

Company’s Financial Assets Managed

 

The Company’s financial assets managed include those managed by the Company’s trust division, retirement plan administration subsidiary, and its broker-dealer subsidiaries.  Assets managed by the trust division and the broker-dealer subsidiaries increased to $5.387 billion at March 31 2013 from $5.237 billion at December 31, 2012, mainly as a result of assets managed by the broker-dealer subsidiary acquired in the BBVAPR Acquisition amounting to $507.9 million at March 31 2013, and an increase in employer and employee account contributions and capital market appreciation.

 

The Company’s trust division offers various types of IRAs and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan administration subsidiary, CPC, manages private retirement plans.  At March 31, 2013, total assets managed by the Company’s trust division and CPC amounted to $2.595 billion, compared to $2.514 billion at December 31 2012.  Oriental Financial Services and OFS Securities offer a wide array of investment alternatives to their client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs.  At March 31, 2013, total assets gathered by Oriental Financial Services and OFS Securities from their customer investment accounts increased to $2.793 billion, compared to $2.722 billion in assets gathered at December 31 2012.

 

Allowance for Loan and Lease Losses and Non-Performing Assets

 

The Company maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. The Company’s allowance for loan and lease losses policy provides for a detailed quarterly analysis of probable losses. Tables 8 through 13 set forth an analysis of activity in the allowance for loan and lease losses and present selected loan loss statistics. In addition, refer to Table 5 for the composition of the loan portfolio.

 

 

Non-covered Loans

 

At March 31, 2013, the Company’s allowance for non-covered loan and lease losses amounted to $42.7 million.  $42.3 million of such allowance corresponded to originated loans, or 2.91% of total non-covered originated loans at March 31, 2013 compared to $39.9 million or 3.17% of total non-covered originated loans at December 31, 2012. The allowance for residential mortgage loans, consumer loans, and auto and leases increased by 8.5% (or $1.8 million), 53.4% (or $457 thousand), and 226.6% (or $1.2 million), respectively, when compared with balances recorded at December 31, 2012.  The allowance for commercial loans decreased by 4.4%, or $758 thousand, when compared with balances recorded at December 31, 2012.  The unallocated allowance at March 31, 2013 decreased by 79.1%, or $291 thousand, when compared with balances recorded at December 31, 2012.

 

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Please refer to the “Provision for Loan and Lease Losses” section in this MD&A for a more detailed analysis of provisions for loan and lease losses.

 

Loans acquired in a business acquisition are recorded at their fair value at the acquisition date. Credit cards, floor plans, revolving lines of credit, and auto loans with FICO scores over 660, acquired as part of the BBVAPR Acquisition are accounted for under the guidance of ASC 310-20, which requires that any differences between contractually required loan payment receivable in excess of the Company’s initial investment in the loans be accreted into interest income on a level-yield basis over the life of the loan. Allowance for loan and lease losses recorded for acquired loans as of March 31, 2013 was $386 thousand. 

 

The remaining loans acquired in the BBVAPR Acquisition are accounted for under ASC-310-30 and were recognized at fair value as of December 18, 2012.  The Company does not believe differences between cash flows collected on the loans acquired in the BBVAPR Acquisition accounted for under ASC-310-30 and those anticipated at December 18, 2012 are the result of credit deterioration from our original estimates and thus no allowance for these loans was recorded as of March 31, 2013.

 

 

 

 

There have been no material changes in criteria or estimation techniques as compared to prior periods that impacted the determination of the current period allowance for loan and lease losses, except for the inclusion of the loans acquired under BBVAPR Acquisition.

 

The Company’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12).  At March 31 2013 and December 31, 2012, the Company had $132.2 million and $146.6 million, respectively, of non-accrual non-covered loans, including acquired loans accounted under ASC 310-20 (loans with revolving feature and/or acquired at a premium).  Covered loans and loans acquired from BBVAPR with credit deterioration are considered to be performing due to the application of the accretion method under ASC 310-30.  At March, 31 2013 and December 31, 2012, loans whose terms have been extended and which are classified as troubled-debt restructuring that are not included in non-performing assets amounted to $48.3 million and $52.0 million, respectively.

 

At March 31 2013, the Company’s non-performing assets decreased 3.2% to $221.3 million (3.84% of total assets, excluding covered assets and acquired loans with deteriorated credit quality) from $228.5 million (3.72% of total assets, excluding covered assets and acquired loans with deteriorated credit quality) at December 31, 2012.  The Company does not expect non-performing loans to result in significantly higher losses as most are well-collateralized with adequate loan-to-value ratios. At March 31 2013, the allowance for non-covered originated loans and lease losses to non-performing loans coverage ratio was 32.45% (27.13% at December 31, 2012).

 

The Company follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain major U.S. mortgage loan originators. Furthermore, the Company has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates, and does not originate construction and development loans.

