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Annual Report: 2017 (Form 10-K)
OFG BANCORP - Annual Report: 2017 (Form 10-K)
UNITED STATES
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☑ ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2017
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
No. 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
Securities Registered Pursuant to Section 12(b) of
the Act:
Common Stock
($1.00 par value per share)
7.125% Noncumulative
Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share)
7.0% Noncumulative
Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share)
8.75% Noncumulative
Convertible Perpetual Preferred Stock, Series C ($1,000.00 liquidation preference per share)
7.125% Noncumulative
Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)
Securities Registered
Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ☐ No ☑
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 ☑ 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 ☑ No ☐
Indicate
by check mark if disclosure of delinquent filings pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ☐.................................
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Accelerated filer ☑
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Non-accelerated filer ☐
|
Smaller reporting company ☐
|
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(Do not check if a smaller reporting company)
|
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark
if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Ac.t ☐
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The
aggregate market value of the common stock held by non-affiliates of OFG
Bancorp (the “Company”) was approximately $439.5 million as of June 30, 2017
based upon 43,947,442 shares outstanding and the reported closing price of
$10.00 on the New York Stock Exchange on that date.
As of
February 28, 2018, the Company had 43,968,342 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive
proxy statement relating to the 2018 annual meeting of shareholders are
incorporated herein by reference in response to Items 10 through 14 of
Part III, except for certain information set forth herein under Item 12.
OFG Bancorp
FORM 10-K
For the Year Ended
December 31, 2017
TABLE OF CONTENTS
FORWARD-LOOKING
STATEMENTS
The information
included in this annual report on Form 10-K 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 (“we,” “our,” “us”
or “Oriental”), 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 Oriental’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 Oriental’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 credit default by
the government of Puerto Rico;
·
amendments to the
fiscal plan approved by the Financial Oversight and Management Board of Puerto
Rico;
·
determinations in the
court-supervised debt-restructuring process under Title III of PROMESA for the
Puerto Rico government and all of its agencies, including some of its public corporations;
·
the impact of property,
credit and other losses in Puerto Rico as a result of hurricanes Irma and
Maria;
·
the amount of
government, private and philanthropic financial assistance for the
reconstruction of Puerto Rico’s critical infrastructure, which suffered
catastrophic damages caused by hurricane Maria;
·
the pace and magnitude
of Puerto Rico’s economic recovery;
·
the potential impact of
damages from future hurricanes and natural disasters in Puerto Rico;
·
the fiscal and monetary
policies of the federal government and its agencies;
·
changes in federal bank
regulatory and supervisory policies, including required levels of capital;
·
the relative strength
or weakness of the commercial and consumer credit sectors and the real estate
market in Puerto Rico;
·
the performance of the
stock and bond markets;
·
competition in the
financial services industry; and
·
possible legislative,
tax or regulatory changes.
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; Oriental’s ability to grow its core businesses;
decisions to downsize, sell or close units or otherwise change Oriental’s
business mix; and management’s ability to identify and manage these and other
risks.
All
forward-looking statements included in this annual report on Form 10-K are
based upon information available to Oriental as of the date of this report, and
other than as required by law, including the requirements of applicable
securities laws, Oriental 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.
ITEM 1. BUSINESS
General
Oriental is a publicly-owned financial holding company
incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto
Rico, providing a full range of banking and financial services through its
subsidiaries. Oriental is subject to the provisions of the U.S. Bank
Holding Company Act of 1956, as amended, (the “BHC Act”) and accordingly,
subject to the supervision and regulation of the Board of Governors of the
Federal Reserve System (the “Federal Reserve Board”).
Oriental provides comprehensive banking and financial
services to its clients through a complete range of banking and financial
solutions, including commercial, consumer, auto, and mortgage lending; checking
and savings accounts; financial planning, insurance, financial services, and investment
brokerage; and corporate and individual trust and retirement services. Oriental
operates through three major business segments: Banking, Wealth Management, and
Treasury, differentiating the Oriental brand through customer segmentation and
innovative solutions, primarily in Puerto Rico. Oriental provides these
services through various subsidiaries including, a commercial bank, Oriental
Bank (the "Bank"), a securities broker-dealer, Oriental Financial
Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental
Insurance, LLC (“Oriental Insurance”), a retirement plan administrator,
Oriental Pension Consultants, Inc. (“OPC”), and a commercial lender, OFG USA
LLC ("OFG USA"), which is part of the Bank. All of our subsidiaries
are based in San Juan, Puerto Rico, except for OPC which is based in Boca
Raton, Florida and OFG USA which is based in Cornelius, North Carolina.
Oriental has 48 branches in Puerto Rico. Oriental’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.
Oriental’s strategy involves:
·
Expanding its ability to attract
deposits and build relationships with customers by refining service delivery
and providing innovative banking technologies for day-to-day customer
transactions, and achieving sustainable levels of differentiation in the
market;
·
Focusing on greater growth in
commercial and consumer lending, trust and financial services and insurance
products;
·
Improving operating efficiencies,
and continuing to maintain effective asset-liability management;
·
Implementing a broad ranging
effort to instill in employees and make customers aware of Oriental’s
determination to effectively serve and advise its customer base in a responsive
and professional manner; and
·
Matching its portfolio of
investment securities with the related funding to achieve favorable spreads,
and primarily investing in U.S. government-sponsored agency obligations.
Together with a highly experienced group of senior and
mid-level executives and the benefits from the acquisitions of Eurobank Puerto
Rico and the Puerto Rico operations of Banco Bilbao Vizcaya Argentaria, S.A.
(“BBVA”), this strategy has resulted in sustained growth in Oriental’s
deposit-taking activities, commercial, consumer and mortgage lending and
financial service activities, allowing Oriental to distinguish itself in a
highly competitive industry. Oriental is not immune from general and local
financial and economic conditions. Past experience is not necessarily
indicative of future performance, but given market uncertainties and on a
reasonable time horizon of three to five years, this strategy is expected to
maintain its steady progress towards Oriental’s long-term goal.
Oriental’s principal funding sources are branch deposits,
securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”)
advances, wholesale deposits, and subordinated capital notes. Through its
branch network, Oriental Bank offers personal non-interest and interest-bearing
checking accounts, savings accounts, certificates of deposit, individual
retirement accounts (“IRAs”) and commercial non-interest bearing checking
accounts. The FDIC insures the Bank’s deposit accounts up to applicable limits.
Management makes retail deposit pricing decisions periodically, adjusting the
rates paid on retail deposits in response to general market conditions and
local competition. Pricing decisions take into account the rates being offered
by other local banks, the London Interbank Offered Rate (“LIBOR”), and mainland
U.S. market interest rates.
Segment Disclosure
Oriental has three reportable segments: Banking,
Wealth Management, 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 Oriental’s organizational
structure, nature of products, distribution channels and economic
characteristics of the products were also considered in the determination of
the reportable segments. Oriental measures the performance of these reportable
segments based on pre-established annual goals involving different financial
parameters such as net income, interest rate spread, loan production, and fees
generated.
For detailed information regarding the performance of
Oriental’s operating segments, please refer to Note 27 in Oriental’s
accompanying consolidated financial statements.
Banking Activities
The Bank, Oriental’s main subsidiary, is a
full-service Puerto Rico commercial bank with its main office located in
San Juan, Puerto Rico. The Bank has 48 branches throughout Puerto Rico and
was incorporated in October 1964 as a federal mutual savings and loan
association. It became a federal mutual savings bank in July 1983 and converted
to a federal stock savings bank in April 1987. Its conversion from a
federally-chartered savings bank to a commercial bank chartered under the
banking law of the Commonwealth of Puerto Rico, on June 30, 1994, allowed
the Bank to more effectively pursue opportunities in its market and obtain more
flexibility in its businesses. As a Puerto Rico-chartered commercial bank, it
is subject to examination by the FDIC and the Office of the Commissioner of
Financial Institutions of Puerto Rico (the “OCFI”). The Bank offers banking
services such as commercial, consumer, and mortgage lending, savings and time
deposit products, financial planning, and corporate and individual trust
services, and capitalizes on its retail banking network to provide commercial
and mortgage lending products to its clients. The Bank has an operating
subsidiary, OFG USA, which is organized in Delaware. It also has two
international banking entities (each an “IBE”) organized in Puerto Rico pursuant
to the International Banking Center Regulatory Act of Puerto Rico, as amended
(the “IBE Act”), one is a unit operating within the Bank, named Oriental
Overseas (the “IBE Unit”), and the other is a wholly-owned subsidiary of the
Bank, named Oriental International Bank, Inc. (the “IBE Subsidiary”). The IBE
Unit and IBE Subsidiary offer the Bank certain Puerto Rico tax advantages, and
their services are limited under Puerto Rico law to persons and
assets/liabilities located outside of Puerto Rico.
Banking activities include the Bank’s branches and
mortgage banking activities with traditional retail banking products such as
deposits, commercial loans, consumer loans and mortgage loans. The Bank’s
significant lending activities are with consumers located in Puerto Rico. The
Bank’s lending transactions include a diversified number of industries and
activities, all of which are encompassed within four main categories:
commercial, consumer, mortgage and auto.
Oriental’s mortgage banking activities are conducted
through a division of the Bank. The mortgage banking activities include the
origination of mortgage loans for the Bank’s own portfolio, and the sale of
loans directly into the secondary market or the securitization of conforming
loans into mortgage-backed securities. The Bank originates Federal Housing
Administration (“FHA”) insured mortgages, Veterans Administration (“VA”)
guaranteed mortgages, and Rural Housing Service (“RHS”) guaranteed loans that
are primarily securitized for issuance of Government National Mortgage
Association (“GNMA”) mortgage-backed securities which can be resold to
individual or institutional investors in the secondary market. Conventional
loans that meet the underwriting requirements for sale or exchange under
standard Federal National Mortgage Association (the “FNMA”) or the Federal Home
Loan Mortgage Corporation (the “FHLMC”) programs are referred to as conforming
mortgage loans and are also securitized for issuance of FNMA or FHLMC
mortgage-backed securities. The Bank is an approved seller of FNMA, as well as
FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed
securities. The Bank is also an approved issuer of GNMA mortgage-backed
securities. Oriental outsources the servicing of the residential mortgage loan
portfolio acquired in 2012 as part of its acquisition of the Puerto Rico
operations of Banco Bilbao Vizcaya Argentaria (the "BBVAPR
Acquisition") and services the GNMA, FNMA, and FHLMC pools that issues,
and the rest of its residential mortgage loan portfolio.
Loan Underwriting
Auto loans: Oriental provides financing for the
purchase of new or used motor vehicles. These loans are generated mainly
through dealers authorized and approved by the auto credit department committee
of Oriental. The auto credit department has the specialized structure and
resources to provide the service required for this product according to market
demands and trends. The auto loan credit policy establishes specific guidance
and parameters for the underwriting and origination processes. Underwriting
procedures, lending
limits, interest rate approval,
insurance coverage, and automobile brand restrictions are some parameters and
internal controls implemented to ensure the quality and profitability of the
auto loan portfolio. The credit scoring system is a fundamental part of the
decision process.
Consumer loans: Consumer loans include personal
loans, credit cards, lines of credit and other loans made by banks to
individual borrowers. All loan originations must be underwritten in accordance
with Oriental’s underwriting criteria, and include an assessment of each
borrower’s personal financial condition, including verification of income,
assets, Fair Isaac Corporation ("FICO") score, and credit reports.
Residential mortgage loans: All loan originations,
regardless of whether originated through Oriental’s retail banking network or
purchased from third parties, must be underwritten in accordance with
Oriental’s underwriting criteria, including loan-to-value ratios, borrower
income qualifications, debt ratios and credit history, investor requirements,
and title insurance and property appraisal requirements. Oriental’s mortgage
underwriting standards comply with the relevant guidelines set forth by the
Department of Housing and Urban Development (“HUD”), VA, FNMA, FHLMC, federal
and Puerto Rico banking regulatory authorities, as applicable. Oriental’s
underwriting personnel, while operating within Oriental’s loan offices, make
underwriting decisions independent of Oriental’s mortgage loan origination
personnel.
Commercial loans: Commercial loans include lines of
credit and term facilities to finance business operations and to provide
working capital for specific purposes, such as to finance the purchase of
assets, equipment or inventory. Since a borrower’s cash flow from operations is
generally the primary source of repayment, Oriental’s analysis of the credit
risk focuses heavily on the borrower’s debt-repayment capacity. Commercial term
loans generally have terms from one to five years, may be collateralized by the
asset being acquired, real estate, or other available assets, and bear interest
rates that float with the prime rate, LIBOR or another established index, or
are fixed for the term of the loan. Lines of credit are extended to businesses
based on an analysis of the financial strength and integrity of the borrowers
and are generally secured primarily by real estate, accounts receivables or
inventory, and have a maturity of one year or less. Such lines of credit bear
an interest rate that floats with a base rate, the prime rate, LIBOR, or
another established index.
Sale of Loans and Securitization Activities
Oriental may engage in the sale or securitization of
the residential mortgage loans that it originates. Oriental is an approved
issuer of GNMA-guaranteed mortgage-backed securities which involves the
packaging of FHA loans, RHS loans and VA loans into pools. Oriental can also
act as issuer in the case of conforming conventional loans which involves
grouping these types of loans into pools and issuing FNMA or FHLMC
mortgage-backed securities. The issuance of mortgage-backed securities provides
Oriental with the flexibility of either selling the security into the open
market or retaining it on books. In the case of conforming conventional loans, Oriental
may also sell such loans through the FNMA and FHLMC cash window programs.
Wealth Management Activities
Wealth management activities are generated by such
businesses as securities brokerage, trust services, retirement planning,
insurance, pension administration, and other financial services.
Oriental Financial Services is a Puerto Rico
corporation and Oriental’s subsidiary engaged in securities brokerage
activities in accordance with Oriental’s strategy of providing fully integrated
financial solutions, covering various investment alternatives such as
tax-advantaged fixed income securities, mutual funds, stocks, and bonds to
retail and institutional clients. It also offers separately-managed accounts
and mutual fund asset allocation programs sponsored by unaffiliated
professional asset managers. These services are designed to meet each client’s
specific needs and preferences, including transaction-based pricing and
asset-based fee pricing. It has managed and participated in public offerings
and private placements of debt and equity securities in Puerto Rico and has
engaged in municipal securities business with the Commonwealth of Puerto Rico
and its instrumentalities, municipalities, and public corporations. Oriental
Financial Services, a member of FINRA and the Securities Investor Protection
Corporation, is a registered securities broker-dealer pursuant to
Section 15(b) of the Securities Exchange Act of 1934. The broker-dealer
does not carry customer accounts and is, accordingly, exempt from the Customer
Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii) of
such rule. It clears securities transactions through Pershing LLC, a clearing
agent that carries the accounts of its customers on a “fully disclosed” basis.
Oriental Insurance is a Puerto Rico limited liability
company and Oriental’s subsidiary engaged in insurance agency services. It was
established by Oriental to take advantage of the cross-marketing opportunities
provided by financial modernization legislation.
Oriental
Insurance currently earns commissions by acting as a licensed insurance agent
in connection with the issuance of insurance policies by unaffiliated insurance
companies and continues to cross market its services to Oriental’s existing
customer base.
OPC, a Florida corporation, is Oriental’s subsidiary
engaged in the administration of retirement plans in the U.S., Puerto Rico, and
the Caribbean.
Corporate and individual trust services
are provided by the Bank’s trust division.
Treasury Activities
Treasury activities encompass all of Oriental’s
treasury-related functions. Oriental’s investment portfolio consists of
mortgage-backed securities, obligations of U.S. government-sponsored
agencies, Puerto Rico government and agency obligations and money market
instruments. Agency mortgage-backed securities, the largest component of the
investment portfolio, consist principally of pools of residential mortgage
loans that are made to consumers and then resold in the form of pass-through
certificates in the secondary market, the payment of interest and principal of
which is guaranteed by GNMA, FNMA or FHLMC.
Market Area and Competition
The main geographic business and service area of
Oriental is in Puerto Rico, where the banking market is highly competitive.
Puerto Rico banks are subject to the same federal laws, regulations and
supervision that apply to similar institutions in the United States of America.
Oriental also competes with brokerage firms with retail operations, credit
unions, savings and loan cooperatives, small loan companies, insurance
agencies, and mortgage banks in Puerto Rico. Oriental encounters intense
competition in attracting and retaining deposits and in its consumer and
commercial lending activities. Management believes that Oriental has been able
to compete effectively for deposits and loans by offering a variety of
transaction account products and loans with competitive terms, by emphasizing
the quality of its service, by pricing its products at competitive interest
rates, by offering convenient branch locations, and by offering financial
planning and financial services at most of its branch locations. The phase-out
consolidation of three failed Puerto Rico banks in 2010 and the failure of
another Puerto Rico bank in 2015 has created an environment for more rational
loan and deposit pricing. Oriental’s ability to originate loans depends
primarily on the services that it provides to its borrowers, in making prompt
credit decisions, and on the rates and fees that it charges.
Regulation and Supervision
General
Oriental is a financial holding company subject to
supervision and regulation by the Federal Reserve Board under the BHC Act, as
amended by the Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “ Dodd-Frank Act”). The qualification requirements
and the process for a bank holding company that elects to be treated as a
financial holding company requires that a bank holding company and all of the
subsidiary banks controlled by it at the time of election must be and remain at
all times “well capitalized” and “well managed.”
Oriental elected to be treated as a financial holding
company as permitted by the Gramm-Leach-Bliley Act. Under the
Gramm-Leach-Bliley Act, if Oriental fails to meet the requirements for being a
financial holding company and is unable to correct such deficiencies within
certain prescribed time periods, the Federal Reserve Board could require
Oriental to divest control of its depository institution subsidiary or
alternatively cease conducting activities that are not permissible for bank
holding companies that are not financial holding companies.
Financial holding companies may engage, directly or
indirectly, in any activity that is determined to be (i) financial in
nature or incidental to such financial activity, or (ii) complementary to
a financial activity provided it does not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally. The
Gramm-Leach-Bliley Act specifically provides that the following activities have
been determined to be “financial in nature”: (a) lending, trust and other
banking activities; (b) insurance activities; (c) financial,
investment or economic advisory services; (d) securitization of assets; (e) securities
underwriting and dealing; (f) existing bank holding company domestic
activities; (g) existing bank holding company foreign activities; and
(h) merchant banking activities. A financial holding company may generally
commence any activity, or acquire any company, that is financial in nature
without prior approval of the Federal Reserve Board. As provided by the
Dodd-Frank Act, a financial holding company may not acquire a company, without
prior Federal Reserve Board approval, in a transaction in which the total consolidated
assets to be acquired by the financial holding company exceed $10 billion.
In addition, the Gramm-Leach-Bliley Act specifically
gives the Federal Reserve Board the authority, by regulation or order, to
expand the list of financial or incidental activities, but requires
consultation with the U.S. Treasury Department and gives the Federal
Reserve Board authority to allow a financial holding company to engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system.
Oriental is required to file with the Federal Reserve
Board and the SEC periodic reports and other information concerning its own
business operations and those of its subsidiaries. In addition, Federal Reserve
Board approval must also be obtained before a bank holding company acquires all
or substantially all of the assets of another bank or merges or consolidates
with another bank holding company. The Federal Reserve Board also has the
authority to issue cease and desist orders against bank holding companies and
their non-bank subsidiaries.
The Bank is regulated by various agencies in the
United States and the Commonwealth of Puerto Rico. Its main regulators are the
OCFI and the FDIC. The Bank is subject to extensive regulation and examination
by the OCFI and the FDIC, and is subject to the Federal Reserve Board’s
regulation of transactions between the Bank and its affiliates. The federal and
Puerto Rico laws and regulations which are applicable to the Bank regulate,
among other things, the scope of its business, its investments, its reserves
against deposits, the timing of the availability of deposited funds, and the
nature and amount of and collateral for certain loans. In addition to the
impact of such regulations, commercial banks are affected significantly by the
actions of the Federal Reserve Board as it attempts to control the money supply
and credit availability in order to control inflation in the economy.
Oriental’s mortgage banking business is subject to the
rules and regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA with respect
to the origination, processing, servicing and selling of mortgage loans and the
sale of mortgage-backed securities. Those rules and regulations, among other
things, prohibit discrimination and establish underwriting guidelines which
include provisions for inspections and appraisal reports, require credit
reports on prospective borrowers and fix maximum loan amounts, and, with
respect to VA loans, fix maximum interest rates. Mortgage origination
activities are subject to, among others, the Equal Credit Opportunity Act, the
Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. Oriental is also
subject to regulation by the OCFI with respect to, among other things,
licensing requirements and maximum origination fees on certain types of
mortgage loan products.
Oriental and its subsidiaries are subject to the rules
and regulations of certain other regulatory agencies. Oriental Financial
Services, as a registered broker-dealer, is subject to the supervision,
examination and regulation of FINRA, the SEC, and the OCFI in matters relating
to the conduct of its securities business, including record keeping and
reporting requirements, supervision and licensing of employees, and obligations
to customers.
Oriental Insurance is subject to the supervision,
examination and regulation of the Office of the Commissioner of Insurance of
Puerto Rico in matters relating to insurance sales, including but not limited to,
licensing of employees, sales practices, charging of commissions and reporting
requirements.
Dodd-Frank Wall Street Reform and Consumer Protection
Act
The Dodd-Frank Act implements a variety of
far-reaching changes and has been described as the most sweeping reform of the
financial services industry since the 1930’s. It has a broad impact on the
financial services industry, including significant regulatory and compliance
changes, such as: (i) enhanced resolution authority of troubled and failing
banks and their holding companies; (ii) enhanced lending limits
strengthening the existing limits on a depository institution’s credit exposure
to one borrower; (iii) increased capital and liquidity requirements;
(iv) increased regulatory examination fees; (v) changes to
assessments to be paid to the FDIC for federal deposit insurance;
(vi) prohibiting bank holding companies, such as Oriental, from including
in regulatory Tier 1 capital future issuances of trust preferred
securities or other hybrid debt and equity securities; and (vii) numerous
other provisions designed to improve supervision and oversight of, and
strengthening safety and soundness for, the financial services sector.
Additionally, the Dodd-Frank Act establishes a new framework for systemic risk
oversight within the financial system to be distributed among new and existing
federal regulatory agencies, including the Financial Stability Oversight
Council, the Federal Reserve Board, the Office of the Comptroller of the
Currency and the FDIC. Further, the Dodd-Frank Act addresses many corporate
governance and executive compensation matters that affect most
U.S. publicly traded companies, including Oriental. A few provisions of
the Dodd-Frank Act became effective immediately, while various provisions have
become effective in stages. Many of the requirements called for in the
Dodd-Frank Act have been implemented over time and most are subject to
implementing regulations.
The
Dodd-Frank Act also created a new consumer financial services regulator, the Bureau
of Consumer Financial Protection (the “CFPB”), which assumed most of the
consumer financial services regulatory responsibilities previously exercised by
federal banking regulators and other agencies. The CFPB’s primary functions
include the supervision of “covered persons” (broadly defined to include any
person offering or providing a consumer financial product or service and any
affiliated service provider) for compliance with federal consumer financial
laws. It has primary authority to enforce the federal consumer financial laws,
as well as exclusive authority to require reports and conduct examinations for
compliance with such laws, in the case of any insured depository institution
with total assets of more than $10 billion and any affiliate thereof. The CFPB
also has broad powers to prescribe rules applicable to a covered person or
service provider in connection with any transaction with a consumer for a
consumer financial product or service, or the offering of a consumer financial
product or service.
Holding Company Structure
The Bank is subject to restrictions under federal laws
that limit the transfer of funds to its affiliates (including Oriental),
whether in the form of loans, other extensions of credit, investments or asset
purchases, among others. Such transfers are limited to 10% of the transferring
institution’s capital stock and surplus with respect to any affiliate
(including Oriental), and, with respect to all affiliates, to an aggregate of
20% of the transferring institution’s capital stock and surplus. Furthermore,
such loans and extensions of credit are required to be secured in specified
amounts, carried out on an arm’s length basis, and consistent with safe and
sound banking practices.
Under the Dodd-Frank Act, a bank holding company, such
as Oriental, must serve as a source of financial strength for any subsidiary
depository institution. The term “source of financial strength” is defined as
the ability of a company to provide financial assistance to its insured
depository institution subsidiaries in the event of financial distress at such
subsidiaries. This support may be required at times when, absent such
requirement, the bank holding company might not otherwise provide such support.
In the event of a bank holding company’s bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain capital of a
subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a
priority of payment. In addition, any capital loans by a bank holding company
to any of its subsidiary banks are subordinate in right of payment to deposits
and to certain other indebtedness of such subsidiary bank. The Bank is
currently the only depository institution subsidiary of Oriental.
Since Oriental is a financial holding company, its
right to participate in the assets of any subsidiary upon the latter’s
liquidation or reorganization will be subject to the prior claims of the
subsidiary’s creditors (including depositors in the case of the Bank) except to
the extent that Oriental is a creditor with recognized claims against the
subsidiary.
Dividend Restrictions
The principal source of funds for Oriental is the
dividends from the Bank. The ability of the Bank to pay dividends on its common
stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the
“Banking Act”), the Federal Deposit Insurance Act, as amended (the “FDIA”), and
the FDIC regulations. In general terms, the Banking Act provides that when the
expenditures of a bank are greater than its receipts, the excess of
expenditures over receipts shall be charged against the undistributed profits
of the bank and the balance, if any, shall be charged against the required
reserve fund of the bank. If there is no sufficient reserve fund to cover such
balance in whole or in part, the outstanding amount shall be charged against
the bank’s capital account. The Banking Act provides that until said capital
has been restored to its original amount and the reserve fund to 20% of the
original capital, the bank may not declare any dividends. In general terms, the
FDIA and the FDIC regulations restrict the payment of dividends when a bank is
undercapitalized, when a bank has failed to pay insurance assessments, or when
there are safety and soundness concerns regarding a bank.
The payment of dividends by the Bank may also be
affected by other regulatory requirements and policies, such as maintenance of
adequate capital. If, in the opinion of the regulatory authority, a depository
institution under its jurisdiction is engaged in, or is about to engage in, an
unsafe or unsound practice (that, depending on the financial condition of the
depository institution, could include the payment of dividends), such authority
may require, after notice and hearing, that such depository institution cease
and desist from such practice. The Federal Reserve Board has a policy statement
that provides that an insured bank or bank holding company should not maintain
its existing rate of cash dividends on common stock unless (i) the
organization’s net income available to common shareholders over the past year
has been sufficient to fully fund the dividends and (ii) the prospective rate
of earnings retention appears consistent with the organization’s capital needs,
asset quality, and overall financial condition. In addition, all insured
depository institutions are subject to the capital-based limitations required
by the Federal Deposit Insurance Corporation Improvement Act of 1991
(“FDICIA”).
Federal Home Loan
Bank System
The FHLB system, of which the Bank is a member,
consists of 12 regional FHLBs governed and regulated by the Federal Housing
Finance Agency. The FHLB serves as a credit facility for member institutions
within their assigned regions. They are funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB system. They make loans
(i.e., advances) to members in accordance with policies and procedures
established by the FHLB and the boards of directors of each regional FHLB.
As a system member, the Bank is entitled to borrow
from the FHLB of New York (the “FHLB-NY”) and is required to invest in FHLB
membership and activity-based stock. The Bank must purchase membership stock
equal to the greater of $1,000 or 0.15% of certain mortgage-related assets held
by the Bank. The Bank is also required to purchase activity-based stock equal
to 4.50% of outstanding advances to the Bank by the FHLB. The Bank is in
compliance with the membership and activity-based stock ownership requirements
described above. All loans, advances and other extensions of credit made by the
FHLB to the Bank are secured by a portion of the Bank’s mortgage loan
portfolio, certain other investments, and the capital stock of the FHLB held by
the Bank. The Bank is required to maintain a minimum amount of qualifying
collateral with a fair value of at least 110% of the outstanding advances.
Prompt Corrective Action Regulations
Pursuant
to the Dodd-Frank Act, federal banking agencies adopted capital rules that
became effective January 1, 2014 for advanced approaches banking organizations
(i.e., those with consolidated assets greater than $250 billion or consolidated
on-balance sheet foreign exposures of at least $10 billion) and January 1, 2015
for all other covered organizations (subject to certain phase-in periods
through January 1, 2019) replaced their general risk-based capital rules,
advanced approaches rule, market risk rule, and leverage rules.
The
new capital rules provide certain changes to the prompt corrective action
regulations adopted by the agencies under Section 38 of the FDIA, as amended by
FDICIA. These regulations are designed to place restrictions on U.S. insured
depository institutions if their capital levels begin to show signs of
weakness. The five capital categories established by the agencies under their
prompt corrective action framework are: “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized”.
The
new capital rules expand such categories by introducing a common equity tier 1
capital requirement for all depository institutions, revising the minimum
risk-based capital ratios and, beginning in 2018, the proposed supplementary
leverage requirement for advanced approaches banking organizations. The common
equity tier 1 capital ratio is a new minimum requirement designed to ensure
that banking organizations hold sufficient high-quality regulatory capital that
is available to absorb losses on a going-concern basis. Under the new rules,
an insured depository institution is:
(i) “well
capitalized,” if it has a total risk-based capital ratio of 10% or more, a tier
1 risk-based capital ratio of 8% or more, a common equity tier 1 capital ratio
of 6.5% or more, and a tier 1 leverage capital ratio of 5% or more, and is
not subject to any written capital order or directive;
(ii) “adequately
capitalized,” if it has a total risk-based capital ratio of 8% or more, a
tier 1 risk-based capital ratio of 6% or more, a common equity tier 1
capital ratio of 4.5% or more, and a tier 1 leverage capital ratio of 4%
or more;
(iii) “undercapitalized,”
if it has a total risk-based capital ratio that is less than 8%, a tier 1
risk-based ratio that is less than 6%, a common equity tier 1 capital ratio
that is less than 4.5%, or a tier 1 leverage capital ratio that is less
than 4%;
(iv)
“significantly undercapitalized,” if it has a total risk-based capital ratio
that is less than 6%, a tier 1 risk-based capital ratio that is less than
4%, a common equity tier 1 capital ratio that is less than 3%, or a tier 1
leverage capital ratio that is less than 3%; and
(v) “critically
undercapitalized,” if it has a ratio of tangible equity (defined as tier 1
capital plus non-tier 1 perpetual preferred stock) to total assets that is
equal to or less than 2%.
The
new capital rules also include a policy statement by the agencies that all
banking organizations should maintain capital commensurate with their risk
profiles, which may entail holding capital
significantly above the minimum requirements. They also provide a reservation
of authority permitting examiners to require that such organizations
hold additional regulatory capital.
FDICIA generally prohibits a depository institution
from making any capital distribution (including payment of a dividend) or
paying any management fees to its holding company if the depository institution
would thereafter be undercapitalized. Undercapitalized
depository
institutions are subject to restrictions on borrowing from the Federal Reserve
System. In addition, undercapitalized depository institutions are subject to
growth limitations and are required to submit capital restoration plans. A
depository institution’s holding company must guarantee the capital plan, up to
an amount equal to the lesser of 5% of the depository institution’s assets at
the time it becomes undercapitalized or the amount of the capital deficiency
when the institution fails to comply with the plan. The federal banking
agencies may not accept a capital plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution’s capital. Significantly undercapitalized
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. Critically undercapitalized
depository institutions are subject to the appointment of a receiver or
conservator.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance
assessments. The Federal Deposit Insurance Reform Act of 2005 (the “Reform
Act”) merged the Bank Insurance Fund (“BIF”) and the Savings Association
Insurance Fund (“SAIF”) into a single Deposit Insurance Fund, and increased the
maximum amount of the insurance coverage for certain retirement accounts, and
possible “inflation adjustments” in the maximum amount of coverage available
with respect to other insured accounts. In addition, it granted a one-time
initial assessment credit (of approximately $4.7 billion) to recognize
institutions’ past contributions to the fund. As a result of the merger of the
BIF and the SAIF, all insured institutions are subject to the same assessment
rate schedule.
The Dodd-Frank Act contains several important deposit
insurance reforms, including the following: (i) the maximum deposit
insurance amount was permanently increased to $250,000; (ii) the deposit
insurance assessment is now based on the insured depository institution’s
average consolidated assets minus its average tangible equity, rather than on
its deposit base; (iii) the minimum reserve ratio for the Deposit Insurance
Fund was raised from 1.15% to 1.35% of estimated insured deposits by
September 30, 2020; (iv) the FDIC is required to “offset the effect”
of increased assessments on insured depository institutions with total
consolidated assets of less than $10 billion; (v) the FDIC is no
longer required to pay dividends if the Deposit Insurance Fund’s reserve ratio
is greater than the minimum ratio; and (vi) the FDIC temporarily insured
the full amount of qualifying “noninterest-bearing transaction accounts” until
December 31, 2012. As defined in the Dodd-Frank Act, a “noninterest-bearing
transaction account” is a deposit or account maintained at a depository
institution with respect to which interest is neither accrued nor paid, on
which the depositor or account holder is permitted to make withdrawals by
negotiable or transferrable instrument, payment orders of withdrawals,
telephone or other electronic media transfers, or other similar items for the
purpose of making payments or transfers to third parties or others, and on
which the insured depository institution does not reserve the right to require
advance notice of an intended withdrawal.
The FDIC amended its regulations under the FDIA, as
amended by the Dodd-Frank Act, to modify the definition of a depository
institution’s insurance assessment base; to revise the deposit insurance
assessment rate schedules in light of the new assessment base and altered
adjustments; to implement the dividend provisions of the Dodd-Frank Act; and to
revise the large insured depository institution assessment system to better
differentiate for risk and better take into account losses from large
institution failures that the FDIC may incur. Since the new assessment base
under the Dodd-Frank Act is larger than the current assessment base, the new assessment
rates adopted by the FDIC are lower than the former rates.
In 2016, the FDIC adopted two new rules to require
large institutions to bear the burden of raising the reserve ratio from 1.15%
to 1.35% and amended the pricing for small institutions after the reserve ratio
reaches 1.15%. Once the reserve ratio reaches 1.38%, small institutions will
receive credits to offset their contribution to raising the reserve ratio above
1.35%. Effective June 30, 2016, the reserve ratio reached 1.15%, and assessment
collections decreased for small institutions like the Bank.
Brokered
Deposits
FDIC regulations adopted under the FDIA govern the
receipt of brokered deposits by banks. Well capitalized institutions are not
subject to limitations on brokered deposits, while adequately capitalized
institutions are able to accept, renew or rollover brokered deposits only with
a waiver from the FDIC and subject to certain restrictions on the interest paid
on such deposits. Undercapitalized institutions are not permitted to accept
brokered deposits. As of December 31, 2017, the Bank is a well capitalized
institution and is therefore not subject to these limitations on brokered
deposits.
Regulatory Capital
Requirements
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, 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,
which phase-out commenced on January 1, 2014 for advanced approaches
banking organizations and January 1, 2015 for other bank holding companies with
consolidated assets of $15 billion or more as of December 31, 2009. However,
such instruments issued before May 19, 2010 by a bank holding company,
such as Oriental, with a total consolidated assets of less than $15 billion as
of December 31, 2009, are not affected by the Collins Amendments, are
“grandfathered” under the new capital rules, and may continue to be included in
tier 1 Capital as a restricted core capital element.
The new capital rules adopted by the federal banking
agencies revise the agencies’ risk-based and leverage capital requirements for
banking organizations, and consolidate three separate notices of proposed
rulemaking that the OCC, Federal Reserve Board and FDIC published in the
Federal Register on August 30, 2012, with selected changes. In particular, and
consistent with the framework of the Basel Committee on Banking Supervision in
“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking
Systems,” the new capital rules include a minimum ratio of common equity tier 1
capital to risk-weighted assets of 4.5% and a common equity tier 1 capital
conservation buffer of 2.5% of risk-weighted assets that apply to all banking
organizations. The rules also raise the minimum ratio of tier 1 capital to
risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4%
for all banking organizations. In addition, for the largest, most
internationally active banking organizations, the rules include a new minimum
supplementary leverage ratio that takes into account off-balance sheet
exposures. The rules incorporate these new requirements into the agencies’
prompt corrective action framework. In addition, the rules establish limits on
a banking organization’s capital distributions and certain discretionary bonus
payments if the banking organization does not hold a specified amount of common
equity tier 1 capital in addition to the amount necessary to meet its minimum
risk-based capital requirements. Further, the rules amend the methodologies
for determining risk-weighted assets for all banking organizations; introduce
disclosure requirements that would apply to top-tier banking organizations
domiciled in the United States with $50 billion or more in total assets; and
adopt changes to the agencies’ regulatory capital requirements that meet the
requirements of Section 171 and Section 939A of the Dodd-Frank Act. These
rules also codify the agencies’ current capital rules, which have previously
resided in various appendices to their respective regulations, into a
harmonized integrated regulatory framework.
Failure to meet the capital guidelines could subject
an institution to a variety of enforcement actions including the termination of
deposit insurance by the FDIC and to certain restrictions on its business. At
December 31, 2017, Oriental was in compliance with all applicable capital
requirements. For more information, please refer to the accompanying
consolidated financial statements.
Safety and Soundness Standards
Section 39 of the FDIA, as amended by FDICIA,
requires each federal banking agency to prescribe for all insured depository
institutions standards relating to internal control, information systems, and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, and such other
operational and managerial standards as the agency deems appropriate. In
addition, each federal banking agency is also required to adopt for all insured
depository institutions standards relating to asset quality, earnings and stock
valuation that the agency determines to be appropriate. Finally, each federal
banking agency is required to prescribe standards for the employment contracts
and other compensation arrangements of executive officers, employees, directors
and principal stockholders of insured depository institutions that would
prohibit compensation, benefits and other arrangements that are excessive or
that could lead to a material financial loss for the institution. If an
institution fails to meet any of the standards described above, it will be
required to submit to the appropriate federal banking agency a plan specifying
the steps that will be taken to cure the deficiency. If the institution fails
to submit an acceptable plan or fails to implement the plan, the appropriate
federal banking agency will require the institution to correct the deficiency
and, until it is corrected, may impose other restrictions on the institution,
including any of the restrictions applicable under the prompt corrective action
provisions of FDICIA.
The FDIC and the other
federal banking agencies have adopted Interagency Guidelines Establishing
Standards for Safety and Soundness that, among other things, set forth
standards relating to internal controls, information systems and internal audit
systems, loan documentation, credit, underwriting, interest rate exposure,
asset growth and employee compensation.
Activities and Investments of Insured State-Chartered
Banks
Section 24 of the FDIA, as amended by FDICIA,
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
FDIC regulations of equity investments, an insured state bank generally may not
directly or indirectly acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank. An insured state bank,
such as the Bank, is not prohibited from, among other things,
(i) acquiring or retaining a majority interest in a subsidiary engaged in
permissible activities, (ii) investing as a limited partner in a
partnership, or as a non-controlling interest holder of a limited liability
company, the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such investments may not exceed 2% of the bank’s total assets,
(iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors’, trustees’ and officers’ liability insurance
coverage or bankers’ blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting stock
of an insured depository institution if certain requirements are met, including
that it is owned exclusively by other banks. Under the FDIC regulations
governing the activities and investments of insured state banks which further
implemented Section 24 of the FDIA, as amended by FDICIA, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as “principal” in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the Deposit Insurance Fund and the bank is in compliance with applicable
regulatory capital requirements.
Transactions with Affiliates and Related Parties
Transactions between the Bank and any of its
affiliates are governed by sections 23A and 23B of the Federal Reserve
Act. These sections are important statutory provisions designed to protect a
depository institution from transferring to its affiliates the subsidy arising
from the institution’s access to the Federal safety net. An affiliate of a bank
is any company or entity that controls, is controlled by, or is under common
control with the bank, including investment funds for which the bank or any of
its affiliates is an investment advisor. Generally, sections 23A and 23B
(i) limit the extent to which a bank or its subsidiaries may engage in
“covered transactions” with any one affiliate to an amount equal to 10% of the
bank’s capital stock and surplus, and limit such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and
(ii) require that all such transactions be on terms that are consistent with
safe and sound banking practices. The term “covered transactions” includes the
making of loans, purchase of or investment in securities issued by the
affiliate, purchase of assets, acceptance of securities issued by the affiliate
as collateral for a loan or extension of credit, issuance of guarantees and
other similar types of transactions. The Dodd-Frank Act expanded the scope of
transactions treated as “covered transactions” to include credit exposure to an
affiliate on derivatives transactions, credit exposure resulting from a
securities borrowing or lending transaction, or derivative transaction, and
acceptances of affiliate-issued debt obligations as collateral for a loan or
extension of credit. Most loans by a bank to any of its affiliates must be secured
by collateral in amounts ranging from 100% to 130% of the loan amount,
depending on the nature of the collateral. In addition, any covered transaction
by a bank with an affiliate and any sale of assets or provision of services to
an affiliate must be on terms that are substantially the same, or at least as
favorable to the bank, as those prevailing at the time for comparable
transactions with nonaffiliated companies. Regulation W of the Federal
Reserve Board comprehensively implements sections 23A and 23B. The
regulation unified and updated staff interpretations issued over the years
prior to its adoption, incorporated several interpretative proposals (such as
to clarify when transactions with an unrelated third party will be attributed
to an affiliate), and addressed issues arising as a result of the expanded
scope of non-banking activities engaged in by banks and bank holding companies
and authorized for financial holding companies under the Gramm-Leach-Bliley
Act.