 

The following items comprise non-performing assets:

 

1.       Originated loans:

 

·         Mortgage loans — are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan.  At March 31 2013, the Company’s originated non-performing mortgage loans totaled $99.1 million (75.0% of the Company’s non-performing loans), a 13.8% decrease from $115.0 million (78.4% of the Company’s non-performing loans) at December 31, 2012.  Non-performing loans in this category are primarily residential mortgage loans. On April 1, 2011, the Bank changed on a prospective basis its policy to place on non-accrual status residential mortgage loans well collateralized and in process of collection when reaching 90 days past due. All loans that were between 90 and 365 days past due when the policy was changed were also placed on non-accrual status. The interest receivable on such loans is evaluated on a periodic basis against the collateral underlying the loans, and written-down, if necessary. On December 31, 2012, the Bank further revised its policy to reverse against income all interest recorded on residential mortgage loans reaching 90 days past due, including the remaining interest on loans that were between 90 and 365 days past due as of April 1, 2011.  On December 31, 2012, the Bank also charged-off this remaining accrued interest on residential mortgage loans over 90 days past due.  This change in estimate was considered necessary to comply with guidance received from the Company’s regulators.

95

 


 

       

 

·         Commercial loans — are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any.  At March 31 2013, the Company’s originated non-performing commercial loans amounted to $30.8 million (23.3% of the Company’s non-performing loans), a 4.2% increase when compared to non-performing commercial loans of $29.5 million at December 31, 2012 (20.1% of the Company’s non-performing loans).  Most of this portfolio is collateralized by commercial real estate properties.

 

·         Consumer loans — are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit.  At March 31 2013, the Company’s originated non-performing consumer loans amounted to $371 thousand (0.3% of the Company’s total non-performing loans), a 16.1% decrease from $442 thousand at December 31, 2012 (0.3% of the Company’s total non-performing loans).

 

·         Auto and leases — are placed on non-accrual status when they become 90 days past due and partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days.  At March 31 2013, the Company’s originated non-performing auto and leases amounted to $219 thousand (0.2% of the Company’s total non-performing loans), an increase of 67.2% from $131 thousand at December 31, 2012 (0.1% of the Company’s total non-performing loans).

 

2.       Acquired loans accounted for under ASC 310-20 (loans with revolving features and/or acquired at premium):

  

·         Commercial lines of credit - are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any.  At March 31 2013, the Company’s acquired non-performing commercial lines of credit accounted for under ASC 310-20 amounted to $153 thousand (0.1% of the Company’s non-performing loans), a 20.7% decrease when compared to non-performing commercial lines of credit accounted for under ASC 310-20 of $193 thousand at December 31, 2012 (0.1% of the Company’s non-performing loans).

 

·         Auto loans - are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days. At March 31 2013, the Company’s acquired non-performing auto loans accounted for under ASC 310-20 totaled $605 thousand (0.5% of the Company’s non-performing loans), a 120.0% increase when compared to non-performing auto loans accounted for under ASC 310-20 of $275 thousand at December 31, 2012 (0.2% of the Company’s non-performing loans).

 

·         Consumer lines of credit and credit cards — are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 180 days.  At March 31 2013, the Company’s acquired non-performing consumer lines of credit and credit cards accounted for under ASC 310-20 totaled $1.0 million (0.8% of the Company’s non-performing loans), a 8.6% decrease when compared to non-performing consumer lines of credit and credit cards accounted for under ASC 310-20 of $1.1 million at December 31, 2012 (0.7% of the Company’s non-performing loans).

 

3.       Acquired loans accounted for under ASC 310-30: are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

 

4.    Foreclosed real estate: is initially recorded at the lower of the related loan balance or fair value less cost to sell as of the date of foreclosure. Any excess of the loan balance over the fair value of the property is charged against the allowance for loan and lease losses. Subsequently, any excess of the carrying value over the estimated fair value less disposition cost is charged to operations. Net losses on the sale of foreclosed real estate for the quarter ended March 31, 2013 amounted to $1.8 million, compared to $398 thousand for the same period in 2012.

 

The Company has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing the Company’s losses on non-performing mortgage loans.

 

The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, RHS, “Banco de la

96

 


 

       

Vivienda de Puerto Rico,” conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to the FNMA and FHLMC, and conventional loans retained by the Company. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and payment in lieu of foreclosure.

 

The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/interest first, variable interest rate, adjustable interest rate and other qualified loans. Non-traditional mortgage loan portfolios are segregated into the following categories: performing loans that meet secondary market requirement and are refinanced by the credit underwriting guidelines of FHA/VA/FNMA/FMAC, and performing loans not meeting secondary market guidelines, processed by the Company’s current credit and underwriting guidelines. The Company achieved an affordable and sustainable monthly payment by taking specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the payment of principal or, if the borrower qualifies, refinancing the loan.