Sections 22(g) and 22(h) of the Federal
Reserve Act place restrictions on loans by a bank to executive officers,
directors, and principal shareholders. Regulation O of the Federal Reserve
Board implements these provisions. Under Section 22(h) and
Regulation O, loans to a director, an executive officer and a
greater-than-10% shareholder of a bank and certain of their related interests (collectively
“insiders”), and insiders of its affiliates, may not exceed, together with all
other outstanding loans to such person and its related interests, the bank’s
single borrower limit (generally equal to 15% of the institution’s unimpaired
capital and surplus). Section 22(h) and Regulation O also require
that loans to insiders and insiders of affiliates be made on terms
substantially the same as offered in comparable transactions to other persons,
unless the loans are made pursuant to a benefit or compensation program that
(i) is widely available to employees of the bank and (ii) does not
give preference to insiders over other employees of the bank. Section 22(h)
and Regulation O also require prior board of directors’ approval for
certain loans, and the aggregate amount of extensions of credit by a bank to
all insiders cannot exceed the institution’s unimpaired capital and surplus.
Furthermore, Section 22(g) and Regulation O place
additional
restrictions on loans to executive officers.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), a
financial institution has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution’s discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires federal examiners, in connection with
the examination of a financial institution, to assess the institution’s record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. The CRA
also requires all institutions to make public disclosure of their CRA ratings.
Oriental has a Compliance Department that oversees the planning of products and
services offered to the community, especially those aimed to serve low and
moderate income communities.
USA Patriot Act
Under Title III of the USA Patriot Act, also
known as the International Money Laundering Abatement and Anti-Terrorism
Financing Act of 2001, all financial institutions, including Oriental, Oriental
Financial Services, and the Bank, are required in general to identify their
customers, adopt formal and comprehensive anti-money laundering programs,
scrutinize or prohibit altogether certain transactions of special concern, and
be prepared to respond to inquiries from U.S. law enforcement agencies
concerning their customers and their transactions.
The U.S. Treasury Department (the “US Treasury”)
has issued a number of regulations implementing the USA Patriot Act that apply
certain of its requirements to financial institutions. The regulations impose
obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing.
Failure of a financial institution to comply with the
USA Patriot Act’s requirements could have serious legal consequences for the
institution. Oriental and its subsidiaries, including the Bank, have adopted
policies, procedures and controls to address compliance with the USA Patriot
Act under existing regulations, and will continue to revise and update their
policies, procedures and controls to reflect changes required by the USA
Patriot Act and the US Treasury’s regulations.
Privacy Policies
Under the Gramm-Leach-Bliley Act, all financial
institutions are required to adopt privacy policies, restrict the sharing of
nonpublic customer data with nonaffiliated parties at the customer’s request,
and establish procedures and practices to protect customer data from
unauthorized access. Oriental and its subsidiaries have established policies
and procedures to assure Oriental’s compliance with all privacy provisions of
the Gramm-Leach-Bliley Act.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (“SOX”) implemented a
range of corporate governance and accounting measures to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of disclosures under federal securities
laws. In addition, SOX established membership requirements and responsibilities
for the audit committee, imposed restrictions on the relationship between
Oriental and external auditors, imposed additional responsibilities for the
external financial statements on the chief executive officer and the chief
financial officer, expanded the disclosure requirements for corporate insiders,
required management to evaluate its disclosure controls and procedures and its
internal control over financial reporting, and required the auditors to issue a
report on the internal control over financial reporting.
Oriental has included in this annual report on
Form 10-K management’s assessment regarding the effectiveness of
Oriental’s internal control over financial reporting. The internal control
report includes a statement of management’s responsibility for establishing and
maintaining adequate internal control over financial reporting for Oriental;
management’s assessment as to the effectiveness of Oriental’s internal control
over financial reporting based on management’s evaluation as of year-end; and
the framework used by management as criteria for evaluating the effectiveness
of Oriental’s internal control over financial reporting. As of December 31,
2017 Oriental’s management concluded that its internal control over financial
reporting was effective.
Puerto Rico Banking
Act
As a Puerto Rico-chartered commercial bank, the Bank
is subject to regulation and supervision by the OCFI under the Banking Act,
which contains provisions governing the incorporation and organization of the
Bank, rights and responsibilities of directors, officers and stockholders, as
well as the corporate powers, savings, lending, capital and investment
requirements and other aspects of the Bank and its affairs. In addition, the
OCFI is given extensive rulemaking power and administrative discretion under
the Banking Act. The OCFI generally examines the Bank at least once every year.
The 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 December 31, 2017 and 2016, legal surplus amounted to $81.5 million and
$76.3 million, respectively. The amount transferred to the legal surplus
account is not available for the payment of dividends to shareholders.
The Banking Act also provides that when the
expenditures of a bank are greater than the receipts, the excess of the former
over the latter must be charged against the undistributed profits of the bank,
and the balance, if any, must be charged against the reserve fund. If there is
no reserve fund sufficient to cover such balance in whole or in part, the
outstanding amount must be charged against the capital account and no dividend
may be declared until said capital has been restored to its original amount and
the reserve fund to 20% of the original capital.
The Banking Act further requires every bank to
maintain a legal reserve which cannot be less than 20% of its demand
liabilities, except government deposits (federal, commonwealth and municipal),
which are secured by actual collateral.
The Banking Act also requires change of control
filings. When any person or entity will own, directly or indirectly, upon
consummation of a transfer, 5% or more of the outstanding voting capital stock
of a bank, the acquiring parties must inform the OCFI of the details not less
than 60 days prior to the date said transfer is to be consummated. The
transfer will require the approval of the OCFI if it results in a change of
control of the bank. Under the Banking Act, a change of control is presumed if
an acquirer who did not own more than 5% of the voting capital stock before the
transfer exceeds such percentage after the transfer.
The Banking Act permits Puerto Rico commercial banks
to make loans to any one person, firm, partnership or corporation, up to an
aggregate amount of 15% of the sum of: (i) the bank’s paid-in capital;
(ii) the bank’s reserve fund; (iii) 50% of the bank’s retained
earnings, subject to certain limitations; and (iv) any other components
that the OCFI may determine from time to time. If such loans are secured by
collateral worth at least 25% more than the amount of the loan, the aggregate
maximum amount will include 33.33% of 50% of the bank’s retained earnings. Such
restrictions under the Banking Act on the amount of loans to a single borrower
do not apply to loans: (i) to the government of the United States or the
government of the Commonwealth of Puerto Rico, or any of their respective
agencies, instrumentalities or municipalities, or (ii) that are wholly secured
by bonds, securities and other evidence of indebtedness of the government of
the United States or of the Commonwealth of Puerto Rico or by bonds, not in
default, of municipalities or instrumentalities of the Commonwealth of Puerto
Rico.
The Puerto Rico Finance Board is composed of the
Commissioner of Financial Institutions of Puerto Rico; the Executive Director
of the Puerto Rico Fiscal Agency and Finance Advisory Authority: the Presidents
of the Economic Development Bank for Puerto Rico and the Puerto Rico Planning
Board; the Secretaries of Commerce and Economic Development, Treasury and
Consumer Affairs of Puerto Rico; the Commissioner of Insurance of Puerto Rico;
and the President of the Public Corporation for Insurance and Supervision of
Puerto Rico Credit Unions. It has the authority to regulate the maximum
interest rates and finance charges that may be charged on loans to individuals
and unincorporated businesses in the Commonwealth. The current regulations of the
Puerto Rico Finance Board provide that the applicable interest rate on loans to
individuals and unincorporated businesses is to be determined by free
competition. The Puerto Rico Finance Board also has the authority to regulate
maximum finance charges on retail installment sales contracts and for credit
card purchases. There is presently no maximum rate for retail installment sales
contracts and for credit card purchases.
Puerto Rico Internal Revenue Code
Puerto Rico tax laws are
mostly embodied in the Puerto Rico Internal Revenue Code of 2011, as amended
(the "PR Code”). Under the PR Code, a corporation pays taxes at a fixed
rate of 20% plus surtax that ranges from 5% for net income in excess of $75,000
to 19% for net income in excess of $275,000. The result is a maximum combined
rate of 39% under the PR Code. The Bank and each other subsidiary of Oriental
are treated as separate taxable corporations and are not entitled to file
consolidated returns. The PR Code
also provides a
dividends-received deduction of 100% on dividends received from
"controlled subsidiaries" subject to taxation in Puerto Rico and 85%
on dividends received from other taxable domestic corporations.
Act No. 77 of 2014 amended the
PR Code to increase the Puerto Rico capital gains tax rate from 15% to 20%, and
for an asset to be considered long term capital asset, the holding period must
be over a year, which before the enactment of this law was defined as having a
holding period of over six months. The PR Code was also amended by Act No. 72 of 2015. The most
relevant provisions of the Act 72, as applicable to Oriental, for taxable years
beginning after December 31, 2014, are as follows: (i) a new definition of
“large taxpayers,” which require them to file their tax return following a
special procedure established by the Secretary of the Treasuryof Puerto Rico, (ii)
net operating losses carried forward may be deducted up to 70% of the
alternative minimum net income for purposes of computing the alternative
minimum tax, and (iii) net operating losses carried forward may be deducted up
to 80% of the net income for purposes of computing the regular corporate income
tax. Other amendments to the PR Code, for
example, include, for example, an increase of the sales and use tax ("SUT") from 7%
to 11.5%, effective July 1, 2015, and a special 4% SUT for certain business
services previously exempted from the SUT, effective October 1, 2015.
International
Banking Center Regulatory Act of Puerto Rico
The business and operations of the Bank’s IBE Unit and
IBE Subsidiary are subject to supervision and regulation by the OCFI. Under the
IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of
shares, interest or participation in the capital of an IBE may be initiated
without the prior approval of the OCFI if by such transaction a person would
acquire, directly or indirectly, control of 10% or more of any class of stock,
interest or participation in the capital of the IBE. The IBE Act and the
regulations issued thereunder by the OCFI (the “IBE Regulations”) limit the
business activities that may be carried out by an IBE. Such activities are
limited in part to persons and assets/liabilities located outside of Puerto
Rico. The IBE Act provides further that every IBE must have not less than $300
thousand of unencumbered assets or acceptable financial guarantees.
Pursuant to the IBE Act and the IBE Regulations, the
Bank’s IBE Unit and IBE Subsidiary have to maintain books and records of all
their transactions in the ordinary course of business. They are also required
to submit quarterly and annual reports of their financial condition and results
of operations to the OCFI, including annual audited financial statements.
The IBE Act empowers the OCFI to revoke or suspend,
after notice and hearing, a license issued thereunder if, among other things,
the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of
its license, or if the OCFI finds that the business or affairs of the IBE are
conducted in a manner that is not consistent with the public interest.
In 2012, the IBE Act was superseded by a new law that,
among other things, prohibits new license applications to organize and operate
an IBE. Any such newly organized entity (now called an “international
financial entity”) must be licensed under the new law, and such entity (as
opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE
Unit and IBE Subsidiary, which are “grandfathered”) will generally be subject
to a 4% Puerto Rico income tax rate.
Volcker
Rule
The so-called “Volcker Rule” adopted by the federal
banking regulatory agencies under Section 619 of the Dodd-Frank Act generally
prohibits insured depository institutions and their affiliates from (i)
engaging in short-term proprietary trading of securities, derivatives,
commodities futures and options on these instruments for their own account; and
(ii) owning, sponsoring or having certain relationships with hedge funds or
private equity funds. However, it exempts certain activities, including market
making, underwriting, hedging, trading in government and municipal obligations,
and organizing and offering a hedge fund or private equity fund, among others.
A banking entity that engages in any such covered activity (i.e., proprietary trading
or investment activities in hedge funds or private equity funds) is generally
required to establish an internal compliance program reasonably designed to
ensure and monitor compliance with the Volcker Rule.
Employees
At December 31, 2017, Oriental had
1,408 employees. None of its employees is represented by a collective
bargaining group. Oriental considers its employee relations to be good.
Internet Access to Reports
Oriental’s annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any and all
amendments to such reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, are available free of charge
on or through the “SEC filings” link of Oriental’s internet website at www.ofgbancorp.com,
as soon as reasonably practicable after Oriental electronically files such
material with, or furnishes it to, the SEC.
Oriental’s
corporate governance principles and guidelines, code of business conduct and
ethics, and the charters of its audit committee, compensation committee, risk
and compliance committee, and corporate governance and nominating committee are
available free of charge on Oriental’s website at www.ofgbancorp.com under the
corporate governance link. Oriental’s code of business conduct and ethics
applies to its directors, officers, employees and agents, including its
principal executive, financial and accounting officers.
ITEM 1A. RISK FACTORS
In addition to other information set
forth in this report, you should carefully consider the following risk factors,
as updated by other filings Oriental makes with the SEC under the Securities
Exchange Act of 1934. Additional risks and uncertainties not presently known to
us at this time or that Oriental currently deems immaterial may also adversely
affect Oriental’s business, financial condition or results of operations.
ECONOMIC AND MARKET CONDITIONS RISK
Most of our business is conducted
in Puerto Rico, which is experiencing a deep economic recession, a downturn in
the real estate market, and a government fiscal and liquidity crisis.
Our loan and deposit activities are
directly affected by economic conditions within Puerto Rico. Because a
significant portion of our credit risk exposure on our loan portfolio, which is
the largest component of our interest-earning assets, is concentrated in Puerto
Rico, our profitability and financial condition may be adversely affected by an
extended economic recession, adverse political, fiscal 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 our loans and loan servicing portfolio.
The Puerto Rico economy has been in a
recession since 2006, and the Commonwealth government currently faces a severe
fiscal and liquidity crisis as a result of many years of significant budget
deficits, among other factors. Puerto Rico also faces high unemployment,
unprecedented population decline, and high levels of government debt and
pension obligations. In anticipation of a widespread default on the Puerto Rico
government’s debt, the United States federal government enacted the Puerto Rico
Oversight, Management, and Economic Stability Act ("PROMESA") to,
among other things, create a Fiscal Oversight and Management Board with broad
powers over the Puerto Rico government’s finances, to create a legal process to
restructure the Puerto Rico government’s debts, and to temporarily stay the
enforcement of debts.
The Commonwealth's government has
generally defaulted in its debt-service obligations and it is currently, along
with all of its agencies and some of its public corporations, in a
court-supervised debt-restructuring process under Title III of PROMESA.
Economic activity is expected to be
constrained as a result of anticipated severe austerity measures and continued
increasing migration trends. A further deterioration in local economic
conditions or in the financial condition of an industry on which the local
market depends could adversely affect factors such as unemployment rates and
real estate vacancy and values. This could result in, among other things, a
reduction of creditworthy borrowers seeking loans, an increase in loan
delinquencies, defaults and foreclosures, an increase in classified and
non-accrual loans, a decrease in the value of collateral for loans, and a
decrease in core deposits. Any of these factors could materially impact our
business.
For a discussion of the impact of the
economy on our loan portfolios, see “—A continuing decline in the real estate market
would likely result in an increase in delinquencies, defaults and foreclosures
and in a reduction in loan origination activity, which would adversely affect
our financial results.”
Hurricanes Irma and Maria caused
unprecedented catastrophic damages throughout Puerto Rico, our principal market
area.
Puerto Rico is our principal market
area, which is susceptible to hurricanes and tropical storms. Hurricane Maria,
a category 4 storm, made landfall in Puerto Rico on September 20, 2017, less
than two weeks after hurricane Irma, a category 5 storm, passed north of Puerto
Rico leaving over a million local residents without electric power. Over five
months after the hurricanes, almost 40% of Puerto Rico was without electricity.
Hurricane Maria caused catastrophic property damages throughout Puerto Rico,
including homes, businesses, roads, bridges, power lines, commercial
establishments, and public facilities. In addition, it caused flooding in some
areas, displaced many local residents, and severely disrupted business
operations and economic activities. Although the hurricanes did not permanently
affect our facilities, they affected our loan originations and impacted our
deposit and customer base. Further, many properties and structures in Puerto
Rico suffered extensive flood or wind damages, which may adversely affect the
value of collateral securing our loans and, potentially, the ability of
borrowers to repay their obligations to us. Approximately 99% of our $4.1
billion loan portfolio as of December 31, 2017, consists of Puerto Rico-based
borrowers, and 55% of such portfolio is secured by Puerto Rico real estate
assets. Therefore, it is likely that loan delinquencies and restructurings will
increase, particularly in the near term, as borrowers undertake recovery and
clean-up efforts, including the pursuit of insurance claims. Our borrowers may
also experience disruptions in their business or employment status. Such
increases in delinquencies and restructurings would negatively affect our cash
flows and, if not timely cured, would increase our
non-performing assets and reduce our net interest income. We may also
experience increases in total loan losses as loan delinquencies and
restructurings increase if insurance proceeds and collateral values are insufficient
to cover balances of loans in default.
We evaluated the impact of hurricanes
Irma and Maria on our loan portfolios relative to the adequacy of the allowance
for loan losses at September 30, 2017 and December 31, 2017, and recorded
additional provisions for loan losses of $27 million and $5.4 million
(pre-tax), respectively. However, the amount of loan losses relating to these
hurricanes remains uncertain and the additional loan loss provision may not be
sufficient to cover our actual loan losses. Alternatively, loan losses may not
materialize due to adequate insurance coverage or the financial resources of
borrowers, which may result in a reduction to the loan loss provision in a
future period.
Collection and foreclosure court
proceedings on our loans in default were also affected or delayed as a result
of the impact that hurricane Maria had on the infrastructure of the Puerto Rico
judiciary branch. The Office of the Administrator of the Courts (known by its
Spanish acronym as “OAT”) announced that all deadlines between September 19 and
November 30, 2017, would be reset for December 1, 2017. OAT also stated that
except for specific instances in which a court reschedules a hearing or
conference, all settings from November 1, 2017 onward remain as scheduled. The
hearings and conferences set to be held in courthouses that were significantly
damaged by the hurricane, such as in the municipalities of Aguadilla, Bayamon
and Utuado, had to be relocated to nearby courthouses.
The severity and duration of the effects
of these hurricanes will depend on a number of factors that are beyond our
control, including the amount and timing of government, private and
philanthropic financial assistance for the reconstruction of Puerto Rico’s
critical infrastructure, the pace and magnitude of Puerto Rico’s economic
recovery, and the extent to which property damages and business interruption
losses caused by these natural disasters is covered by insurance. Also, changes
to the Commonwealth’s fiscal plan, as mandated by the Financial Oversight and
Management Board under PROMESA, increases in local unemployment, population
decline due to migration, and further declines in Puerto Rico real estate
values as a result of these hurricanes may be generally expected. Therefore, a
significant uncertainty remains regarding the impact of these hurricanes on our
business, financial condition, and results of operations.
Puerto Rico is susceptible to
hurricanes and major storms, which could further deteriorate Puerto Rico’s
economy and infrastructure.
Our branch network and most of our
business is concentrated in Puerto Rico, which is susceptible to hurricanes and
major storms that affect the local economy and the demand for our loans and
financial services, as well as the ability of our customers to repay their
loans. Any such natural disasters may further adversely affect Puerto Rico’s
critical infrastructure, which is generally weak. This makes us vulnerable to
downturns in Puerto Rico’s economy as a result of natural disasters, such as
hurricanes Irma and Maria. Any subsequent hurricanes, major storms or similar
natural disasters could further deteriorate Puerto Rico’s economy and
infrastructure and negatively affect or disrupt our operations and customer
base.
Changes in interest
rates could reduce Oriental’s net interest income
Market risk refers to the
probability of variations in the net interest income or the fair value of
assets and liabilities due to changes in interest rates, currency exchange
rates or equity prices.
Changes in interest rates are one of the
principal market risks affecting us. Our earnings are dependent to a large
degree on net interest income, which is the difference between the interest
rates earned on interest-earning assets, such as loans and investment
securities, and the interest rates paid on interest-bearing liabilities, such
as deposits and borrowings. Depending on the duration and repricing
characteristics of the assets, liabilities and off-balance sheet items, changes
in interest rates could either increase or decrease the level of net interest
income. For any given period, the pricing structure of the assets and
liabilities is matched when an equal amount of such assets and liabilities
mature or reprice in that period. Like all financial institutions, our
financial position is affected by fluctuations in interest rates. Volatility
in interest rates can also result in the flow of funds away from financial
institutions. We may suffer losses or experience lower spreads than anticipated
if we are not effective in managing our interest rate risk.
CREDIT RISK
We are exposed to credit risk in
connection with our loans to certain municipalities of Puerto Rico, and the
restructuring of the government could adversely affect the value of such loans.
At December 31, 2017, we had
approximately $145.2 million of credit exposure to four Puerto Rico
municipalities. This credit exposure consists of collateralized loans or
obligations that have special additional property tax revenues pledged for
their repayment.
The Puerto Rico government faces a
number of severe economic and fiscal challenges that are expected to require a
significant government restructuring, as well as severe austerity measures to
close its significant budget deficit.
If the government restructuring affects
the ability of the municipalities to pay their obligations to us as they become
due, or under certain other circumstances, we may be required to adversely
classify such loans and increase the provision for loan losses in connection therewith.
Such provision may significantly impact our earnings.
Heightened credit risk could
require us to increase our provision for credit losses, which could have a
material adverse effect on our results of operations and financial condition.
Making loans is an essential element of our business,
and there is a risk that the loans will not be repaid. This default risk is
affected by a number of factors, including:
·
the duration of the loan;
·
credit risks of a particular
borrower;
·
changes in economic or industry
conditions; and
·
in the case of a collateralized
loan, risks resulting from uncertainties about the future value of the
collateral.
Our customers might
not repay their loans according to the original terms, and the collateral
securing the payment of those loans might be insufficient to pay any remaining
loan balance. Hence, we may experience significant loan losses, which could
have a materially adverse effect on our operating results. We make various
assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real
estate and other assets serving as collateral for the repayment of loans. In
determining the amount of the allowance for loan losses, we rely on loan quality
reviews, past loss experience, and an evaluation of economic conditions, among
other factors. If our assumptions prove to be incorrect, our allowance for loan
losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in additions to the allowance. Material additions to the allowance
would materially decrease our net income.
Our emphasis on the
origination of business and retail loans is one of the more significant factors
in evaluating our allowance for loan losses. As we continue to increase the
amount of these loans, additional or increased provisions for credit losses may
be necessary and as a result would decrease our earnings.
We strive to maintain an appropriate allowance for
loan and lease losses to provide for probable losses inherent in the loan
portfolio. We periodically determine the amount of the allowance based on
consideration of several factors such as default frequency, internal risk
ratings, expected future cash collections, loss recovery rates and general
economic factors, among others. Our methodology for measuring the adequacy of
the allowance relies on several key elements, which include a specific
allowance for identified problem loans and a general systematic allowance.
We believe our allowance for loan and lease losses is
currently sufficient given the constant monitoring of the risk inherent in the
loan portfolio. However, there is no precise method of predicting loan losses
and therefore we always face the risk that charge-offs in future periods will
exceed the allowance for loan and lease losses and that additional increases in
the allowance for loan and lease losses will be required. In addition, the FDIC
as well as the OCFI may require us to establish additional reserves. Additions
to the allowance for loan and lease losses would result in a decrease of net
earnings and capital, and could hinder our ability to pay dividends.
Given the severe economic conditions in
Puerto Rico, we may continue to experience increased credit costs or need to
take greater than anticipated markdowns and make greater than anticipated
provisions to increase the allowances for loan losses that could adversely
affect our financial condition and results of operations in the future.
Bank regulators periodically review our allowance for loan losses and
may require us to increase our provision for credit losses or loan charge-offs.
Any increase in our allowance for loan losses or loan charge-offs as required
by these regulatory authorities could have a materially adverse effect on our
results of operations and/or financial condition.
We are subject to default and other risks in
connection with mortgage loan originations.
From the time that we fund the mortgage loans
originated to the time that they are sold, we are generally at risk for any
mortgage loan defaults. Once we sell the mortgage loans, the risk of loss from
mortgage loan defaults and foreclosures passes to the purchaser or insurer of
the mortgage loans. However, in the ordinary course of business, we make
representations and warranties to the purchasers and insurers of mortgage loans
relating to the validity of such loans. If there is a breach of any of these
representations or warranties, we may be required to repurchase the mortgage
loan and bear any subsequent loss on the mortgage loan. We also may be required
to repurchase mortgage loans in the event that there was improper underwriting
or fraud or in the event that the loans become delinquent shortly after they
are originated. For the year ended December 31, 2017, we repurchased $3.2
million of loans from GNMA and FNMA. Any such repurchases in the future may negatively
impact our liquidity and operating results. Termination of our ability to sell
mortgage products to U.S government-sponsored entities would have a material
adverse effect on our results of operations and financial condition. In
addition, we may be required to indemnify certain purchasers and others against
losses they incur in the event of breaches of our representations and
warranties and in various other circumstances, including securities fraud
claims, and the amount of such losses could exceed the purchase amount of the
related loans. Consequently, we may be exposed to credit risk associated with
sold loans. In addition, we incur higher liquidity risk with respect to
mortgage loans not eligible to be purchased or insured by FNMA, GNMA or FHLMC, due
to a lack of secondary market in which to sell these loans.
We have established reserves in our consolidated
financial statements for potential losses that are considered to be both
probable and reasonably estimable related to the mortgage loans sold by us. The
adequacy of the reserve and the ultimate amount of losses incurred will depend
on, among other things, the actual future mortgage loan performance, the actual
level of future repurchase and indemnification requests, the actual success
rate of claimants, developments in litigation related to us and the industry,
actual recoveries on the collateral and macroeconomic conditions (including
unemployment levels and housing prices). Due to uncertainties relating to these
factors, there can be no assurance that our reserves will be adequate or that
the total amount of losses incurred will not have a material adverse effect
upon our financial condition or results of operations. For additional
information related to our allowance for loan and lease losses, see “Note 7—Allowance
for Loan and Lease Losses” to our consolidated financial statements included in
this annual report on Form 10-K.
A continuing decline in the real estate market would
likely result in an increase in delinquencies, defaults and foreclosures and in
a reduction in loan origination activity, which would adversely affect our
financial results.
The residential mortgage loan origination business has
historically been cyclical, enjoying periods of strong growth and profitability
followed by periods of lower volumes and industry-wide losses. The market for
residential mortgage loan originations in Puerto Rico is currently in decline,
and this trend could also reduce the level of mortgage loans that we may
originate in the future and may adversely impact our business. During periods
of rising interest rates, refinancing originations for many mortgage products
tend to decrease as the economic incentives for borrowers to refinance their
existing mortgage loans are reduced. In addition, the residential mortgage loan
origination business is impacted by home values. A significant trend of
decreasing values in several housing segments in Puerto Rico continues to be
experienced. There is a risk that a reduction in housing values could
negatively impact our loss levels on the mortgage loan portfolio because the
value of the homes underlying the loans is a primary source of repayment in the
event of foreclosure.
The decline in Puerto Rico’s economy has
had an adverse effect in the credit quality of our loan portfolios. Among other
things, during the ongoing recession, we have experienced an increase in the
level of non-performing assets and loan loss provision, which adversely
affected our profitability. Although the delinquency rates have decreased recently,
due in part to our optional and temporary moratorium on most retail loans and
some commercial loan, they may increase if the recession continues or worsens.
If there is another decline in economic activity, additional increases in the
allowance for loan and lease losses could be necessary with further adverse
effects on our profitability.
Any sustained period of increased delinquencies,
foreclosures or losses could harm our ability to sell loans, the price received
on the sale of such loans, and the value of the mortgage loan portfolio, all of
which could have a negative impact on our results of operations and financial
condition. In addition, any material decline in real estate values would weaken
our collateral loan-to-value ratios and increase the possibility of loss if a
borrower defaults. For a discussion of the impact of the Puerto Rico economy on
our business
operations, see “Most of our business is
conducted in Puerto Rico, which is experiencing a deep economic recession, a downturn
in the real estate market, and a government fiscal and liquidity crisis.”
OPERATIONS AND BUSINESS RISK
Non-Compliance with USA Patriot Act, Bank Secrecy Act,
or other laws and regulations could result in fines and other sanctions.
Financial institutions are generally required under
the USA Patriot Act and the Bank Secrecy Act to develop programs to prevent such
financial institutions from being used for money-laundering and terrorist financing
activities. Financial institutions are generally also required to file
suspicious activity reports with the Financial Crimes Enforcement Network of
the U.S. Treasury Department if such activities are detected. These rules also
require financial institutions to establish procedures for identifying and
verifying the identity of customers seeking to open new financial accounts. We
have developed a compliance program reasonably designed to ensure compliance
with such laws and regulations. Our failure or the inability to comply with
these regulations could result in enforcement actions, fines or penalties,
curtailment of expansion opportunities, intervention or sanctions by
regulators, costly litigation, or expensive additional internal controls and
systems.
We are subject to security and
operational risks related to our use of technology, including the risk of
cyber-attack or cyber theft.
Our operations rely on the secure
processing, transmission and storage of confidential information in our
computer systems and networks regarding our customers and their accounts. To
provide these products and services, we use information systems and
infrastructure that we and third party service providers operate. As a
financial institution, we also are subject to and examined for compliance with
an array of data protection laws, regulations and guidance, as well as to our
own internal privacy and information security policies and programs.
Such incidents may include unauthorized
access to our digital systems for purposes of misappropriation of assets,
gaining access to sensitive information, corrupting data, or causing
operational disruption. Although our information technology structure continue
to be subject to cyber attacks, we have not, to our knowledge, experience a
breach of cyber-security. Such an event could compromise our confidential
information, as well as that of our customers and third parties with whom we
interact with and may result in negative consequences.
While we have policies and procedures designated to
prevent or limit the effects of a possible security breach of our information
systems, if unauthorized persons were somehow to get access to confidential
information in our possession or to our proprietary information, it could
result in significant legal and financial exposure, damage to our reputation or
a loss of confidence in the security of our systems that could adversely affect
our business. Though we have insurance against some cyber-risks and attacks, it
may not be sufficient to offset the impact of a material loss event.
We rely on third parties to
provide services and systems essential to the operation of our business, and
any failure, interruption or termination of such services or systems could have
a material adverse affect on our financial condition and results of operations.
Our business relies on the secure,
successful and uninterrupted functioning of our core banking platform,
information technology, telecommunications, and loan servicing. We outsource
some of our major systems, such as customer data and deposit processing, part
of our mortgage loan servicing, internet and mobile banking, and electronic
fund transfer systems. The failure or interruption of such systems, or the
termination of a third-party software license or any service agreement on which
any of these systems or services is based, could interrupt our operations.
Because our information technology and telecommunications systems interface
with and depend on third-party systems, we could experience service denials if
demand for such services exceeds capacity or such systems fail or experience
interruptions. In addition, replacing third party service providers could also
entail significant delay and expense.
If sustained or repeated, a failure,
denial or termination of such systems or services could result in a
deterioration of our ability to process new loans, service existing loans,
gather deposits and/or provide customer service. It could also compromise our
ability to operate effectively, damage our reputation, result in a loss of
customer business and/or subject us to additional regulatory scrutiny and
possible financial liability. Any of the foregoing could have a material
adverse effect on our financial condition and results of operations.
Our risk management
policies, procedures and systems may be inadequate to mitigate all risks
inherent in our various businesses.
A
comprehensive risk management function is essential to the financial and
operational success of our business. The types of risk we monitor and seek to
manage include, but are not limited to, operational, technological, organizational,
market, fiduciary, legal, compliance, liquidity and credit risks. We have
adopted various policies, procedures and systems to monitor and manage these
risks. There can be no assurance that those policies, procedures and systems
are adequate to identify and mitigate all risks inherent in our various
businesses. Our businesses and the markets in which we operate are also
continuously evolving. If we fail to fully understand the implications of
changes in our business or the financial markets and to adequately or timely
enhance the risk framework to address those changes, we could incur losses. In
addition, in a difficult or less liquid market environment, our risk management
strategies may not be effective because other market participants may be
attempting to use the same or similar strategies to deal with the challenging
market conditions. In such circumstances, it may be difficult for us to reduce
our risk positions due to the activity of such other market participants.
LIQUIDITY RISK
Our business could
be adversely affected if we cannot maintain access to stable funding sources.
Our business requires continuous access to various
funding sources. We are able to fund our operations through deposits as well as
through advances from the FHLB-NY and FRB-NY; however, our business is
significantly dependent upon other wholesale funding sources, such as
repurchase agreements and brokered deposits, which consisted of approximately
14% of our total interest-bearing liabilities as of December 31, 2017.
Brokered deposits are typically sold through an
intermediary to small retail investors. Our 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, our credit
rating and the relative interest rates that we are 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.
We expect to have continued access to credit from the
foregoing sources of funds. However, 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 us, the availability and cost of funding sources could be
adversely affected. In that event, our cost of funds may increase, thereby
reducing the net interest income, or we may need to dispose of a portion of the
investment portfolio, which, depending upon market conditions, could result in
realizing a loss or experiencing other adverse accounting consequences upon such
dispositions. The interest rates that we pay on our securities are also
influenced by, among other things, applicable credit ratings from recognized
rating agencies. A downgrade to any of these credit ratings could affect our
ability to access the capital markets, increase our borrowing costs and have a
negative impact on our results of operations. Our 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 us or market-related events. In the event that such sources of funds
are reduced or eliminated and we are not able to replace them on a
cost-effective basis, we may be forced to curtail or cease our loan origination
business and treasury activities, which would have a material adverse effect on
our operations and financial condition.
Our ability to receive dividends from our subsidiaries
could affect our liquidity and ability to pay dividends.
We
are a separate and distinct legal entity from our subsidiaries. Dividends to us
from our subsidiaries have represented a major source of funds for us to pay
dividends on our common and preferred stock, make payments on corporate debt
securities and meet other obligations. There are various U.S. federal and
Puerto Rico law limitations on the extent to which Oriental Bank, our main
subsidiary, can finance or otherwise supply funds to us through dividends and
loans. These limitations include minimum regulatory capital requirements, U.S.
federal and Puerto Rico banking law requirements concerning the payment of
dividends out of net profits or surplus, Sections 23A and 23B of the Federal
Reserve Act and Regulation W of the Federal Reserve Board governing
transactions between an insured depository institution and its affiliates, as
well as general federal regulatory oversight to prevent unsafe or unsound
practices. Further, under the new capital rules
adopted by the federal banking regulatory agencies, a banking organization will
need to hold a capital conservation buffer (composed of common equity tier 1
capital) greater than 2.5% of total risk-weighted assets to avoid limitations
on capital distributions and discretionary bonus payments. Compliance with the
capital conservation buffer is determined as of the end of the calendar quarter
prior to any such capital distribution or discretionary bonus payment, and is
subject to a three-year transition period beginning in 2016.
If our subsidiaries’
earnings are not sufficient to make dividend payments while maintaining
adequate capital levels, our liquidity may be affected, and we may not be able
to make dividend payments to our holders of common and preferred stock or
payments on outstanding corporate debt securities or meet other obligations,
each of which could have a material adverse impact on our results of
operations, financial position or perception of financial health.
In addition, our right to participate in a
distribution of assets upon a subsidiary’s liquidation or reorganization is
subject to the prior claims of the subsidiary’s creditors.
COMPETITIVE AND STRATEGIC
RISK
Competition with other
financial institutions could adversely affect our profitability.
We face substantial competition
in originating loans and in attracting deposits and assets to manage. The competition
in originating loans and attracting assets comes principally from other U.S.,
Puerto Rico and foreign banks, investment advisors, securities broker-dealers,
mortgage banking companies, consumer finance companies, credit unions,
insurance companies, and other institutional lenders and purchasers of loans.
We will encounter greater competition as we expand our operations. Increased
competition may require us to increase the rates paid on deposits or lower the
rates charged on loans which could adversely affect our profitability.
We operate in a highly regulated environment and may
be adversely affected by changes in federal and local laws and regulations.
Our operations are subject to extensive regulation by
federal and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on
all or part of our operations. Because our business is highly regulated, the
laws, rules and regulations applicable to us are subject to regular
modification and change. For example, the Dodd-Frank Act has a broad impact on
the financial services industry, including significant regulatory and compliance
changes, as discussed under the subheading “Dodd-Frank Wall Street Reform and
Consumer Protection Act” in Item 1of this annual report. The changes resulting
from the Dodd-Frank Act may impact the profitability of our business
activities, require changes to certain of our business practices, impose upon
us more stringent capital, liquidity and leverage ratio requirements or
otherwise adversely affect our business.
We may be required to invest significant management
attention and resources to evaluate and make necessary changes in order to
comply with new statutory and regulatory requirements. Failure to comply with
the new requirements may negatively impact our results of operations and
financial condition. While we cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their
interpretations would have on us, these changes could be materially adverse to
our investors.
Competition in attracting talented people could
adversely affect our operations.
We depend on our ability to attract and retain key
personnel and we rely heavily on our management team. The inability to recruit
and retain key personnel or the unexpected loss of key managers may adversely
affect our operations. Our success to date has been influenced strongly by the
ability to attract and retain senior management experienced in banking and
financial services. Retention of senior managers and appropriate succession
planning will continue to be critical to the successful implementation of our strategies.
Reputational risk and social factors may impact our
results.
Our ability to originate loans and to attract deposits
and assets is highly dependent upon the perceptions of consumer, commercial and
funding markets of our business practices and our financial health. Negative
public opinion could result from actual or alleged conduct in any number of
activities or circumstances, including lending practices, regulatory
compliance, inadequate protection of customer information, or sales and marketing,
and from actions taken by regulators in response to such conduct. Adverse
perceptions regarding us could lead to difficulties in originating loans and
generating and maintaining accounts as well as in financing them.
In addition, a variety of social factors may cause
changes in borrowing activity, including credit card use, payment patterns and
the rate of defaults by account holders and borrowers. If consumers develop or
maintain negative attitudes about incurring debt, or if consumption trends decline,
our business and financial results will be negatively affected.
ACCOUNTING AND
TAX RISK
Changes in
accounting standards issued by the Financial Accounting Standards Board
(“FASB”) or other standard-setting bodies may adversely affect our financial
statements.
Our financial statements are subject to the
application of GAAP, which are periodically revised and/or expanded.
Accordingly, from time to time we are required to adopt new or revised
accounting standards issued by FASB. Market conditions have prompted accounting
standard setters to promulgate new guidance which further interprets or seeks
to revise accounting pronouncements related to financial instruments,
structures or transactions as well as to issue new standards expanding
disclosures. See “Note 1—Summary of Significant Accounting Policies” to our
consolidated financial statements included herein for a discussion of any
accounting developments that have been issued but not yet implemented. An
assessment of proposed standards is not provided as such proposals are subject
to change through the exposure process and, therefore, the effects on our
consolidated financial statements cannot be meaningfully assessed. It is
possible that future accounting standards that we are required to adopt could
change the current accounting treatment that applies to the consolidated
financial statements and that such changes could have a material effect on our
financial condition and results of operations.
Our goodwill
and other intangible assets could be determined to be impaired in the future
and could decrease Oriental’s earnings.
We are required to test
our goodwill, core deposit and customer relationship intangible assets for
impairment on a periodic basis. The impairment testing process considers a
variety of factors, including the current market price of our common shares,
the estimated net present value of our assets and liabilities, and information
concerning the terminal valuation of similarly situated insured depository
institutions. If an impairment determination is made in a future reporting
period, our earnings and the book value of these intangible assets will be
reduced by the amount of the impairment. If an impairment loss is recorded, it
will have little or no impact on the tangible book value of our common shares
or our regulatory capital levels, but such an impairment loss could significantly
restrict Oriental’s ability to make dividend payments without prior regulatory
approval.
Based on our annual
goodwill impairment test, we determined that no impairment charges were
necessary. As of December 31, 2017, we had on our consolidated balance sheet
$86.1 million of goodwill in connection with the BBVAPR Acquisition and
the FDIC-assisted Eurobank acquisition, $3.3 million of core deposit intangible
in connection with the FDIC-assisted Eurobank acquisition and the BBVAPR
Acquisition, and $1.3 million of customer relationship intangible in connection
with the BBVAPR Acquisition. There can be no assurance that future evaluations
of such goodwill or intangibles will not result in any impairment charges.
Among other factors, further declines in our common stock as a result of
macroeconomic conditions and the general weakness of the Puerto Rico economy,
could lead to an impairment of such assets. If such assets become impaired, it
could have a negative impact on our results of operations.
Legislative and other measures that may be taken by
Puerto Rico governmental authorities could materially increase our tax burden
or otherwise adversely affect our financial condition, results of operations or
cash flows.
In an effort to
address the Commonwealth’s ongoing fiscal problems, the Puerto Rico government
has enacted tax reform in the past and is expected to do so in the future. In
2014, the government of Puerto Rico approved an amendment to the PR Code,
which, among other things, changed the income tax rate for capital gains from
15% to 20%. In addition, in May 2015, the government approved an increase in
the Puerto Rico sales and use tax, effective July 1, 2015, from 7% to 11.5%,
expanded the sales and use tax to certain business services that were previously
exempt. Legislative changes, particularly changes in tax laws, could adversely
impact our results of operations.
We operate the IBE Unit and IBE Subsidiary pursuant to
the IBE Act that provide us with significant tax advantages. An IBE has the benefits
of exemptions from Puerto Rico income taxes on interest earned on, or gain
realized from the sale of, non-Puerto Rico assets, including
U.S. government obligations and certain mortgage-backed securities. This
exemption has allowed us to have effective tax rates significantly below the
maximum statutory tax rates. In the past, the Legislature of Puerto Rico has
considered proposals to curb the tax benefits afforded to IBEs. In 2012, a new
Puerto Rico law was enacted in this area. Although it did not repeal the IBE
Act, the new law does not allow new license applications under the IBE Act to
organize and operate an IBE. Any newly organized entity (now called an
“international financial entity”) must be licensed under the new law and such
entity (as opposed to existing IBEs organized under the IBE Act, including the
Bank’s IBE Unit and IBE Subsidiary, which are “grandfathered”) will generally
be subject to a 4% Puerto Rico income tax rate. In the event other legislation
is passed in Puerto Rico to eliminate or modify the tax exemption enjoyed by
IBEs, the consequences could have a materially adverse impact on us, including
increasing the tax burden or otherwise adversely affecting our financial
condition, results of operations or cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Oriental owns a fifteen-story office building located at
254 Muñoz Rivera Avenue, San Juan Puerto Rico, known as Oriental Center.
Oriental operates a full service branch at the plaza level and our centralized
units and subsidiaries occupy approximately 74% of the office floor space.