 

There may not be a foreclosure sale scheduled within 60 days prior to a loan modification under any such programs. This requirement does not apply to loans where the foreclosure process has been stopped by the Company. In order to apply for any of the loan modification programs, the borrower may not be in active bankruptcy or have been discharged from Chapter 7 bankruptcy since the loan was originated. Loans in these programs will be evaluated by management for troubled debt restructuring classification if the Company grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

 

Covered Loans

 

The allowance for loan and lease losses on covered loans acquired in the FDIC-assisted acquisition of Eurobank is accounted under the provisions of ASC 310-30. Under this accounting guidance, the allowance for loan and lease losses on covered loans is evaluated at each financial reporting period, based on forecasted cash flows. Credit related decreases in expected cash flows, compared to those previously forecasted, are recognized by recording a provision for credit losses on covered loans when it is probable that all cash flows expected at acquisition will not be collected. The portion of the loss on covered loans reimbursable from the FDIC is recorded as an offset to the provision for credit losses and increases the FDIC shared-loss indemnification asset.

 

During the quarter ended March 31, 2013, the assessment of actual versus expected cash flows resulted in a net provision of $672 thousand as certain pools of real estate backed loans and of commercial and industrial loans underperformed.  The net provision also included the reversal of a previously recorded allowance in certain commercial real estate and commercial and industrial pools whose loans the Company has managed to workout with better outcomes than forecasted.  The loss share portion of the reversal of allowance during the quarter ended March 31, 2013 was proportionally higher than the allowance reversal recorded on the impaired loans. This resulted from the fact that there were some pools in which an additional allowance was recognized but no offsetting adjustment was done to the FDIC shared-loss indemnification asset as these losses were not covered by a loss share agreement.  As a result of such reversal, the allowance for covered loans decreased from $54.1 million at December 31, 2012 to $53.0 million at March 31, 2013.

97

 


 

       

 

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

  

 

 

 

 

 

 

Variance

  

2013 

 

2012 

 

%

 

(Dollars in thousands)

Non-covered loans

 

 

 

 

 

 

 

 Originated loans:

 

 

 

 

 

 

 

    Balance at beginning of period

$

 39,921 

 

$

 37,010 

 

7.9%

      Provision for non-covered

        loan and lease losses

 

 5,795 

 

 

 3,000 

 

93.2%

      Charge-offs

 

 (3,482) 

 

 

 (2,772) 

 

25.6%

      Recoveries

 

 100 

 

 

 123 

 

-18.7%

 

 

 42,334 

 

 

 37,361 

 

13.3%

 Acquired loans accounted for  

   under ASC 310-20:

 

 

 

 

 

 

 

      Provision for non-covered

        loan and lease losses

 

 2,120 

 

 

 - 

 

100.0%

      Charge-offs

 

 (3,171) 

 

 

 - 

 

100.0%

      Recoveries

 

 1,437 

 

 

 - 

 

100.0%

 

 

 386 

 

 

 - 

 

100.0%

Total non-covered loans balance

  at end of period

$

 42,720 

 

$

 37,361 

 

14.3%

 

 

 

 

 

 

 

 

    Allowance for loans and lease

      losses on originated loans to:

 

 

 

 

 

 

 

      Total originated loans

 

2.91%

 

 

3.03%

 

-4.0%

      Non-performing originated loans

 

32.45%

 

 

30.54%

 

6.3%

 

 

 

 

 

 

 

 

    Allowance for loans and lease

      losses on acquired loans 

       accounted for under ASC 310-20:

 

 

 

 

 

 

 

      Total acquired loans accounted

        for under ASC 310-20

 

0.05%

 

 

 - 

 

100.0%

      Non-performing acquired loans

        accounted for under ASC 310-20

 

21.94%

 

 

 - 

 

100.0%

 

 

 

 

 

 

 

 

Covered loans

 

 

 

 

 

 

 

Balance at beginning of period

$

 54,124 

 

$

 37,256 

 

45.3%

    Provision for covered

        loan and lease losses, net

 

 672 

 

 

 7,157 

 

-90.6%

    FDIC shared-loss portion on

       (provision for) recapture of loan

       and lease losses 

 

 (1,822) 

 

 

 12,024 

 

-115.2%

Balance at end of period

$

 52,974 

 

$

 56,437 

 

-6.1%

98

 


 

       

 

TABLE 9 — ALLOWANCE FOR NON-COVERED LOAN AND LEASE LOSSES BREAKDOWN

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

March 31,

 

 

December 31,

 

Variance

  

2013 

 

2012 

 

%

 

(Dollars in thousands)

Originated loans

 

 

 

 

 

 

 

 Allowance balance:

 

 

 

 

 

 

 

    Mortgage

$

 22,889 

 

$

 21,092 

 

8.5%

    Commercial

 

 16,314 

 

 

 17,072 

 

-4.4%

    Auto and leasing

 

 1,741 

 

 

 533 

 

226.6%

    Consumer

 

 1,313 

 

 

 856 

 

53.4%

    Unallocated allowance

 

 77 

 

 

 368 

 

-79.1%

        Total allowance balance

$

 42,334 

 

$

 39,921 

 

6.0%

 Allowance composition:

 

 

 

 

 

 

 

    Mortgage

 

54.07%

 

 

52.83%

 

2.3%

    Commercial

 

38.54%

 

 

42.76%

 

-9.9%

    Auto and leasing

 

4.11%

 

 

1.34%

 

206.7%

    Consumer

 

3.10%

 

 

2.14%

 

44.9%

    Unallocated allowance

 

0.18%

 

 

0.93%

 

-80.6%

 

 

100.00%

 

 

100.00%

 

 

 Allowance coverage ratio at end of period applicable to:

 

 

 

 

 

 

 

    Mortgage

 

2.89%

 

 

2.62%

 

10.2%

    Commercial

 

3.62%

 

 

4.82%

 

-24.9%

    Auto and leasing

 

1.19%

 

 

1.05%

 

12.9%

    Consumer

 

2.01%

 

 

1.78%

 

13.0%

    Unallocated allowance to total originated loans

 

0.01%

 

 

0.03%

 

-81.9%

        Total allowance to total originated loans

 

2.91%

 

 

3.17%

 

-8.2%

 Allowance coverage ratio to non-performing loans:

 

 

 

 

 

 

 

    Mortgage

 

23.09%

 

 

18.34%

 

25.9%

    Commercial

 

53.04%

 

 

57.86%

 

-8.3%

    Auto and leasing

 

794.98%

 

 

406.87%

 

95.4%

    Consumer

 

353.91%

 

 

193.67%

 

82.7%

        Total

 

32.45%

 

 

27.52%

 

17.9%

Acquired loans accounted for under ASC 310-20

 

 

 

 

 

 

 

 Allowance balance:

 

 

 

 

 

 

 

    Commercial

$

 386 

 

$

 - 

 

100.0%

        Total allowance balance

$

 386 

 

$

 - 

 

100.0%

 Allowance composition:

 

 

 

 

 

 

 

    Commercial

 

100.00%

 

 

0.00%

 

100.0%

 

 

100.00%

 

 

0.00%

 

 

 Allowance coverage ratio at end of period applicable to:

 

 

 

 

 

 

 

    Commercial

 

0.12%

 

 

0.00%

 

100.0%

        Total allowance to total acquired loans

 

0.05%

 

 

0.00%

 

100.0%

 Allowance coverage ratio to non-performing loans:

 

 

 

 

 

 

 

    Commercial

 

252.29%

 

 

0.00%

 

100.0%

99

 


 

       

 

TABLE 10 — NET CREDIT LOSSES STATISTICS ON NON-COVERED ORIGINATED LOAN AND LEASES

 

 

 

 

 

 

 

 

Quarter Ended March 31,

  

 

 

 

 

 

 

Variance

  

2013 

 

2012 

 

%

 

(In thousands)

Mortgage

 

 

 

 

 

 

 

    Charge-offs

$

 (2,588) 

 

$

 (922) 

 

180.7%

    Recoveries

 

 - 

 

 

 - 

 

0.0%

        Total

 

 (2,588) 

 

 

 (922) 

 

180.7%

Commercial

 

 

 

 

 

 

 

    Charge-offs

 

 (557) 

 

 

 (1,637) 

 

-66.0%

    Recoveries

 

 28 

 

 

 67 

 

-58.2%

        Total

 

 (529) 

 

 

 (1,570) 

 

-66.3%

Consumer

 

 

 

 

 

 

 

    Charge-offs

 

 (246) 

 

 

 (182) 

 

35.2%

    Recoveries

 

 65 

 

 

 52 

 

25.0%

        Total

 

 (181) 

 

 

 (130) 

 

39.2%

Auto and leasing

 

 

 

 

 

 

 

    Charge-offs

 

 (91) 

 

 

 (31) 

 

193.5%

    Recoveries

 

 7 

 

 

 4 

 

75.0%

        Total

 

 (84) 

 

 

 (27) 

 

211.1%

Net credit losses

 

 

 

 

 

 

 

    Total charge-offs

 

 (3,482) 

 

 

 (2,772) 

 

25.6%

    Total recoveries

 

 100 

 

 

 123 

 

-18.7%

        Total

$

 (3,382) 

 

$

 (2,649) 

 

27.7%

Net credit losses to average

    loans outstanding:

 

 

 

 

 

 

 

    Mortgage

 

1.26%

 

 

0.44%

 

186.4%

    Commercial

 

0.56%

 

 

2.13%

 

-73.7%

    Consumer

 