Approximately 14% of the office space is leased to outside tenants and 12% is
available for lease.
The Bank owns nine branch premises and leases thirty nine
branch commercial offices throughout Puerto Rico. The Bank’s management
believes that each of its facilities is well maintained and suitable for its
purpose and can readily obtain appropriate additional space as may be required
at competitive rates by extending expiring leases or finding alternative space.
At December 31, 2017, the aggregate future rental
commitments under the terms of the leases, exclusive of taxes, insurance and
maintenance expenses payable by Oriental, was $34.3 million.
Oriental’s investment in premises and equipment, exclusive
of leasehold improvements at December 31, 2017, was $114.9 million, gross
of accumulated depreciation.
ITEM 3. LEGAL PROCEEDINGS
Oriental and its subsidiaries are defendants in a number of legal
proceedings incidental to their business. Oriental 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 Oriental’s financial condition or results of operations.
ITEM
4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Oriental’s common stock is traded on the New York Stock
Exchange (“NYSE”) under the symbol “OFG”. Information concerning the range of
high and low sales prices for Oriental’s common stock for each quarter in the
years ended December 31, 2017 and 2016, as well as cash dividends declared for
such periods is set forth under the sub-heading “Stockholders’ Equity” in the
“Analysis of Financial Condition” caption in the Management’s Discussion and
Analysis of Financial Condition and Results of Operations (“MD&A”).
Information concerning legal or regulatory restrictions on
the payment of dividends by Oriental and the Bank is contained under the
sub-heading “Dividend Restrictions” in Item 1 of this annual report.
As of December 31, 2017, Oriental had approximately 4,355 holders
of record of its common stock, including all directors and officers of Oriental,
and beneficial owners whose shares are held in “street” name by securities
broker-dealers or other nominees.
Stock
Performance Graph
The graph below compares the percentage change in
Oriental’s cumulative total stockholder return during the measurement period
with the cumulative total return, assuming reinvestment of dividends, of the
Russell 2000 Index and the SNL Bank Index.
The cumulative total stockholder return was obtained by
dividing (a) the sum of (i) the cumulative amount of dividends per share,
assuming dividend reinvestment, for the measurement period beginning
December 31, 2012, and (ii) the difference between the share price at
the beginning and the end of the measurement period, by (b) the share price at
the beginning of the measurement period.
Comparison of 5 Year Cumulative Total
Return
Assumes Initial
Investment of $100
|
Index
|
12/31/2012
|
12/31/2013
|
12/31/2014
|
12/31/2015
|
12/31/2016
|
12/31/2017
|
|
OFG Bancorp
|
100.00
|
131.91
|
129.25
|
58.67
|
107.80
|
79.17
|
|
Russell 2000
|
100.00
|
138.82
|
145.62
|
139.19
|
168.85
|
193.58
|
|
SNL Bank
|
100.00
|
137.30
|
153.48
|
156.10
|
197.23
|
232.91
|
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” under Item 7 and “Financial Statements and
Supplementary Data” under Item 8 of this annual report.
|
OFG Bancorp
|
|
SELECTED FINANCIAL DATA
|
|
YEARS ENDED DECEMBER 31, 2017, 2016,
2015, 2014, AND 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
EARNINGS DATA:
|
(In thousands, except per share data)
|
|
Interest income
|
$
|
345,647
|
|
$
|
356,592
|
|
$
|
406,568
|
|
$
|
485,257
|
|
$
|
493,632
|
|
Interest expense
|
|
41,475
|
|
|
57,165
|
|
|
69,196
|
|
|
76,782
|
|
|
83,960
|
|
Net
interest income
|
|
304,172
|
|
|
299,427
|
|
|
337,372
|
|
|
408,475
|
|
|
409,672
|
|
Provision for loan
and lease losses
|
|
113,139
|
|
|
65,076
|
|
|
161,501
|
|
|
60,640
|
|
|
72,894
|
|
Net
interest income after provision for loan and leases losses
|
|
191,033
|
|
|
234,351
|
|
|
175,871
|
|
|
347,835
|
|
|
336,778
|
|
Non-interest income
|
|
78,687
|
|
|
66,819
|
|
|
52,576
|
|
|
17,323
|
|
|
17,095
|
|
Non-interest
expenses
|
|
201,631
|
|
|
215,990
|
|
|
248,505
|
|
|
242,725
|
|
|
264,136
|
|
Income
(loss) before taxes
|
|
68,089
|
|
|
85,180
|
|
|
(20,058)
|
|
|
122,433
|
|
|
89,737
|
|
Income tax
(benefit) expense
|
|
15,443
|
|
|
25,994
|
|
|
(17,554)
|
|
|
37,252
|
|
|
(8,709)
|
|
Net income
(loss)
|
|
52,646
|
|
|
59,186
|
|
|
(2,504)
|
|
|
85,181
|
|
|
98,446
|
|
Less: dividends on
preferred stock
|
|
(13,862)
|
|
|
(13,862)
|
|
|
(13,862)
|
|
|
(13,862)
|
|
|
(13,862)
|
|
Income
(loss) available to common shareholders
|
$
|
38,784
|
|
$
|
45,324
|
|
$
|
(16,366)
|
|
$
|
71,319
|
|
$
|
84,584
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
|
$
|
1.58
|
|
$
|
1.85
|
|
Diluted
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
|
$
|
1.50
|
|
$
|
1.73
|
|
Average common
shares outstanding
|
|
43,939
|
|
|
43,913
|
|
|
51,455
|
|
|
45,024
|
|
|
45,706
|
|
Average common
shares outstanding and equivalents
|
|
51,096
|
|
|
51,088
|
|
|
44,231
|
|
|
52,326
|
|
|
53,033
|
|
Cash dividends
declared per common share
|
$
|
0.24
|
|
|
0.24
|
|
|
0.36
|
|
|
0.34
|
|
|
0.26
|
|
Cash dividends
declared on common shares
|
$
|
10,553
|
|
|
10,544
|
|
|
15,932
|
|
|
15,286
|
|
|
11,875
|
|
PERFORMANCE
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
assets (ROA)
|
|
0.84%
|
|
|
0.88%
|
|
|
-0.03%
|
|
|
1.10%
|
|
|
1.15%
|
|
Return on
average tangible common stockholders' equity
|
|
5.64%
|
|
|
6.94%
|
|
|
-2.47%
|
|
|
10.91%
|
|
|
14.01%
|
|
Return on
average common equity (ROE)
|
|
4.98%
|
|
|
6.08%
|
|
|
-2.16%
|
|
|
9.50%
|
|
|
12.03%
|
|
Equity-to-assets
ratio
|
|
15.27%
|
|
|
14.16%
|
|
|
12.64%
|
|
|
12.65%
|
|
|
10.85%
|
|
Efficiency ratio
|
|
53.99%
|
|
|
57.82%
|
|
|
60.00%
|
|
|
49.90%
|
|
|
53.45%
|
|
Interest rate
spread
|
|
5.15%
|
|
|
4.74%
|
|
|
4.95%
|
|
|
5.79%
|
|
|
5.46%
|
|
Interest rate
margin
|
|
5.23%
|
|
|
4.82%
|
|
|
5.03%
|
|
|
5.84%
|
|
|
5.46%
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
PERIOD END
BALANCES AND CAPITAL RATIOS:
|
(In thousands, except per share data)
|
|
Investments and
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
$
|
1,166,050
|
|
$
|
1,362,511
|
|
$
|
1,615,872
|
|
$
|
1,402,056
|
|
$
|
1,614,809
|
|
Loans and
leases, net
|
|
4,056,329
|
|
|
4,147,692
|
|
|
4,434,213
|
|
|
4,826,646
|
|
|
5,019,419
|
|
Total
investments and loans
|
$
|
5,222,379
|
|
$
|
5,510,203
|
|
$
|
6,050,085
|
|
$
|
6,228,702
|
|
$
|
6,634,228
|
|
Deposits and
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
4,799,482
|
|
$
|
4,664,487
|
|
$
|
4,717,751
|
|
$
|
4,924,406
|
|
$
|
5,383,265
|
|
Securities
sold under agreements to repurchase
|
|
192,869
|
|
|
653,756
|
|
|
934,691
|
|
|
980,087
|
|
|
1,267,618
|
|
Other
borrowings
|
|
135,879
|
|
|
141,598
|
|
|
436,843
|
|
|
439,919
|
|
|
439,816
|
|
Total
deposits and borrowings
|
$
|
5,128,230
|
|
$
|
5,459,841
|
|
$
|
6,089,285
|
|
$
|
6,344,412
|
|
$
|
7,090,699
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
$
|
176,000
|
|
$
|
176,000
|
|
$
|
176,000
|
|
$
|
176,000
|
|
$
|
176,000
|
|
Common stock
|
|
52,626
|
|
|
52,626
|
|
|
52,626
|
|
|
52,626
|
|
|
52,707
|
|
Additional
paid-in capital
|
|
541,600
|
|
|
540,948
|
|
|
540,512
|
|
|
539,311
|
|
|
538,071
|
|
Legal surplus
|
|
81,454
|
|
|
76,293
|
|
|
70,435
|
|
|
70,435
|
|
|
61,957
|
|
Retained
earnings
|
|
200,878
|
|
|
177,808
|
|
|
148,886
|
|
|
181,184
|
|
|
133,629
|
|
Treasury
stock, at cost
|
|
(104,502)
|
|
|
(104,860)
|
|
|
(105,379)
|
|
|
(97,070)
|
|
|
(80,642)
|
|
Accumulated
other comprehensive (loss) income
|
|
(2,949)
|
|
|
1,596
|
|
|
13,997
|
|
|
19,711
|
|
|
3,191
|
|
Total
stockholders' equity
|
$
|
945,107
|
|
$
|
920,411
|
|
$
|
897,077
|
|
$
|
942,197
|
|
$
|
884,913
|
|
Per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
per common share
|
$
|
17.73
|
|
$
|
17.18
|
|
$
|
16.67
|
|
$
|
17.40
|
|
$
|
15.74
|
|
Tangible
book value per common share
|
$
|
15.67
|
|
$
|
15.08
|
|
$
|
14.53
|
|
$
|
15.25
|
|
$
|
13.60
|
|
Market
price at end of period
|
$
|
9.40
|
|
$
|
13.10
|
|
$
|
7.32
|
|
$
|
16.65
|
|
$
|
17.34
|
|
Capital ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
capital
|
|
13.92%
|
|
|
12.99%
|
|
|
11.18%
|
|
|
10.61%
|
|
|
9.06%
|
|
Tier 1
common equity to risk-weighted assets
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
11.88%
|
|
|
10.46%
|
|
Common
equity Tier 1 capital ratio
|
|
14.59%
|
|
|
14.05%
|
|
|
12.14%
|
|
|
N/A
|
|
|
N/A
|
|
Tier 1
risk-based capital
|
|
19.05%
|
|
|
18.35%
|
|
|
15.99%
|
|
|
16.02%
|
|
|
14.38%
|
|
Total
risk-based capital
|
|
20.34%
|
|
|
19.62%
|
|
|
17.29%
|
|
|
17.57%
|
|
|
16.16%
|
|
Financial
assets managed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets
managed
|
$
|
3,039,998
|
|
$
|
2,850,494
|
|
$
|
2,691,423
|
|
$
|
2,841,111
|
|
$
|
2,796,923
|
|
Broker-dealer
assets gathered
|
|
2,250,460
|
|
|
2,350,718
|
|
|
2,374,709
|
|
|
2,622,001
|
|
|
2,493,324
|
|
Total assets
managed
|
$
|
5,290,458
|
|
$
|
5,201,212
|
|
$
|
5,066,132
|
|
$
|
5,463,112
|
|
$
|
5,290,247
|
The ratios
shown below demonstrate Oriental’s ability to generate sufficient earnings to
pay the fixed charges or expenses of its debt and preferred stock dividends. Oriental’s
consolidated ratios of earnings to combined fixed charges and preferred stock
dividends were computed by dividing earnings by combined fixed charges and
preferred stock dividends, as specified below, using two different assumptions,
one excluding interest on deposits and the second including interest on
deposits:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
Consolidated
Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends
|
|
|
Excluding
interests on deposits
|
|
2.91x
|
|
|
2.60x
|
|
|
(A)
|
|
|
2.81x
|
|
|
2.26x
|
|
Including
interests on deposits
|
|
1.92x
|
|
|
1.97x
|
|
|
(A)
|
|
|
2.16x
|
|
|
1.75x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) In 2015,
earnings were not sufficient to cover preferred stock dividends, and the
ratio was less than 1:1. The Company would have had to generate additional
earnings of $34 million to achieve a ratio of 1:1 in 2015.
|
For purposes of computing these consolidated ratios, earnings
represent income before income taxes plus fixed charges and amortization of
capitalized interest, less interest capitalized. Fixed charges consist of
interest expensed and capitalized, amortization of debt issuance costs, and
Oriental’s estimate of the interest component of rental expense. The term
“preferred stock dividends” is the amount of pre-tax earnings that is required
to pay dividends on Oriental’s outstanding preferred stock. As of the dates
presented above, Oriental had noncumulative perpetual preferred stock issued
and outstanding amounting to $176.0 million, as follows:
(i) Series A amounting to $33.5 million or 1,340,000 shares
at a $25 liquidation value; (ii) Series B amounting to $34.5 million
or 1,380,000 shares at a $25 liquidation value; (iii) Series C
amounting to $84.0 million or 84,000 shares at a $1,000 liquidation
value; and (iv) Series D amounting to $24.0 million or 960,000 shares
at a $25 liquidation value.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2017
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by Oriental conform with
GAAP and general practices within the financial services industry. Oriental’s
significant accounting policies are described in detail in Note 1 to the
consolidated financial statements and should be read in conjunction with this
section.
Critical accounting policies require management to make estimates and
assumptions, which involve significant judgment about the effect of matters
that are inherently uncertain and that involve a high degree of subjectivity.
These estimates are made under facts and circumstances at a point in time and
changes in those facts and circumstances could produce actual results that
differ from those estimates. The following MD&A section is a summary of
what management considers Oriental’s critical accounting policies and estimates.
Fair
Value Measurement of Financial Instruments
Oriental currently measures at fair value on a
recurring basis its trading assets, available-for-sale securities, derivatives,
mortgage servicing rights and contingent consideration. Occasionally, Oriental
may be required to record at fair value other assets on a nonrecurring basis,
such as loans held-for-sale, impaired loans held-in-portfolio that are
collateral dependent and certain other assets. These nonrecurring fair value
adjustments typically result from the application of lower of cost or fair
value accounting or write-downs of individual assets.
Oriental categorizes its assets and liabilities
measured at fair value under the three-level hierarchy. The level within the
hierarchy is based on whether the inputs to the valuation methodology used for
fair value measurement are observable.
Oriental requires the use
of observable inputs when available, in order to minimize the use of
unobservable inputs to determine fair value. The inputs or methodologies used
for valuing securities are not necessarily an indication of the risk associated
with investing in those securities. The amount of judgment involved in
estimating the fair value of a financial instrument depends upon the
availability of quoted market prices or observable market parameters. In
addition, it may be affected by other factors such as the type of instrument,
the liquidity of the market for the instrument, transparency around the inputs
to the valuation, as well as the contractual characteristics of the instrument.
If listed prices or quotes are not available, Oriental
employs valuation models that primarily use market-based inputs including yield
curves, interest rate curves, volatilities, credit curves, and discount,
prepayment and delinquency rates, among other considerations. When market
observable data is not available, the valuation of financial instruments becomes
more subjective and involves substantial judgment. The need to use unobservable
inputs generally results from diminished observability of both actual trades
and assumptions resulting from the lack of market liquidity for those types of
loans or securities. When fair values are estimated based on modeling
techniques such as discounted cash flow models, Oriental uses assumptions such
as interest rates, prepayment speeds, default rates, loss severity rates and discount
rates. Valuation adjustments are limited to those necessary to ensure that the
financial instrument’s fair value is adequately representative of the price
that would be received or paid in the marketplace.
Management believes that fair values are reasonable
and consistent with the fair value measurement guidance based on Oriental’s
internal validation procedure and consistency of the processes followed, which
include obtaining market quotes when possible or using valuation techniques
that incorporate market-based inputs.
Refer to Note 27 to the consolidated financial
statements for information on Oriental’s fair value measurement disclosures
required by the applicable accounting standard. At December 31, 2017, 99%, of
the assets measured at fair value on a recurring basis used market-based or
market-derived valuation methodology and, therefore, were classified as Level 1
or Level 2. Level 2 classified instruments, consisted primarily of U.S.
Treasury securities, obligations of U.S. Government-sponsored entities, Puerto
Rico or state-government obligations, including the political subdivision, most
mortgage-backed securities (“MBS”), and collateralized mortgage obligations
(“CMOs”), and derivative instruments.
There were no transfers in and/or out of Level 1, Level 2, or Level 3
for financial instruments measured at fair value on a recurring basis during
the years ended December 31, 2017, 2016, and 2015. Oriental’s policy is to
recognize transfers as of the end of the reporting period.
Trading Account Securities and Investment Securities Available-for-Sale
The majority of the values for trading account securities and
investment securities available-for-sale are obtained from third-party pricing
services and are validated with alternate pricing sources when available.
Securities not priced by a secondary pricing source are documented and
validated internally according to their significance for Oriental’s financial
statements. Management has established materiality thresholds according to the
investment class to monitor and investigate material deviations in prices
obtained from the primary pricing service provider and the secondary pricing
source used as support for the valuation results. During the year ended
December 31, 2017, Oriental did not adjust any prices obtained from pricing
service providers.
Inputs are evaluated to ascertain that they consider current market
conditions, including the relative liquidity of the market. When a market quote
for a specific security is not available, the pricing service provider
generally uses observable data to derive an exit price for the instrument, such
as benchmark yield curves and trade data for similar products. To the extent
trading data is not available, the pricing service provider relies on specific
information including buy side clients, credit ratings, spreads to established
benchmarks and transactions on similar securities, to draw correlations based
on the characteristics of the evaluated instrument. If for any reason the
pricing service provider cannot observe data required to feed its model, it
discontinues pricing the instrument.
During the year ended December 31, 2017, none of Oriental’s investment
securities were subject to pricing discontinuance by the pricing service
providers. The pricing methodology and approach of our primary pricing service
providers is concluded to be consistent with the fair value measurement
guidance.
Furthermore, management assesses the fair value of its portfolio of
investment securities at least on a quarterly basis, which includes analyzing
changes in fair value that have resulted in losses that may be considered
other-than-temporary. Factors considered include, for example, the nature of
the investment, severity and duration of possible impairments, industry
reports, sector credit ratings, economic environment, creditworthiness of the
issuers and any guarantees.
Securities are classified in the fair value hierarchy according to
product type, characteristics and market liquidity. At the end of each period,
management assesses the valuation hierarchy for each asset or liability
measured. The fair value measurement analysis performed by Oriental includes
validation procedures and review of market changes, pricing methodology,
assumption and level hierarchy changes, and evaluation of distressed
transactions.
Refer to Note 27 to the consolidated financial statements for a
description of Oriental’s valuation methodologies used for the assets and
liabilities measured at fair value.
Interest on Loans and Allowance for Loan and Lease Losses
Interest on loans is
accrued and recorded as interest income based upon the principal amount
outstanding.
Non-accrual loans are those
loans on which the accrual of interest is discontinued. When a loan is placed
on non-accrual status, all previously accrued and unpaid interest is charged
against income and the loan is accounted for either on a cash-basis method or
on the cost-recovery method. Loans designated as non-accruing are returned to
accrual status when Oriental expects repayment of the remaining contractual
principal and interest. The determination as to the ultimate collectability of
the loan’s balance may involve management’s judgment in the evaluation of the
borrower’s financial condition and prospects for repayment.
Refer to the MD&A
section titled Credit Risk Management, particularly the Non-performing Assets
sub-section, for a detailed description of Oriental’s non-accruing and
charge-off policies by major loan categories.
One of the most critical
and complex accounting estimates is associated with the determination of the
allowance for loan and lease losses. The provision for loan losses charged to
current operations is based on this determination. Oriental’s assessment of the
allowance for loan and lease losses is determined in accordance with accounting
guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20
and loan impairment guidance in ASC Section 310-10-35.
For a detailed description
of the principal factors used to determine the general reserves of the
allowance for loan and lease losses and for the principal enhancements management
made to its methodology, refer to Notes 1 and 7 to the consolidated financial
statements.
According to the loan
impairment accounting guidance in ASC Section 310-10-35, a loan is impaired
when, based on current information and events, it is probable that the
principal and/or interest are not going to be collected according to the
original contractual terms of the loan agreement. Current information and
events include “environmental” factors, such as existing industry, geographical,
economic and political factors. Probable means the future event or events which
will confirm the loss or impairment of the loan is likely to occur. The
collateral dependent method is generally used for the impairment determination
on commercial loans since the expected realizable value of the loan is based
upon the proceeds received from the liquidation of the collateral property. For
commercial properties, the “as is” value or the “income approach” value is used
depending on the financial condition of the subject borrower and/or the nature
of the subject collateral. In most cases, impaired commercial loans do not have
reliable or sustainable cash flow to use the discounted cash flow valuation method.
Appraisals may be adjusted due to their age, property conditions, geographical
area or general market conditions. The adjustments applied are based upon
internal information, like other appraisals and/or loss severity information
that can provide historical trends in the real estate market. Discount rates
used may change from time to time based on management’s estimates.
For additional information
on Oriental’s policy of its impaired loans, refer to Note 1 to the consolidated
financial statements.
Oriental’s management
evaluates the adequacy of the allowance for loan and lease losses on a
quarterly basis following a systematic methodology in order to provide for
known and inherent risks in the loan portfolio. In developing its assessment of
the adequacy of the allowance for loan and lease losses, Oriental must rely on
estimates and exercise judgment regarding matters where the ultimate outcome is
unknown, such as economic developments affecting specific customers, industries
or markets. Other factors that can affect management’s estimates are the years
of historical data to include when estimating losses, the level of volatility
of losses in a specific portfolio, changes in underwriting standards, financial
accounting standards and loan impairment measurement, among others. Changes in
the financial condition of individual borrowers, in economic conditions, in
historical loss experience and in the condition of the various markets in which
collateral may be sold may all affect the required level of the allowance for
loan losses. Consequently, the business, financial condition, liquidity, capital
and results of operations could also be affected.
A restructuring constitutes
a "troubled-debt restructuring" ("TDR") when Oriental
separately concludes that the restructuring constitutes a concession and the
debtor is experiencing financial difficulties. For information on Oriental’s
TDR policy, refer to Note 1 to the financial consolidated statements.
Acquisition
Accounting for Loans
Oriental has acquired loans in two separate acquisitions, the BBVAPR
Acquisition in December 2012 and the FDIC-assisted Eurobank acquisition in
April 2010. Oriental accounted for both acquisitions under the accounting
guidance of ASC Topic 805, Business Combinations, which requires the use of the
purchase method of accounting.
All identifiable assets and liabilities acquired were
initially recorded at fair value. No allowance for loan and lease losses
related to the acquired loans was recorded on the acquisition date as the fair
value of the loans acquired incorporated assumptions regarding credit risk.
Loans acquired were recorded at fair value in accordance with the fair value methodology
prescribed in ASC Topic 820. These fair value estimates associated with the
loans included estimates related to expected prepayments and the amount and
timing of expected principal, interest and other cash flows.
Because the FDIC agreed to reimburse Oriental for
losses related to the acquired loans in the FDIC-assisted Eurobank transaction,
subject to certain provisions specified in the agreements, an indemnification
asset was recorded at fair value at the acquisition date. The indemnification
asset was recognized at the same time as the indemnified loans, and is measured
on the same basis, subject to collectability or contractual limitations. The shared-loss
indemnification asset on the acquisition date reflected the reimbursements
expected to be received from the FDIC, using an appropriate discount rate,
which reflected counterparty credit risk and other uncertainties. On February
6, 2017, the Bank and the FDIC agreed to terminate the single family and
commercial shared-loss agreements related to the FDIC assisted acquisition.
The initial valuation of these loans and related
indemnification asset required management to make subjective judgments
concerning estimates about how the acquired loans would perform in the future
using valuation methods, including discounted cash flow analyses and independent
third-party appraisals. Factors that may significantly affect the initial
valuation included, among others, market-based and industry data related to
expected changes in interest rates, assumptions related to probability and
severity of credit losses, estimated timing of credit losses including the
timing of foreclosure and liquidation of collateral, expected prepayment rates,
required or anticipated loan modifications, unfunded loan commitments, the
specific terms and provisions of any shared-loss agreement, and specific
industry and market conditions that may impact discount rates and independent
third-party appraisals.
For both
acquisitions, Oriental considered the following factors as indicators that an
acquired loan had evidence of deterioration in credit quality and was therefore
in the scope of ASC 310-30:
·
Loans that were 90 days or more
past due;
·
Loans that had an internal risk
rating of substandard or worse substandard is consistent with regulatory
definitions and is defined as having a well-defined weakness that jeopardizes
liquidation of the loan;
·
Loans that were classified as
nonaccrual by the acquired bank at the time of acquisition; and
·
Loans that had been previously
modified in a troubled debt restructuring.
Any acquired loans that were
not individually in the scope of ASC 310-30 because they did not meet the
criteria above were either (i) pooled into groups of similar loans based on the
borrower type, loan purpose, and collateral type and accounted for under ASC
310-30 by analogy or (ii) accounted for under ASC 310-20 (Non-refundable fees
and other costs).
Acquired
Loans Accounted for under ASC 310-20 (loans with revolving feature and/or
acquired at a premium)
Revolving credit facilities such as credit cards,
retail and commercial lines of credit and floor plans which are specifically
scoped out of ASC 310-30 are accounted for under the provisions of ASC 310-20.
Also, performing auto loans with FICO scores over 660 acquired at a premium in
the BBVAPR Acquisition are accounted for under this guidance. Auto loans with
FICO scores below 660 were acquired at a discount and are accounted for under
the provisions of ASC 310-30. The provisions of ASC 310-20 require that any
differences between the contractually required loan payments in excess of
Oriental’s initial investment in the loans be accreted into interest income on
a level-yield basis over the life of the loan. Loans acquired in the BBVAPR
Acquisition that were accounted for under the provisions of ASC 310-20, which
had fully amortized their premium or discount recorded at the date of
acquisition, are removed from the acquired loan category. Loans accounted for
under ASC 310-20 are placed on non-accrual status when past due in accordance
with Oriental’s non-accruing policy and any accretion of discount is
discontinued. These assets were recorded at estimated fair value on their
acquisition date, incorporating an estimate of future expected cash flows. Such
fair value includes a credit discount which accounts for expected loan losses
over the estimated life of these loans. Management takes into consideration
this credit discount when determining the necessary allowance for acquired
loans that are accounted for under the provisions of ASC 310-20.
The allowance for loan and lease losses model for
acquired loans accounted for under ASC 310-20 is the same as for the originated
loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including
those accounted for under ASC 310-30 by analogy)
Oriental performed a fair
market valuation of each of the loan pools, and each pool was recorded at a
discount. Oriental determined that at least part of the discount on the
acquired individual or pools of loans was attributable to credit quality by
reference to the valuation model used to estimate the fair value of these pools
of loans. The valuation model incorporated lifetime expected credit losses into
the loans’ fair valuation in consideration of factors such as evidence of
credit deterioration since origination and the amounts of contractually
required principal and interest that Oriental did not expect to collect as of
the acquisition date. Based on the guidance included in the December 18, 2009
letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply
ASC 310-30 by analogy to all of these acquired pools of loans as they all (i)
were acquired in a business combination or asset purchase, (ii) resulted in recognition
of a discount attributable, at least in part, to credit quality, and (iii) were
not subsequently accounted for at fair value.
The excess of expected cash
flows from acquired loans over the estimated fair value of acquired loans at
acquisition is referred to as the accretable discount and is recognized into
interest income over the remaining life of the acquired loans using the
interest method. The difference between contractually required payments at
acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount
represents estimated future credit losses expected to be incurred over the life
of the acquired loans. Subsequent decreases to the expected cash flows require Oriental
to evaluate the need for an addition to the allowance for loan losses.
Subsequent improvements in expected cash flows result in the reversal of the
associated allowance for loan losses, if any, and the reversal of a
corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income
over the remaining life of the loan using the interest method. Oriental’s
evaluation of the amount of future cash flows that it expects to collect takes
into account actual credit performance of the acquired loans to date and
Oriental’s best estimates for the expected lifetime credit performance of the
loans using currently available information. Charge-offs of the principal
amount on acquired loans would be first applied to the nonaccretable discount
portion of the fair value adjustment.
In accordance with ASC 310-30,
recognition of income is dependent on having a reasonable expectation about the
timing and amount of cash flows expected to be collected. Oriental performs
such an evaluation on a quarterly basis on both its acquired loans individually
accounted for under ASC 310-30 and those in pools accounted for under ASC
310-30 by analogy.
Cash flows for acquired loans
individually accounted for under ASC 310-30 are estimated on a quarterly basis.
Based on this evaluation, a determination is made as to whether or not Oriental
has a reasonable expectation about the timing and amount of cash flows. Such an
expectation includes cash flows from normal customer repayment, collateral
value, foreclosure or other collection efforts. Cash flows for acquired loans
accounted for on a pooled basis under ASC 310-30 by analogy are also estimated
on a quarterly basis. For residential real estate, home equity and other
consumer loans, cash flow loss estimates are calculated based on a model that
incorporates a projected probability of default and loss. For commercial loans,
lifetime loss rates are assigned to each pool with consideration given for pool
make-up, including risk rating profile. Lifetime loss rates are developed from
internally generated historical loss data and are applied to each pool.
To the extent that Oriental cannot reasonably estimate
cash flows, interest income recognition is discontinued. The unit of account
for loans in pools accounted for under ASC 310-30 by analogy is the pool of
loans. Accordingly, as long as Oriental can reasonably estimate cash flows for
the pool as a whole, accretable yield on the pool is recognized and all individual
loans within the pool - even those more than 90 days past due - would be
considered to be accruing interest in Oriental’s financial statement
disclosures, regardless of whether or not Oriental expects any principal or
interest cash flows on an individual loan 90 days or more past due.
Oriental writes-off the loan’s
recorded investment and derecognizes the associated allowance for loan and
lease losses for loans that exit the acquired pools.
Income
Taxes
Income taxes are accounted for using the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized based on the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis, and attributable to operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the years in which the
temporary differences are expected to be recovered or paid. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
earnings in the period when the changes are enacted.
The calculation of periodic income taxes is complex
and requires the use of estimates and judgments. Oriental has recorded two
accruals for income taxes: (i) the net estimated amount currently due or to be
received from taxing jurisdiction, including any reserve for potential
examination issues, and (ii) a deferred income tax that represents the estimated
impact of temporary differences between how Oriental recognizes assets and
liabilities under GAAP, and how such assets and liabilities are recognized
under the tax code. Differences in the actual outcome of these future tax
consequences could impact Oriental’s financial position or its results of
operations. In estimating taxes, management assesses the relative merits and
risks of the appropriate tax treatment of transactions taking into
consideration statutory, judicial and regulatory guidance.
A deferred tax asset should be reduced by a valuation
allowance if based on the weight of all available evidence, it is more likely
than not (a likelihood of more than 50%) that some portion or the entire
deferred tax asset will not be realized. The valuation allowance should be sufficient
to reduce the deferred tax asset to the amount that is more likely than not to
be realized. The determination of whether a deferred tax asset is realizable is
based on weighting all available evidence, including both positive and negative
evidence. The realization of deferred tax assets, including carryforwards and
deductible temporary differences, depends upon the existence of sufficient
taxable income of the same character during the carryback or carryforward
period. The realization of deferred tax assets requires the consideration of
all sources of taxable income available to realize the deferred tax asset,
including the future reversal of existing temporary differences, future taxable
income exclusive of reversing temporary differences and carryforwards, taxable
income in carryback years and tax-planning strategies.
Management evaluates the realization of the deferred tax asset an entity
by entity basis, since no consolidation is allowed in the income tax filing.
For the evaluation of the realization of the deferred tax asset refer to Note 19
to the consolidated financial statements.
Under PR Code, Oriental and its subsidiaries are treated as separate
taxable entities and are not entitled to file consolidated tax returns. The PR Code
provides a dividends-received deduction of 100% on dividends received from
“controlled subsidiaries" subject to taxation in Puerto Rico.
Changes in Oriental’s estimates can occur due to changes in tax rates,
new business strategies, newly enacted guidance, and resolution of issues with
taxing authorities regarding previously taken tax positions. Such changes could
affect the amount of accrued taxes. Oriental has made tax payments in
accordance with estimated tax payments rules. Any remaining payment will not
have any significant impact on liquidity and capital resources.
The valuation of deferred tax assets requires judgment in assessing the
likely future tax consequences of events that have been recognized in the
financial statements or tax returns and future profitability. The accounting
for deferred tax consequences represents management’s best estimate of those
future events. Changes in management’s current estimates, due to unanticipated
events, could have a material impact on Oriental’s financial condition and
results of operations.
Oriental establishes tax liabilities or reduces tax assets for
uncertain tax positions when, despite its assessment that its tax return
positions are appropriate and supportable under local tax law, Oriental
believes it may not succeed in realizing the tax benefit of certain positions
if challenged. In evaluating a tax position, Oriental determines whether it is
more-likely-than-not that the position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position.
Oriental’s estimate of the ultimate tax liability contains assumptions
based on past experiences, and judgments about potential actions by taxing
jurisdictions as well as judgments about the likely outcome of issues that have
been raised by taxing jurisdictions. The tax position is measured as the
largest amount of benefit that is greater than 50% likely of being realized
upon ultimate settlement. Oriental evaluates these uncertain tax positions each
quarter and adjusts the related tax liabilities or assets in light of changing
facts and circumstances, such as the progress of a tax audit or the expiration
of a statute of limitations. Oriental believes the estimates and assumptions
used to support its evaluation of uncertain tax positions are reasonable.
The amount of unrecognized tax benefits may increase or decrease in the
future for various reasons including adding amounts for current tax year
positions, expiration of open income tax returns due to the statutes of
limitation, changes in management’s judgment about the level of uncertainty,
status of examinations, litigation and legislative activity and the addition or
elimination of uncertain tax positions. Although the outcome of tax audits is
uncertain, Oriental believes that adequate amounts of tax, interest and
penalties have
been provided for any adjustments that
are expected to result from open years. From time to time, Oriental is audited
by state and local authorities regarding income tax matters. Although
management believes its approach in determining the appropriate tax treatment
is supportable and in accordance with the accounting standards, it is possible
that the applicable tax authority will take a tax position that is different
than the tax position reflected in Oriental’s income tax provision and other
tax reserves. As each audit is conducted, adjustments, if any, are appropriately
recorded in the consolidated financial statement in the period determined. Such
differences could have an adverse effect on Oriental’s income tax provision or
benefit, or other tax reserves, in the reporting period in which such
determination is made and,
consequently, on Oriental’s results of operations, financial position
and/or cash flows for such period.
Goodwill
Oriental’s goodwill and other identifiable intangible
assets having an indefinite useful life are tested for impairment. Intangibles
with indefinite lives are evaluated for impairment at least annually, and on a
more frequent basis, if events or circumstances indicate impairment could have
taken place. Such events could include, among others, a significant adverse
change in the business climate, an adverse action by a regulator, an
unanticipated change in the competitive environment, and a decision to change
the operations or dispose of a reporting unit.
Under applicable accounting standards, goodwill
impairment analysis is a two-step test. The first step of the goodwill
impairment test involves comparing the fair value of the reporting unit with
its carrying amount, including goodwill. If the fair value of the reporting
unit exceeds its carrying amount, goodwill of the reporting unit is not
considered impaired; however, if the carrying amount of the reporting unit
exceeds its fair value, the second step must be performed. The second step
involves calculating an implied fair value of goodwill for each reporting unit
for which the first step indicated possible impairment. The implied fair value
of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination, which is the excess of the fair value of
the reporting unit, as determined in the first step, over the aggregate fair
values of the individual assets, liabilities and identifiable intangibles
(including any unrecognized intangible assets, such as unrecognized core
deposits and trademarks) as if the reporting unit was being acquired in a
business combination and the fair value of the reporting unit was the price
paid to acquire the reporting unit.
Oriental estimates the fair values of the assets and
liabilities of a reporting unit, consistent with the requirements of the fair
value measurements accounting standard, which defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The
fair value of the assets and liabilities reflects market conditions, thus
volatility in prices could have a material impact on the determination of the
implied fair value of the reporting unit goodwill at the impairment test date.
The adjustments to measure the assets, liabilities and intangibles at fair
value are for the purpose of measuring the implied fair value of goodwill and
such adjustments are not reflected in the consolidated statement of condition.
If the implied fair value of goodwill exceeds the goodwill assigned to the reporting
unit, there is no impairment. If the goodwill assigned to a reporting unit
exceeds the implied fair value of the goodwill, an impairment charge is
recorded for the excess. An impairment loss recognized cannot exceed the amount
of goodwill assigned to a reporting unit, and the loss establishes a new basis
in the goodwill. Subsequent reversal of goodwill impairment losses is not
permitted under applicable accounting standards.
At December 31, 2017, goodwill amounted to $86.1 million. For a
detailed description of the annual goodwill impairment evaluation performed by Oriental
during the fourth quarter of 2017, refer to Note 1to the consolidated financial
statement.
OVERVIEW OF FINANCIAL PERFORMANCE
Making sure that our
people and organization survive hurricanes Irma and Maria was our number one
accomplishment in 2017. Separate from that, we had important additional
achievements last year that helped to:
•
Move Oriental forward
in its mission.
•
Position Oriental as a
different kind of bank, more agile, one that can get things done faster and
easier.
•
And speed our
recovery.
Oriental
introduced five new “firsts” in Puerto Rico banking technologies during 2017,
further enhancing our digital channel. These included Video Interactive ATMs
and SecurLock for protection of credit and debit cards. The technologies are
designed to attract customers with a noticeably different and higher level of
service, but at a reasonable cost.
By mid-year Oriental had eliminated all central government-related
debt. And after several years of preparation, we launched our U.S. commercial
loan program in October. The former will eliminate a drag on our loan book,
while the stateside initiative has already begun to add new loans, using the
same credit underwriting criteria that we have so successfully employed in
Puerto Rico.
Oriental's 2017 results were significantly impacted by hurricanes
Irma and Maria. The intensity and extent of damages caused by hurricane Maria,
less than two weeks after hurricane Irma left over a million Puerto Rico
residents without electric power, is unprecedented in Puerto Rico. In response
to the magnitude of this natural disaster and its general adverse effects on
our customers, we offered a moratorium to defer payments on our personal, auto,
mortgage and commercial loan portfolios.
Our moratorium covered all personal and auto loan customers that
were not over 89 days delinquent in their loans as of August 31, 2017. It
consisted of an optional automatic deferment of three scheduled monthly
payments of principal and interest. For any customer that did not opt out, the
deferred payments are due and payable in three consecutive installments after
the loan’s maturity date. Such loans continue to accrue interest on their
principal balances during the moratorium at their respective rates, and such
customers are not charged late payment fees in connection with the deferment,
nor is their credit history affected thereby.
For commercial
loans, we offered a one-month optional deferment in the payment of principal
and interest for loans that were not over 30 days past due as of August 31,
2017, and additional one-month deferrals in certain cases. For conforming
mortgage loans (Rural, VA, FNMA, FHA and FHLMC), we offered a three-month
optional deferment of principal and interest due and payable in January 2018,
and for credit card balances that were not over 29 days past due, we offered a
waiver of minimum payments for October, November and December 2017.
Puerto Rico has a
long reconstruction road ahead. However, with the expected benefit from an
influx of substantial funds from the federal government, as well as from
insurance recoveries, over the next two years, the short-term outlook is
hopeful. Results for the fourth quarter of 2017 are a testament to our
successful effort in restoring operations quickly after the hurricanes. Our
clientele and the communities we serve clearly appreciated our efforts as we
are starting to see momentum build despite a very challenging economic environment.
•
Net income available to shareholders was $38.8 million, or $0.88
per share fully diluted, compared to $45.3 million, or $1.03 per share, in
2016.
• Return on
average assets and average tangible common equity was 0.84% and 5.64%,
respectively. Tangible book value per common share was $15.67, and the tangible
common equity ratio was 11.29%.
• Based on
preliminary assessments of the impact of the hurricanes on our credit
portfolio, 2017 results included a $32.4 million loan loss provision, pre-tax,
related to the hurricanes.
Adjusted results of operations – Non-GAAP financial measures
Oriental prepares its consolidated financial statements using
GAAP. In addition to analyzing Oriental’s results on a reported basis,
management monitors “Adjusted net income” of Oriental and excludes the impact
of certain transactions on the results of its operations. During 2017, in the
span of two weeks in September, hurricanes Irma and Maria caused catastrophic
damages throughout Puerto Rico. Oriental has excluded the impact of these
events for its "Adjusted net income". Adjusted net income is a
non-GAAP financial measure. Management believes that Adjusted net income and
other non-GAAP financial measures provides meaningful information about the
underlying performance of Oriental’s ongoing operations.