1.32%

 

 

1.26%

 

4.8%

    Auto and leasing

 

0.34%

 

 

0.40%

 

-15.0%

        Total  

 

1.00%

 

 

0.88%

 

13.6%

Recoveries to charge-offs

 

2.87%

 

 

4.44%

 

-35.3%

Average originated loans:

 

 

 

 

 

 

 

    Mortgage

$

 823,356 

 

$

 835,592 

 

-1.5%

    Commercial

 

 376,676 

 

 

 295,043 

 

27.7%

    Consumer

 

 55,047 

 

 

 41,194 

 

33.6%

    Auto and leasing

 

 98,752 

 

 

 26,878 

 

267.4%

        Total

$

 1,353,831 

 

$

 1,198,707 

 

12.9%

100

 


 

       

 

TABLE 11 — NON-PERFORMING ASSETS

 

 

  

March 31,

 

December 31,

 

Variance

  

2013 

 

2012 

 

(%)

 

(Dollars in thousands)

Non-performing assets:

 

 

 

 

 

 

 

    Non-accruing loans

 

 

 

 

 

 

 

        Troubled Debt Restructuring loans

$

 46,492 

 

$

 50,468 

 

-7.9%

        Other loans

 

 85,723 

 

 

 96,176 

 

-10.9%

    Accruing loans

 

 

 

 

 

 

 

        Troubled Debt Restructuring loans

 

 - 

 

 

 - 

 

0.0%

        Other loans

 

 - 

 

 

 - 

 

0.0%

            Total non-performing loans

$

 132,215 

 

$

 146,644 

 

-9.8%

    Foreclosed real estate not covered under the

        shared-loss agreements with the FDIC

 

 87,899 

 

 

 75,447 

 

16.5%

    Other repossessed asset

 

 1,178 

 

 

 6,084 

 

-80.6%

    Mortgage loans held for sale

 

 - 

 

 

 319 

 

-100.0%

 

$

 221,292 

 

$

 228,494 

 

-3.2%

Non-performing assets to total assets, excluding covered assets and acquired loans with deteriorated credit quality (including those by analogy)

 

3.84%

 

 

3.73%

 

3.0%

Non-performing assets to total capital

 

25.43%

 

 

26.46%

 

-3.9%

 

  

Quarter Ended March 31,

  

2013 

 

2012 

 

(In thousands)

Interest that would have been recorded in the period if the

    loans had not been classified as non-accruing loans

$

 1,524 

 

$

 1,714 

           

101

 


 

       

 

TABLE 12 — NON-PERFORMING LOANS

 

 

 

March 31,

 

December 31,

 

Variance

 

2013 

 

2012 

 

%

 

(Dollars in thousands)

Non-performing loans:

 

 

 

 

 

 

 

  Originated loans

 

 

 

 

 

 

 

    Mortgage

$

 99,110 

 

$

 115,002 

 

-13.8%

    Commercial

 

 30,756 

 

 

 29,506 

 

4.2%

    Consumer

 

 371 

 

 

 442 

 

-16.1%

    Auto and leasing

 

 219 

 

 

 131 

 

67.2%

    Acquired loans accounted for under ASC 310-20 (Loans with

        revolving feature and/or acquired at a premium)

 

 

 

 

 

 

 

    Commercial lines of credit

 

 153 

 

 

 193 

 

-20.7%

    Auto loans

 

 605 

 

 

 275 

 

120.0%

    Consumer lines of credit and credit cards

 

 1,001 

 

 

 1,095 

 

-8.6%

        Total

$

 132,215 

 

$

 146,644 

 

-9.8%

Non-performing loans composition percentages:

 

 

 

 

 

 

 

  Originated loans

 

 

 

 

 

 

 

    Mortgage

 

75.0%

 

 

78.4%

 

 

    Commercial

 

23.3%

 

 

20.1%

 

 

    Consumer

 

0.3%

 

 

0.3%

 

 

    Auto and leasing

 

0.2%

 

 

0.1%

 

 

    Acquired loans accounted for under ASC 310-20 (Loans with

        revolving feature and/or acquired at a premium)

 

 

 

 

 

 

 

    Commercial lines of credit

 

0.1%

 

 

0.1%

 

 

    Auto loans

 

0.5%

 

 

0.2%

 

 

    Consumer lines of credit and credit cards

 

0.8%

 

 

0.7%

 

 

        Total

 

100.0%

 

 

100.0%

 

 

Non-performing loans to:

 

 

 

 

 

 

 

    Total loans, excluding covered loans and loans accounted for

        under ASC 310-30 (including those by analogy)

 

5.73%

 

 

6.84%

 

-16.2%

    Total assets, excluding covered assets and loans accounted for

        under ASC 310-30 (including those by analogy)

 

2.29%

 

 

2.39%

 

-4.1%

    Total capital

 