Refer to the following table for a reconciliation of the reported
results to the Adjusted net income and other non-GAAP financial measures for
the year ended December 31, 2017. Non-GAAP financial measures used by Oriental
may not be comparable to similarly named non-GAAP financial measures used by
other companies.
|
Reconciliation
to Non-GAAP Financial Measures adjusted to exclude the effect of hurricanes Irma
and Maria:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
(Dollars in thousands)
|
|
U.S GAAP Net
income
|
|
$
|
52,646
|
|
Non-GAAP
adjustments:
|
|
|
|
|
Additional loan
loss provision from Hurricanes Irma and María
|
|
|
32,406
|
|
Income tax
effect
|
|
|
(10,146)
|
|
Adjusted net income
(Non-GAAP)
|
|
|
74,906
|
|
Less: dividends
on preferred stock
|
|
|
(13,862)
|
|
Adjusted
income available to common shareholders (Non-GAAP)
|
|
|
61,044
|
|
Plus: Effect of
assumed conversion of the convertible preferred stock
|
|
|
7,350
|
|
|
|
$
|
68,394
|
|
Average common shares
outstanding and equivalents
|
|
|
51,096
|
|
Adjusted
earnings per common share - diluted (Non-GAAP)
|
|
$
|
1.34
|
|
|
|
|
|
|
Adjusted net
income (Non-GAAP)
|
|
$
|
74,906
|
|
Average assets,
excluding hurricane loan provision
|
|
$
|
6,263,647
|
|
Return on
average assets, excluding hurricane loan provision (Non-GAAP)
|
|
|
1.20%
|
|
|
|
|
|
|
Adjusted income
available to common shareholders (Non-GAAP)
|
|
$
|
61,044
|
|
Average tangible
common stockholders' equity, excluding hurricane loan provisions
|
|
$
|
687,712
|
|
Return on
average tangible common stockholders' equity, excluding hurricane loan
provision (Non-GAAP)
|
|
|
8.88%
|
·
Excluding the aforementioned
impact of the hurricanes (Non-GAAP):
☐ Adjusted net income available to shareholders totaled
$61.0 million or $1.34 per share fully diluted. That is an increase of $0.31
per share or 30% from 2016.
☐ Return on average assets was 1.20% and return on
average tangible common equity was 8.88% – 32 and 194 basis points higher,
respectively, than 2016.
ANALYSIS
OF RESULTS OF OPERATIONS
The following tables show 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 years ended December 31, 2017 and 2016:
|
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE
TO VOLUME/RATE
|
|
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Average rate
|
|
Average balance
|
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
|
2017
|
|
2016
|
|
2017
|
2016
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
A - TAX EQUIVALENT SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
$
|
345,647
|
|
$
|
356,592
|
|
5.94%
|
|
5.74%
|
|
$
|
5,818,598
|
|
$
|
6,210,003
|
|
Tax equivalent adjustment
|
|
4,791
|
|
|
4,724
|
|
0.08%
|
|
0.08%
|
|
|
-
|
|
|
-
|
|
Interest-earning assets - tax equivalent
|
|
350,438
|
|
|
361,316
|
|
6.02%
|
|
5.82%
|
|
|
5,818,598
|
|
|
6,210,003
|
|
Interest-bearing liabilities
|
|
41,475
|
|
|
57,165
|
|
0.79%
|
|
1.00%
|
|
|
5,226,654
|
|
|
5,703,927
|
|
Tax equivalent net interest income / spread
|
|
308,963
|
|
|
304,151
|
|
5.23%
|
|
4.82%
|
|
|
591,944
|
|
|
506,076
|
|
Tax equivalent interest rate margin
|
|
|
|
|
|
|
5.31%
|
|
4.90%
|
|
|
|
|
|
|
|
B - NORMAL SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
28,587
|
|
|
32,109
|
|
2.28%
|
|
2.39%
|
|
|
1,255,580
|
|
|
1,345,926
|
|
Trading securities
|
|
20
|
|
|
37
|
|
6.64%
|
|
11.04%
|
|
|
301
|
|
|
335
|
|
Interest bearing cash and money market investments
|
|
4,619
|
|
|
2,501
|
|
1.06%
|
|
0.52%
|
|
|
436,913
|
|
|
484,586
|
|
Total investments
|
|
33,226
|
|
|
34,647
|
|
1.96%
|
|
1.89%
|
|
|
1,692,794
|
|
|
1,830,847
|
|
Non-acquired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
37,465
|
|
|
39,621
|
|
5.37%
|
|
5.33%
|
|
|
697,873
|
|
|
743,838
|
|
Commercial
|
|
71,685
|
|
|
63,186
|
|
5.73%
|
|
4.56%
|
|
|
1,251,051
|
|
|
1,385,421
|
|
Consumer
|
|
32,815
|
|
|
27,214
|
|
11.14%
|
|
10.75%
|
|
|
294,572
|
|
|
253,069
|
|
Auto and leasing
|
|
78,626
|
|
|
69,152
|
|
9.61%
|
|
9.65%
|
|
|
818,155
|
|
|
716,373
|
|
Total non-acquired loans
|
|
220,591
|
|
|
199,173
|
|
7.20%
|
|
6.43%
|
|
|
3,061,651
|
|
|
3,098,701
|
|
Acquired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
30,205
|
|
|
32,833
|
|
5.63%
|
|
5.60%
|
|
|
536,247
|
|
|
586,100
|
|
Commercial
|
|
20,488
|
|
|
26,288
|
|
8.53%
|
|
8.70%
|
|
|
240,267
|
|
|
302,323
|
|
Consumer
|
|
10,852
|
|
|
12,136
|
|
18.00%
|
|
18.09%
|
|
|
60,285
|
|
|
67,082
|
|
Auto
|
|
9,726
|
|
|
21,016
|
|
10.72%
|
|
11.34%
|
|
|
90,698
|
|
|
185,280
|
|
Total acquired BBVAPR loans
|
|
71,271
|
|
|
92,273
|
|
7.68%
|
|
8.09%
|
|
|
927,497
|
|
|
1,140,785
|
|
Acquired Eurobank
|
|
20,559
|
|
|
30,499
|
|
15.04%
|
|
21.84%
|
|
|
136,655
|
|
|
139,670
|
|
Total loans
|
|
312,421
|
|
|
321,945
|
|
7.57%
|
|
7.35%
|
|
|
4,125,804
|
|
|
4,379,156
|
|
Total interest-earning assets
|
|
345,647
|
|
|
356,592
|
|
5.94%
|
|
5.74%
|
|
|
5,818,598
|
|
|
6,210,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Average rate
|
|
Average balance
|
|
|
December
|
|
December
|
|
|
December
|
December
|
December
|
|
December
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW Accounts
|
|
3,893
|
|
|
5,086
|
|
|
0.37%
|
|
0.42%
|
|
|
1,059,051
|
|
|
1,200,394
|
|
Savings and money market
|
|
5,922
|
|
|
5,441
|
|
|
0.51%
|
|
0.49%
|
|
|
1,170,800
|
|
|
1,114,931
|
|
Individual retirement accounts
|
|
1,583
|
|
|
1,914
|
|
|
0.66%
|
|
0.71%
|
|
|
241,377
|
|
|
267,969
|
|
Retail certificates of deposits
|
|
8,432
|
|
|
6,115
|
|
|
1.47%
|
|
1.28%
|
|
|
575,270
|
|
|
476,035
|
|
Total core deposits
|
|
19,830
|
|
|
18,556
|
|
|
0.65%
|
|
0.61%
|
|
|
3,046,498
|
|
|
3,059,329
|
|
Institutional deposits
|
|
1,337
|
|
|
2,553
|
|
|
0.60%
|
|
1.00%
|
|
|
222,387
|
|
|
255,227
|
|
Brokered deposits
|
|
8,211
|
|
|
7,450
|
|
|
1.47%
|
|
1.20%
|
|
|
557,115
|
|
|
619,569
|
|
Total wholesale deposits
|
|
9,548
|
|
|
10,003
|
|
|
1.22%
|
|
1.15%
|
|
|
779,502
|
|
|
874,796
|
|
|
|
29,378
|
|
|
28,559
|
|
|
0.77%
|
|
0.73%
|
|
|
3,826,000
|
|
|
3,934,125
|
|
Non-interest bearing deposits
|
|
-
|
|
|
-
|
|
|
0.00%
|
|
-0.04%
|
|
|
860,287
|
|
|
781,877
|
|
Deposits fair value premium amortization
|
|
-
|
|
|
(340)
|
|
|
0.00%
|
|
0.00%
|
|
|
-
|
|
|
-
|
|
Core deposit intangible amortization
|
|
920
|
|
|
1,034
|
|
|
0.00%
|
|
0.00%
|
|
|
-
|
|
|
-
|
|
Total deposits
|
|
30,298
|
|
|
29,253
|
|
|
0.65%
|
|
0.62%
|
|
|
4,686,287
|
|
|
4,716,002
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
7,223
|
|
|
18,805
|
|
|
1.80%
|
|
2.83%
|
|
|
401,070
|
|
|
663,845
|
|
Advances from FHLB and other borrowings
|
|
2,398
|
|
|
6,186
|
|
|
2.32%
|
|
2.60%
|
|
|
103,214
|
|
|
238,366
|
|
Subordinated capital notes
|
|
1,556
|
|
|
2,921
|
|
|
4.31%
|
|
3.41%
|
|
|
36,083
|
|
|
85,714
|
|
Total borrowings
|
|
11,177
|
|
|
27,912
|
|
|
2.07%
|
|
2.83%
|
|
|
540,367
|
|
|
987,925
|
|
Total interest bearing liabilities
|
|
41,475
|
|
|
57,165
|
|
|
0.79%
|
|
1.00%
|
|
|
5,226,654
|
|
|
5,703,927
|
|
Net interest income / spread
|
$
|
304,172
|
|
$
|
299,427
|
|
|
5.15%
|
|
4.74%
|
|
|
|
|
|
|
|
Interest rate margin
|
|
|
|
|
|
|
|
5.23%
|
|
4.82%
|
|
|
|
|
|
|
|
Excess of average interest-earning assets
over average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
$
|
591,944
|
|
$
|
506,076
|
|
Average interest-earning assets to average
interest-bearing liabilities ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
111.33%
|
|
|
108.87%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C - CHANGES IN NET INTEREST INCOME DUE TO:
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
$
|
(2,613)
|
|
$
|
1,192
|
|
$
|
(1,421)
|
|
|
|
|
|
|
|
|
|
Loans
|
|
(17,868)
|
|
|
8,344
|
|
|
(9,524)
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
(20,481)
|
|
|
9,536
|
|
|
(10,945)
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
(184)
|
|
|
1,229
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
(7,444)
|
|
|
(4,138)
|
|
|
(11,582)
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
(5,193)
|
|
|
40
|
|
|
(5,153)
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
(12,821)
|
|
|
(2,869)
|
|
|
(15,690)
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
$
|
(7,660)
|
|
$
|
12,405
|
|
$
|
4,745
|
|
|
|
|
|
|
|
|
|
TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES
DUE TO VOLUME/RATE
|
|
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Average rate
|
|
Average balance
|
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
|
2016
|
|
2015
|
|
2016
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
A - TAX EQUIVALENT SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
$
|
356,592
|
|
$
|
406,568
|
|
5.74%
|
|
6.06%
|
|
$
|
6,210,003
|
|
$
|
6,704,995
|
|
Tax equivalent adjustment
|
|
4,724
|
|
|
6,891
|
|
0.08%
|
|
0.10%
|
|
|
-
|
|
|
-
|
|
Interest-earning assets - tax equivalent
|
|
361,316
|
|
|
413,459
|
|
5.82%
|
|
6.16%
|
|
|
6,210,003
|
|
|
6,704,995
|
|
Interest-bearing liabilities
|
|
57,165
|
|
|
69,196
|
|
1.00%
|
|
1.11%
|
|
|
5,703,927
|
|
|
6,226,042
|
|
Tax equivalent net interest income / spread
|
|
304,151
|
|
|
344,263
|
|
4.82%
|
|
5.05%
|
|
|
506,076
|
|
|
478,953
|
|
Tax equivalent interest rate margin
|
|
|
|
|
|
|
4.90%
|
|
5.13%
|
|
|
|
|
|
|
|
B - NORMAL SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
32,109
|
|
|
37,596
|
|
2.39%
|
|
2.49%
|
|
|
1,345,926
|
|
|
1,508,819
|
|
Trading securities
|
|
37
|
|
|
70
|
|
11.04%
|
|
8.25%
|
|
|
335
|
|
|
848
|
|
Interest bearing cash and money market investments
|
|
2,501
|
|
|
1,280
|
|
0.52%
|
|
0.26%
|
|
|
484,586
|
|
|
491,051
|
|
Total investments
|
|
34,647
|
|
|
38,946
|
|
1.89%
|
|
1.95%
|
|
|
1,830,847
|
|
|
2,000,718
|
|
Non-acquired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
39,621
|
|
|
39,778
|
|
5.33%
|
|
5.16%
|
|
|
743,838
|
|
|
771,322
|
|
Commercial
|
|
63,186
|
|
|
60,931
|
|
4.56%
|
|
4.56%
|
|
|
1,385,421
|
|
|
1,336,510
|
|
Consumer
|
|
27,214
|
|
|
21,003
|
|
10.75%
|
|
10.35%
|
|
|
253,069
|
|
|
202,971
|
|
Auto and leasing
|
|
69,152
|
|
|
62,108
|
|
9.65%
|
|
9.86%
|
|
|
716,373
|
|
|
629,910
|
|
Total non-acquired loans
|
|
199,173
|
|
|
183,820
|
|
6.43%
|
|
6.25%
|
|
|
3,098,701
|
|
|
2,940,713
|
|
Acquired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
32,833
|
|
|
34,842
|
|
5.60%
|
|
5.55%
|
|
|
586,100
|
|
|
628,340
|
|
Commercial
|
|
26,288
|
|
|
48,730
|
|
8.70%
|
|
10.65%
|
|
|
302,323
|
|
|
457,767
|
|
Consumer
|
|
12,136
|
|
|
13,187
|
|
18.09%
|
|
16.35%
|
|
|
67,082
|
|
|
80,666
|
|
Auto
|
|
21,016
|
|
|
34,633
|
|
11.34%
|
|
9.03%
|
|
|
185,280
|
|
|
383,583
|
|
Total acquired BBVAPR loans
|
|
92,273
|
|
|
131,392
|
|
8.09%
|
|
8.47%
|
|
|
1,140,785
|
|
|
1,550,356
|
|
Acquired Eurobank
|
|
30,499
|
|
|
52,410
|
|
21.84%
|
|
24.58%
|
|
|
139,670
|
|
|
213,208
|
|
Total loans
|
|
321,945
|
|
|
367,622
|
|
7.35%
|
|
7.81%
|
|
|
4,379,156
|
|
|
4,704,277
|
|
Total interest-earning assets
|
|
356,592
|
|
|
406,568
|
|
5.74%
|
|
6.06%
|
|
|
6,210,003
|
|
|
6,704,995
|
|
|
Interest
|
|
|
Average rate
|
|
Average balance
|
|
|
December
|
|
December
|
|
|
December
|
|
December
|
|
December
|
|
December
|
|
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW Accounts
|
$
|
5,086
|
|
$
|
4,451
|
|
|
0.42%
|
|
0.38%
|
|
$
|
1,200,394
|
|
$
|
1,163,424
|
|
Savings and money market
|
|
5,441
|
|
|
6,504
|
|
|
0.49%
|
|
0.52%
|
|
|
1,114,931
|
|
|
1,256,909
|
|
Individual retirement accounts
|
|
1,914
|
|
|
2,482
|
|
|
0.71%
|
|
0.88%
|
|
|
267,969
|
|
|
281,197
|
|
Retail certificates of deposits
|
|
6,115
|
|
|
5,397
|
|
|
1.28%
|
|
1.32%
|
|
|
476,035
|
|
|
409,038
|
|
Total core deposits
|
|
18,556
|
|
|
18,834
|
|
|
0.61%
|
|
0.61%
|
|
|
3,059,329
|
|
|
3,110,568
|
|
Institutional deposits
|
|
2,553
|
|
|
2,790
|
|
|
1.00%
|
|
1.04%
|
|
|
255,227
|
|
|
268,678
|
|
Brokered deposits
|
|
7,450
|
|
|
4,900
|
|
|
1.20%
|
|
0.78%
|
|
|
619,569
|
|
|
624,210
|
|
Total wholesale deposits
|
|
10,003
|
|
|
7,690
|
|
|
1.14%
|
|
0.86%
|
|
|
874,796
|
|
|
892,888
|
|
|
|
28,559
|
|
|
26,524
|
|
|
0.73%
|
|
0.66%
|
|
|
3,934,125
|
|
|
4,003,456
|
|
Non-interest bearing deposits
|
|
-
|
|
|
-
|
|
|
0.00%
|
|
-0.01%
|
|
|
781,877
|
|
$
|
769,460
|
|
Deposits fair value premium amortization
|
|
(340)
|
|
|
(660)
|
|
|
0.00%
|
|
0.00%
|
|
|
-
|
|
|
-
|
|
Core deposit intangible amortization
|
|
1,034
|
|
|
1,170
|
|
|
0.00%
|
|
0.00%
|
|
|
-
|
|
|
-
|
|
Total deposits
|
|
29,253
|
|
|
27,034
|
|
|
0.62%
|
|
0.57%
|
|
|
4,716,002
|
|
|
4,772,916
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
18,805
|
|
|
29,567
|
|
|
2.83%
|
|
2.92%
|
|
|
663,845
|
|
|
1,012,756
|
|
Advances from FHLB and other borrowings
|
|
6,186
|
|
|
9,072
|
|
|
2.60%
|
|
2.68%
|
|
|
238,366
|
|
|
338,299
|
|
Subordinated capital notes
|
|
2,921
|
|
|
3,523
|
|
|
3.41%
|
|
3.45%
|
|
|
85,714
|
|
|
102,071
|
|
Total borrowings
|
|
27,912
|
|
|
42,162
|
|
|
2.83%
|
|
2.90%
|
|
|
987,925
|
|
|
1,453,126
|
|
Total interest-bearing liabilities
|
|
57,165
|
|
|
69,196
|
|
|
1.00%
|
|
1.11%
|
|
|
5,703,927
|
|
|
6,226,042
|
|
Net interest income / spread
|
$
|
299,427
|
|
$
|
337,372
|
|
|
4.74%
|
|
4.95%
|
|
|
|
|
|
|
|
Interest rate margin
|
|
|
|
|
|
|
|
4.82%
|
|
5.03%
|
|
|
|
|
|
|
|
Excess of average interest-earning assets over
average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
$
|
506,076
|
|
$
|
478,953
|
|
Average interest-earning assets to average
interest-bearing liabilities ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
108.87%
|
|
|
107.69%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C - CHANGES IN NET INTEREST INCOME DUE TO:
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
$
|
(3,307)
|
|
$
|
(992)
|
|
$
|
(4,299)
|
|
|
|
|
|
|
|
|
|
Loans
|
|
(35,735)
|
|
|
(9,942)
|
|
|
(45,677)
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
(39,042)
|
|
|
(10,934)
|
|
|
(49,976)
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
(322)
|
|
|
2,541
|
|
|
2,219
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
(10,186)
|
|
|
(576)
|
|
|
(10,762)
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
(3,327)
|
|
|
(161)
|
|
|
(3,488)
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
(13,835)
|
|
|
1,804
|
|
|
(12,031)
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
$
|
(25,207)
|
|
$
|
(12,738)
|
|
$
|
(37,945)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Income
Net interest income is a function of the difference between rates
earned on Oriental’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). Oriental constantly monitors the composition and re-pricing of its
assets and liabilities to maintain its net interest income at adequate levels.
Comparison for the years ended December 31, 2017 and 2016
Net interest income of $304.2 million increased $4.8 million from
$299.4 million. Interest rate spread increased 41 basis points to 5.15% from
4.74% and net interest margin increased 41 basis points to 5.23% from 4.82%.
These increases are mainly due to the net effect of a 20 basis point increase
in the average yield of interest-earning assets from 5.74% to 5.94% and a 21
basis point decrease in average costs of interest-bearing liabilities from
1.00% to 0.79%.
Net interest income was positively impacted by:
·
Higher interest income from originated loans of $21.4 million, reflecting the recognition of $4.8 million
from the pay-off before maturity of a commercial loan previously classified as
non-accrual, and from higher yields in the commercial and retail loan portfolios;
·
The recognition of $3.1 million in cost recoveries from the loan
pay-off by the Puerto Rico Housing Finance Authority (PRHFA) included as
interest income from acquired BBVAPR loans; and
·
Lower interest expenses on securities sold under agreements to
repurchase due to decreases in volume and interest rate of $7.4 million and
$4.1 million, respectively, mainly as a result of (i) the repayment at maturity
of a $232.0 million repurchase agreement at 4.78% in March 2017, and (ii) the
unwinding of $180.0 million repurchase agreements during 2017.
Net interest income was adversely
impacted by:
·
A decrease of $30.9 million in the interest income from the
acquired BBVAPR and Eurobank loan portfolios as such loans continue to be
repaid;
·
A slight increase in interest expenses from deposits of 3.6% to
$30.3 million, reflecting lower volume balances by $184 thousand, offset by
$1.2 million higher interest rates; and
·
A slight decrease in interest income from investments of 4.1% to
$1.4 million, reflecting lower volume balances offset by higher yields on cash
balances.
Comparison of years ended December 31, 2016 and 2015
Net interest income of $299.4 million decreased 11.2% compared
with $337.4 million reported during 2015, reflecting decreases of 12.4% in
interest income from loans and 11.0% in interest income from investments.