15.19%

 

 

16.98%

 

-10.5%

Non-performing loans with partial charge-offs to:

 

 

 

 

 

 

 

    Total loans, excluding covered loans and loans accounted for

        under ASC 310-30 (including those by analogy)

 

1.95%

 

 

2.00%

 

-2.5%

    Non-performing loans

 

33.93%

 

 

29.17%

 

16.3%

Other non-performing loans ratios:

 

 

 

 

 

 

 

    Charge-off rate on non-performing loans to non-performing loans

        on which charge-offs have been taken

 

29.45%

 

 

27.86%

 

5.7%

    Allowance for loan and lease losses to non-performing

        loans on which no charge-offs have been taken

 

48.90%

 

 

38.24%

 

27.9%

102

 


 

       

 

TABLE 13 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

Higher-Risk Residential Mortgage Loans*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High Loan-to-Value Ratio Mortgages

 

Junior Lien Mortgages

 

Interest Only Loans

 

LTV 90% and over

 

Carrying

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

Carrying

 

 

 

 

 

 

Value

 

Allowance

 

Coverage

 

Value

 

Allowance

 

Coverage

 

Value

 

Allowance

 

Coverage

 

(In thousands)

Delinquency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0 - 89 days

$

 14,723 

 

$

 257 

 

1.75%

 

$

 27,500 

 

$

 1,183 

 

4.30%

 

$

 74,297 

 

$

 2,239 

 

3.01%

120 - 179 days

 

 459 

 

 

 32 

 

6.97%

 

 

 269 

 

 

 60 

 

22.30%

 

 

 3,506 

 

 

 139 

 

3.96%

180 - 364 days

 

 500 

 

 

 34 

 

6.80%

 

 

 1,153 

 

 

 258 

 

22.38%

 

 

 7,655 

 

 

 312 

 

4.08%

365+ days

 

 1,963 

 

 

 173 

 

8.81%

 

 

 2,983 

 

 

 1,026 

 

34.39%

 

 

 16,398 

 

 

 1,721 

 

10.50%

Total

$

 17,645 

 

$

 496 

 

2.81%

 

$

 31,905 

 

$

 2,527 

 

7.92%

 

$

 101,856 

 

$

 4,411 

 

4.33%

Percentage of total loans excluding

    acquired loans accounted for under ASC 310-30

 

0.75%

 

 

 

 

 

 

 

1.36%

 

 

 

 

 

 

 

4.33%

 

 

 

 

 

Refinanced or Modified Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

$

 2,493 

 

$

 177 

 

7.10%

 

$

 - 

 

$

 - 

 

0.00%

 

$

 20,195 

 

$

 1,402 

 

6.94%

Percentage of Higher-Risk Loan

    Category

 

14.13%

 

 

 

 

 

 

 

0.00%

 

 

 

 

 

 

 

19.83%

 

 

 

 

 

Loan-to-Value Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under 70%

$

 13,292 

 

$

 378 

 

2.84%

 

$

 5,064 

 

$

 218 

 

4.30%

 

$

 - 

 

$

 - 

 

-  

70% - 79%

 

 2,851 

 

 

 46 

 

1.61%

 

 

 6,737 

 

 

 763 

 

11.33%

 

 

 - 

 

 

 - 

 

-  

80% - 89%

 

 1,051 

 

 

 39 

 

3.71%

 

 

 8,463 

 

 

 598 

 

7.07%

 

 

 - 

 

 

 - 

 

-  

90% and over

 

 451 

 

 

 33 

 

7.32%

 

 

 11,641 

 

 

 948 

 

8.14%

 

 

 101,856 

 

 

 4,411 

 

4.33%

 

$

 17,645 

 

$

 496 

 

2.81%

 

$

 31,905 

 

$

 2,527 

 

7.92%

 

$

 101,856 

 

$

 4,411 

 

4.33%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Background

 

The Company’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through the adoption of a risk management program, which is overseen and monitored by the Chief Risk Officer and the Risk Management and Compliance Committee. The Company has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

 

All aspects of the Company’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, the Company’s primary risk exposures include, market, interest rate, credit, liquidity, operational and concentration risks.

 

Market Risk

 

Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices. The Company evaluates market risk together with interest rate risk. The Company’s financial results and capital levels are constantly exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by the Company complies with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by the Company is within the parameters established in such policies.

 

Interest Rate Risk

 

Interest rate risk is the exposure of the Company’s earnings or capital to adverse movements in interest rates. It is a predominant market risk in terms of its potential impact on earnings. The Company manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income. ALCO oversees interest rate risk, liquidity management and other related matters.

 

In discharging its responsibilities, ALCO examines current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps, and any tax or regulatory issues which may be pertinent to these areas.

 

On a monthly basis, the Company performs a net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a one-year time horizon, assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Simulations are carried out in two ways:

 

(i)       using a static balance sheet as the Company had on the simulation date, and

 

(ii)     using a dynamic balance sheet based on recent growth patterns and business strategies.

 

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income.

 

The Company uses a software application to project future movements in the Company’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.

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These simulations are highly complex, and use many simplifying assumptions that are intended to reflect the general behavior of the Company over the period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The following table presents the results of the simulations at March 31, 2013 for the most likely scenario, assuming a one-year time horizon:

 

  

Net Interest Income Risk (one year projection)

  

Static Balance Sheet

 

Growing Simulation

  

Amount

 

Percent

 

Amount

 

Percent

 

Change

 

Change

 

Change

 

Change

Change in interest rate

(Dollars in thousands)

+ 200 Basis points

$

 9,571 

 

2.57%

 

$

 9,663 

 

2.64%

+ 100 Basis points

$

 5,768 

 

1.55%

 

$

 6,054 

 

1.65%

- 50 Basis points

$

 (3,669) 

 

-0.98%

 

$

 (3,999) 

 

-1.09%

 

The impact of -100 and -200 basis point reductions in interest rates is not presented in view of current level of the federal funds rate and other short-term interest rates.

 

Future net interest income could be affected by the Company’s investments in callable securities, prepayment risk related to mortgage loans and mortgage-backed securities, and its structured repurchase agreements and advances from the FHLB. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of the Company’s assets and liabilities, the maturity and the re-pricing frequency of the liabilities has been extended to longer terms and the amounts of its structured repurchase agreements and advances from the FHLB has been reduced

 

The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability in earnings is expected to be substantially offset by the Company’s gains and losses on the derivative instruments that are linked to the forecasted cash flows of these hedged assets and liabilities. The Company considers its strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Company’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuations is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will increase or decrease.

 

Derivative instruments that are used as part of the Company’s interest risk management strategy include interest rate swaps, forward-settlement swaps, futures contracts, and option contracts that have indices related to the pricing of specific balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based on a common notional principal amount and maturity date. Interest rate futures generally involve exchanged-traded contracts to buy or sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some purchased option contracts give the Company the right to enter into interest rate swaps and cap and floor agreements with the writer of the option. In addition, the Company enters into certain transactions that contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value. Please refer to Note 7 to the accompanying unaudited consolidated financial statements for further information concerning the Company’s derivative activities.

 

Following is a summary of certain strategies, including derivative activities, currently used by the Company to manage interest rate risk:

 

Interest rate swaps — The Company entered into hedge-designated forward-settlement swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings, attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowings transactions occurred, the interest rate swap effectively fix the Company’s interest payments on an amount of forecasted

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interest expense attributable to the one-month LIBOR rate corresponding to the swap notional stated rate. A derivative liability of $16.2 million was recognized at March 31, 2013, related to the valuation of these swaps. Refer to Note 7 of the unaudited consolidated financial statements for a description of these swaps.

 

As part of the BBVAPR Acquisition, the Company assumed certain derivative contracts from BBVAPR, including interest rate swaps not designated as hedging instruments which are utilized to convert certain fixed-rate loans to variable rates, and the mirror-images of these interest rate swaps in which BBVAPR entered into to minimize its interest rate risk exposure that results from offering the derivatives to clients. These interest rate swaps are marked to market through earnings. At March 31, 2013, interest rate swaps offered to clients not designated as hedging instruments represented a derivative asset of $7.6 million, and the mirror-image interest rate swaps in which BBVAPR entered into represented a derivative liability of $7.5 million. Refer to Note 7 of the unaudited consolidated financial statements for a description of these swaps.

 

S&P options — The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P 500 Index. At the end of five years, the depositor receives a minimum return or a specified percentage of the average increase of the month-end value of the S&P 500 Index. The Company uses option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in that index. Under the terms of the option agreements, the Company receives the average increase in the month-end value of S&P 500 Index in exchange for a fixed premium. The changes in fair value of the options purchased and the options embedded in the certificates of deposit are recorded in earnings.

 

At March 31, 2013 and December 31, 2012, the fair value of the purchased options used to manage the exposure to the S&P 500 Index on stock-indexed certificates of deposit represented an asset of $15.4 million and $13.2 million, respectively, and the options sold to customers embedded in the certificates of deposit represented a liability of $14.8 million and $12.7 million, respectively.

 

Wholesale borrowings — The Company uses interest rate swaps to hedge the variability of interest cash flows of certain advances from FHLB that are tied to a variable rate index. The interest rate swaps effectively fix the Company’s interest payments on these borrowings. As of March 31, 2013, the Company had $225 million in interest rate swaps at an average rate of 2.63% designated as cash flow hedges for $225 million in advances from FHLB that reprice or are being rolled over on a monthly basis. 

 

In addition, the Company has outstanding structured repurchase agreements and advances from FHLB in which the counterparty has the right to put back the borrowing to the Company before their stated maturity under certain conditions.

 

Credit Risk

 

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for the Company is its lending activities. In Puerto Rico, the Company’s principal market, economic growth remains a challenge due to the lack of significant employment growth, a housing sector that remains under pressure and the Puerto Rico government’s large structural deficit.

 

The Company manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. The Company also employs proactive collection and loss mitigation practices.

 

The Company may also encounter risk of default in relation to its securities portfolio. The securities held by the Company are principally agency mortgage-backed securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S. government-sponsored entity, or the full faith and credit of the U.S. government.

 

Management’s Executive Credit Committee, composed of the Company’s Chief Executive Officer, Chief Credit Risk Officer and other senior executives, has primary responsibility for setting strategies to achieve the Company’s credit risk goals and objectives. Those goals and objectives are set forth in the Company’s Credit Policy as approved by the Board.

 

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Liquidity Risk

 

Liquidity risk is the risk of the Company not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due without incurring substantial losses. The Board has established a policy to manage this risk. The Company’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and funding of new and existing investments as required.

 

The Company’s business requires continuous access to various funding sources. While the Company is able to fund its operations through deposits as well as through advances from the FHLB of New York and other alternative sources, the Company’s business is dependent upon other wholesale funding sources. Although the Company has selectively reduced its use of wholesale funding sources, such as repurchase agreements and brokered deposits, it is still significantly dependent on repurchase agreements. The Company’s repurchase agreements have been structured with initial terms that mature from one month to two years for seven repurchase agreements amounting to $989.3 million, and a $500 million repurchase agreement that matures on March 2, 2017 in which the counterparty has the right to exercise at par on a quarterly basis its put option before the contractual maturity. 

 

Brokered deposits are typically offered through an intermediary to small retail investors. The Company’s ability to continue to attract brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, the Company’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in interest rates offered on deposits.

 

The Company participates in the Federal Reserve Bank’s Borrower-in custody Program which allows it to pledge certain type of loans while keeping physical control of the collateral.

 

Although the Company expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if negative developments occur with respect to the Company, the availability and cost of the Company’s funding sources could be adversely affected. In that event, the Company’s cost of funds may increase, thereby reducing its net interest income, or the Company may need to dispose of a portion of its investment portfolio, which depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting consequences upon the dispositions. The Company’s efforts to monitor and manage liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other reductions in liquidity driven by the Company or market-related events. In the event that such sources of funds are reduced or eliminated and the Company is not able to replace these on a cost-effective basis, the Company may be forced to curtail or cease its loan origination business and treasury activities, which would have a material adverse effect on its operations and financial condition.

 

As of March 31, 2013, the Company had approximately $561.4 million in cash and cash equivalents, $205million in investment securities, $600 million in borrowing capacity at the FHLB of New York and $397 million in borrowing capacity at the Federal Reserve’s Discount Window available to cover liquidity needs.

 

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Operational Risk

 

Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All functions, products and services of the Company are susceptible to operational risk.

 

The Company faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products. Coupled with external influences such as market conditions, security risks, and legal risk, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Company has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide reasonable assurance that the Company’s business operations are functioning within established limits.

 

The Company classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, the Company has specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information Technology and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. All these matters are reviewed and discussed in the Information Technology Steering Committee, and the Risk Management and Compliance Committee.

 

The Company is subject to extensive United States federal and Puerto Rico regulation, and this regulatory scrutiny has been significantly increasing over the last several years. The Company has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. The Company has a corporate compliance function headed by a Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program.

 

Concentration Risk

 

Substantially all of the Company’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, the Company’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio.

 

ITEM 4.      CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, the Company’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

 

Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d -15 (f) under the Exchange Act) during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART – II OTHER INFORMATION

 

ITEM 1.      LEGAL PROCEEDINGS

 

The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Company is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Company’s financial condition or results of operations.

 

ITEM 1A.      RISK FACTORS  

 

There have been no material changes to the risk factors previously disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2012.  In addition to other information set forth in this report, you should carefully consider the risk factors included in the Company’s annual report on Form 10-K, as updated by this report or other filings the Company makes with the SEC under the Exchange Act.  Additional risks and uncertainties not presently known to the Company at this time or that the Company currently deems immaterial may also adversely affect the Company’s business, financial condition or results of operations.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS

 

None

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.      OTHER INFORMATION

 

None.

 

Item 6. Exhibits

 

Exhibit No.                                                                            Description of Document:

 

 

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101     The following materials from OFG Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OFG Bancorp

(Registrant)

 

 

 

 

 

By:

/s/ José Rafael Fernández

 

 

Date: May 9, 2013

 

José Rafael Fernández

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

By:

/s/ Ganesh Kumar

 

 

Date: May 9, 2013

 

Ganesh Kumar

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

110