Net interest income was positively impacted by:
·
Higher interest income from
originated loans of $15.4 million; and
·
Lower interest expenses on repurchases
agreements and other borrowings of $14.3 million, mainly from the partial
unwinding of a repurchase agreement amounting to $268.0 million, which carried
a cost of 4.78%, and the repayment of $227.0 million in short term FHLB
advances at maturity.
Net interest income was adversely impacted by:
·
A decrease of $61.0 million in the interest income from the
acquired BBVAPR and Eurobank loan portfolios as such loans continue to be
repaid and from lower cost recoveries, $7.5 million in 2016 as compared to
$22.8 million in 2015;
·
A decrease in interest income from investments by $4.3 million due
to lower volume; and
·
An increase in interest expenses from deposits by $2.2 million.
|
TABLE 2 - NON-INTEREST INCOME SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
Variance
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Banking service revenue
|
$
|
39,468
|
|
$
|
41,647
|
|
-5.2%
|
|
$
|
41,466
|
|
Wealth management revenue
|
|
25,790
|
|
|
27,433
|
|
-6.0%
|
|
|
29,040
|
|
Mortgage banking activities
|
|
4,050
|
|
|
5,021
|
|
-19.3%
|
|
|
6,128
|
|
Total banking and financial service revenue
|
|
69,308
|
|
|
74,101
|
|
-6.5%
|
|
|
76,634
|
|
Total other-than-temporarily impaired securities
|
|
-
|
|
|
-
|
|
0.0%
|
|
|
(4,662)
|
|
Portion of loss recognized in other comprehensive income, before
taxes
|
|
-
|
|
|
-
|
|
0.0%
|
|
|
3,172
|
|
Net impairment osses recognized in earnings
|
|
-
|
|
|
-
|
|
0.0%
|
|
|
(1,490)
|
|
FDIC shared-loss benefit (expense), net:
|
|
1,403
|
|
|
(13,581)
|
|
110.3%
|
|
|
(42,808)
|
|
Reimbursement from FDIC shared-loss coverage in sale of loans
|
|
-
|
|
|
-
|
|
0.0%
|
|
|
20,000
|
|
Net gain (loss) on:
|
|
|
|
|
|
|
|
|
|
|
|
Sale of securities available for sale
|
|
6,896
|
|
|
12,207
|
|
-43.5%
|
|
|
2,572
|
|
Derivatives
|
|
132
|
|
|
(71)
|
|
286.6%
|
|
|
(190)
|
|
Early extinguishment of debt
|
|
(80)
|
|
|
(12,000)
|
|
99.3%
|
|
|
-
|
|
Other non-interest income (loss)
|
|
1,028
|
|
|
6,163
|
|
-83.3%
|
|
|
(2,142)
|
|
|
|
9,379
|
|
|
(7,282)
|
|
228.8%
|
|
|
(24,058)
|
|
Total non-interest income, net
|
$
|
78,687
|
|
$
|
66,819
|
|
17.8%
|
|
$
|
52,576
|
Non-Interest Income
Non-interest income is
affected by the level of trust assets under management, transactions generated
by clients’ financial assets serviced by the securities broker-dealer and
insurance agency subsidiaries, the level of mortgage banking activities, and the
fees generated from loans and deposit accounts.
Comparison
of years ended December 31, 2017 and 2016
Oriental recorded
non-interest income, net, in the amount of $78.7 million, compared to $66.8
million, an increase of 17.8%, or $11.9 million. The increase in non-interest
income was mainly due to:
·
The elimination of the
FDIC shared-loss expense as Oriental entered into an agreement with the FDIC to
terminate the shared-loss agreements covering certain assets during the first
quarter of 2017. During 2016, Oriental recorded expenses of $13.6 million
related to such agreement; and
·
The sale of $166.0
million of its mortgage-backed securities, generating a gain of $6.9 million.
As a result of this sale, Oriental unwound $100 million of repurchase
agreements at a cost of $80 thousand, included as a loss on early
extinguishment of debt in the consolidated statements of operations. The
transaction resulted in a net benefit of $6.8 million. In the same period in
2016, Oriental sold $277.2 million in mortgage-backed securities and $11.1
million in Puerto Rico government bonds, resulting in a gain of $12.2 million.
This transaction resulted in the repayment before maturity of $268.0 million of
a repurchase agreement at a cost of $12.0 million, included as a loss on the
early extinguishment of debt in the consolidated statements of operations. The
transaction resulted in a net benefit of $207
thousand.
The increase in non-interest income was
partially offset by:
·
A decrease in banking
service revenue of 5.2% or $2.2 million, reflecting lower electronic banking
fees, mainly related to business interruption from the lack of electricity as a
consequence of hurricanes Irma and Maria which struck the island on September
7, 2017 and September 20, 2017, respectively; and
·
A decrease in other
non-interest income of $5.1 million which reflects the receipt of $5.0 million during 2016 from a loss in 2009 related
to a private label collateralized mortgage obligation.
Comparison of
years ended December 31, 2016 and 2015
Oriental recorded non-interest income, net, in the amount of $66.8
million, compared to $52.5 million, an increase of 27.3%, or $14.3 million. The increase in non-interest income was
mainly due to:
·
The expiration of the
FDIC commercial and non-single family loans loss share coverage at June 30,
2015, decreasing the FDIC shared-loss expense in 2016 to $13.6 million as
compared to $42.8 million;
·
An increase in other non-interest income due to the aforementioned
$5.0 million recognized in 2016 from a recovery of a previous loss related to a
private label collateralized mortgage obligation;
·
An other-than-temporary impairment charge recognized in 2015 on
obligations from the Puerto Rico government and its political subdivisions in
the investment securities available-for-sale portfolio. Oriental determined
that $1.5 million of the unrealized loss carried by these securities was
attributed to estimated credit losses. These investment securities were sold
during 2016.
The
increase in non-interest income was partially offset by an agreement entered in 2015 with the FDIC pursuant to which the
FDIC concurred with a sale of loss share assets covered under the non-single
family loss share agreement. As a result to such agreement, the FDIC paid $20.0
million in loss share coverage with respect to the aggregate loss resulting
from the bulk sale of covered non-performing commercial loans.
|
TABLE 3 -
NON-INTEREST EXPENSES SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
Variance %
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Compensation and employee benefits
|
$
|
79,751
|
|
$
|
76,761
|
|
3.9%
|
|
$
|
78,999
|
|
Professional and service fees
|
|
12,406
|
|
|
12,235
|
|
1.4%
|
|
|
14,973
|
|
Occupancy and equipment
|
|
32,557
|
|
|
30,300
|
|
7.5%
|
|
|
33,466
|
|
Insurance
|
|
5,223
|
|
|
9,109
|
|
-42.7%
|
|
|
9,567
|
|
Electronic banking charges
|
|
19,322
|
|
|
20,707
|
|
-6.7%
|
|
|
21,893
|
|
Information technology expenses
|
|
8,010
|
|
|
7,116
|
|
12.6%
|
|
|
5,648
|
|
Advertising, business promotion, and strategic initiatives
|
|
5,616
|
|
|
5,485
|
|
2.4%
|
|
|
6,452
|
|
Loss on sale of foreclosed real estate and other repossessed
assets
|
|
4,634
|
|
|
10,282
|
|
-54.9%
|
|
|
30,546
|
|
Loan servicing and clearing expenses
|
|
4,693
|
|
|
8,247
|
|
-43.1%
|
|
|
9,198
|
|
Taxes, other than payroll and income taxes
|
|
9,187
|
|
|
9,782
|
|
-6.1%
|
|
|
9,460
|
|
Communication
|
|
3,415
|
|
|
3,379
|
|
1.1%
|
|
|
3,808
|
|
Printing, postage, stationery and supplies
|
|
2,437
|
|
|
2,558
|
|
-4.7%
|
|
|
2,575
|
|
Director and investor relations
|
|
1,072
|
|
|
1,086
|
|
-1.3%
|
|
|
1,091
|
|
Credit related expenses
|
|
7,992
|
|
|
10,267
|
|
-22.2%
|
|
|
11,091
|
|
Other operating expenses
|
|
5,316
|
|
|
8,676
|
|
-38.7%
|
|
|
9,738
|
|
Total non-interest expenses
|
$
|
201,631
|
|
$
|
215,990
|
|
-6.6%
|
|
$
|
248,505
|
|
Relevant ratios and data:
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
53.99%
|
|
|
57.82%
|
|
|
|
|
60.00%
|
|
Compensation and benefits to
non-interest expense
|
|
39.55%
|
|
|
35.54%
|
|
|
|
|
31.79%
|
|
Compensation to average total assets owned
|
|
1.27%
|
|
|
1.14%
|
|
|
|
|
1.08%
|
|
Average number of employees
|
|
1,450
|
|
|
1,446
|
|
|
|
|
1,496
|
|
Average compensation per employee
|
$
|
55.0
|
|
$
|
53.1
|
|
|
|
$
|
52.8
|
|
Average loans per average employee
|
$
|
2,846
|
|
$
|
3,031
|
|
|
|
$
|
3,145
|
Non-Interest
Expenses
Comparison of years
ended December 31, 2017 and 2016
Non-interest expense was
$201.6 million, representing a decrease of 6.6% compared to $216.0 million.
The decrease in
non-interest expenses was driven by:
·
Lower losses on the sale of
foreclosed real estate and other repossessed assets by $5.6 million due to
higher sales of foreclosed real estate at a gain and lower write-downs, mainly
in the acquired portfolio;
·
Lower insurance
expenses by $3.9 million as a result of a change in the calculation method of
the FDIC Deposit Insurance Fund insurance. The change was effective beginning
with June 30, 2016 invoice, which was received during the third quarter of
2016;
·
Lower loan servicing and clearing
expenses by $3.6 million, mainly due to a reduction of $3.2 million in mortgage
servicing expense from the migration to in-house servicing during the third
quarter of 2016;
·
Lower credit related expenses by
$2.3 million, mainly due to a decrease in legal expenses from foreclosures of
$1.9 million; and
·
Lower other operating expense by
$3.4 million due to the settlement of outstanding claims at amounts below those
previously reserved by $1.4 million and decrease of $2.4 million in accrual for
claims and settlements expenses in our broker dealer subsidiary.
The decreases in the foregoing non-interest expenses were
partially offset by:
·
Higher compensation and employee
benefits by $3.0 million as a result of higher average employees until
hurricane Maria; and
·
Higher occupancy and equipment
expenses by $2.3 million, primarily due to lower rent income and an increase in
internet services.
The efficiency ratio improved to 53.99%
from 57.82%. The efficiency ratio measures how much of Oriental’s revenues is
used to pay operating expenses. Oriental 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 the sale of investment securities,
derivatives gains or losses, FDIC shared-loss benefit/expense, losses on the
early extinguishment of debt, other gains and losses, and other income that may
be considered volatile in nature. Management believes that the exclusion of
those items permits consistent comparability. Amounts presented as part of
non-interest income that are excluded from efficiency ratio computation for
2017 and 2016 amounted to $9.4 million income and a $7.3 million loss,
respectively.
Oriental implemented
its disaster response plan as hurricanes Irma and Maria approached its service
areas. To operate in disaster response mode, Oriental incurred expenses for,
among other things, buying diesel and generators for electric power, debris
removal, security services, property damages, and emergency communication with
customers regarding the status of Bank operations. Estimated losses as of
December 31, 2017 amounted to $6.6 million.
Oriental maintains insurance for
casualty losses as well as for disaster response costs and certain revenue lost
through business interruption. Management believes that recovery of $2.2
million incurred costs as of December 31, 2017 is probable. Oriental received a
$1.0 million partial payment from the insurance company in December 2017.
Accordingly, a receivable of $1.2 million was included in other assets as of
December 31, 2017 for the expected recovery.
Comparison of years
ended December 30, 2016 and 2015
Non-interest expense for 2016 was $216.0 million, representing a
decrease of 13.0% compared to $248.4 million in the previous year. The decrease in non-interest expenses
was driven by:
·
Lower losses on the sale of
foreclosed real estate and other repossessed assets by $20.3 million, primarily as a result of the
bulk sale of non-performing assets in the third quarter of 2015. That year
included $9.1 million other real estate owned and other mortgage properties
markdowns, as part of 2015 de-risking efforts. Also, 2015 included a loss of
$4.8 million on the sale of repossessed assets, contrasting with 2016 which
included a gain of $1.6 million, mainly from efficiencies in the selling
process.
·
Lower occupancy and equipment expensed by 9.4% or $3.2 million
reflecting a reduction in depreciation of leasehold improvements, rent expense,
security equipment rent and maintenance, and building maintenance, as a
consequence of the closing of seven branches during 2015.
·
Lower compensation and employee benefits by 2.8% or $2.2 million,
mostly due to the decrease in average employees. In addition, during 2015,
Oriental offered a voluntary early retirement program for qualified employees
and accumulated an additional compensation expense related to this program.
·
Lower professional and service fees by 7.9% or $1.3 million,
mostly due to lower legal expenses from strategic initiatives performed in
2015, lower collection services due to in-house collection efforts, and lower
billings, consulting and outsourcing fees in 2015.
The decreases in the
foregoing non-interest expenses were partially offset by higher information
technology expenses of 26.0% or $1.5 million, mainly due to an increase in the
data processing expenses.
The efficiency ratio improved to 57.82% from 60.00% for the same period in
2015. Amounts presented as part of non-interest income that are excluded from
efficiency ratio computation for 2016 and 2015 amounted to $7.3 million and
$24.2 million, respectively.
Provision for Loan and Lease Losses
Comparison
of years ended December 31, 2017 and 2016
Provision for
loan and lease losses increased 73.9%, or $48.1 million, to $113.1 million.
Based on an analysis of the credit quality and the composition of Oriental’s
loan portfolio, management determined that the provision for the year was
adequate to maintain the allowance for loan and lease losses at an appropriate
level to provide for probable losses based upon an evaluation of known and
inherent risks.
Oriental was
impacted by hurricanes Irma and Maria, which struck the island on September 7,
2017 and September 20, 2017, respectively. Based on our assessment of the facts
related to these hurricanes, we have increased our provision for loan losses
$32.4 million, $17.2 million for originated loans and $15.2 million for
acquired loans.
Excluding the special provision made as a result of the
hurricanes in 2017, the total provision increased $15.7 million. Provision for
originated and other loan and lease losses increased by $17.3 million, mainly
from the increase in the provision for commercial loans. Such provision
includes $4.3 million recorded to charge-off the loss on sale of a municipal
loan and another provision of $5.9 million recorded for the general allowance
on the municipal loan portfolio during the second quarter of 2017.
Please refer to the "Allowance for Loan and Lease
Losses" in the "Credit Risk Management" section of this MD&A
for a more detailed analysis of the allowance for loan and lease losses.
Comparison of years ended
December 31, 2016 and 2015
Provision for loan and lease losses decreased 59.7%, or $96.4
million, to $65.1 million. During 2015, Oriental changed to non-accrual status the PREPA line of
credit and recorded a $53.3 million provision for loan and lease losses related
thereto. In addition, in 2015 the Company recognized a provision for loan and
lease losses of $32.9 million related to the sale of certain non-performing
acquired commercial loans.
Income Taxes
Comparison of years ended December
31, 2017 and 2016
Income
tax expense was $15.4 million, compared to $26.0 million, reflecting the
effective income tax rate of 22.7% and the net income before income taxes of
$68.1 million for 2017, due to higher a proportion of exempt income and income
subject to preferential rates.
Comparison of years ended December
31, 2016 and 2015
Income
tax expense was $26.0 million, compared to an income tax benefit of $17.6
million for 2015, reflecting the effective income tax rate of 30.5% and the net
income before income taxes of $85.2 million.
Business Segments
Oriental segregates its businesses into the following major
reportable segments: Banking, Wealth Management, 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 Oriental’s organization, nature of its products, distribution channels
and economic characteristics of the products were also considered in the
determination of the reportable segments. Oriental 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. Oriental’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. Following are the
results of operations and the selected financial information by operating
segment for the years ended December 31, 2017, 2016 and 2015.
|
|
Year Ended December 31,
2017
|
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
|
(In thousands)
|
|
Interest income
|
$
|
311,503
|
|
$
|
53
|
|
$
|
34,091
|
|
$
|
345,647
|
|
$
|
-
|
|
$
|
345,647
|
|
Interest expense
|
|
(26,308)
|
|
|
-
|
|
|
(15,167)
|
|
|
(41,475)
|
|
|
-
|
|
|
(41,475)
|
|
Net interest income
|
|
285,195
|
|
|
53
|
|
|
18,924
|
|
|
304,172
|
|
|
-
|
|
|
304,172
|
|
Provision for
loan and lease losses
|
|
(113,108)
|
|
|
-
|
|
|
(31)
|
|
|
(113,139)
|
|
|
-
|
|
|
(113,139)
|
|
Non-interest income
|
|
45,102
|
|
|
26,069
|
|
|
7,516
|
|
|
78,687
|
|
|
-
|
|
|
78,687
|
|
Non-interest expenses
|
|
(178,540)
|
|
|
(17,830)
|
|
|
(5,261)
|
|
|
(201,631)
|
|
|
-
|
|
|
(201,631)
|
|
Intersegment revenue
|
|
1,604
|
|
|
-
|
|
|
748
|
|
|
2,352
|
|
|
(2,352)
|
|
|
-
|
|
Intersegment expenses
|
|
(748)
|
|
|
(1,137)
|
|
|
(467)
|
|
|
(2,352)
|
|
|
2,352
|
|
|
-
|
|
Income before income taxes
|
$
|
39,505
|
|
$
|
7,155
|
|
$
|
21,429
|
|
$
|
68,089
|
|
$
|
-
|
|
$
|
68,089
|
|
Income tax expense
|
|
15,407
|
|
|
2,790
|
|
|
(2,754)
|
|
|
15,443
|
|
|
-
|
|
|
15,443
|
|
Net income
|
$
|
24,098
|
|
$
|
4,365
|
|
$
|
24,183
|
|
$
|
52,646
|
|
$
|
-
|
|
$
|
52,646
|
|
Total assets
|
$
|
5,597,077
|
|
$
|
25,980
|
|
$
|
1,536,417
|
|
$
|
7,159,474
|
|
$
|
(970,421)
|
|
$
|
6,189,053
|
|
|
Year Ended December 31,
2016
|
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
|
(In thousands)
|
|
Interest income
|
$
|
321,868
|
|
$
|
65
|
|
$
|
34,659
|
|
$
|
356,592
|
|
$
|
-
|
|
$
|
356,592
|
|
Interest expense
|
|
(27,838)
|
|
|
-
|
|
|
(29,327)
|
|
|
(57,165)
|
|
|
-
|
|
|
(57,165)
|
|
Net interest income
|
|
294,030
|
|
|
65
|
|
|
5,332
|
|
|
299,427
|
|
|
-
|
|
|
299,427
|
|
Provision for loan and lease losses
|
|
(65,076)
|
|
|
-
|
|
|
-
|
|
|
(65,076)
|
|
|
-
|
|
|
(65,076)
|
|
Non-interest income (loss)
|
|
35,587
|
|
|
26,788
|
|
|
4,444
|
|
|
66,819
|
|
|
-
|
|
|
66,819
|
|
Non-interest expenses
|
|
(193,156)
|
|
|
(17,443)
|
|
|
(5,391)
|
|
|
(215,990)
|
|
|
-
|
|
|
(215,990)
|
|
Intersegment revenue
|
|
1,521
|
|
|
-
|
|
|
883
|
|
|
2,404
|
|
|
(2,404)
|
|
|
-
|
|
Intersegment expenses
|
|
(883)
|
|
|
(1,108)
|
|
|
(413)
|
|
|
(2,404)
|
|
|
2,404
|
|
|
-
|
|
Income before income taxes
|
$
|
72,023
|
|
$
|
8,302
|
|
$
|
4,855
|
|
$
|
85,180
|
|
$
|
-
|
|
$
|
85,180
|
|
Income tax expense
|
|
28,089
|
|
|
3,238
|
|
|
(5,333)
|
|
|
25,994
|
|
|
-
|
|
|
25,994
|
|
Net income
|
$
|
43,934
|
|
$
|
5,064
|
|
$
|
10,188
|
|
$
|
59,186
|
|
$
|
-
|
|
$
|
59,186
|
|
Total assets
|
$
|
5,584,866
|
|
$
|
23,315
|
|
$
|
1,837,514
|
|
$
|
7,445,695
|
|
$
|
(943,871)
|
|
$
|
6,501,824
|
|
|
Year Ended December 31,
2015
|
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
|
(In thousands)
|
|
Interest income
|
$
|
367,620
|
|
$
|
95
|
|
$
|
38,853
|
|
$
|
406,568
|
|
$
|
-
|
|
$
|
406,568
|
|
Interest expense
|
|
(28,425)
|
|
|
-
|
|
|
(40,771)
|
|
|
(69,196)
|
|
|
-
|
|
|
(69,196)
|
|
Net interest income
|
|
339,195
|
|
|
95
|
|
|
(1,918)
|
|
|
337,372
|
|
|
-
|
|
|
337,372
|
|
Provision for
loan and lease losses
|
|
(161,501)
|
|
|
-
|
|
|
-
|
|
|
(161,501)
|
|
|
-
|
|
|
(161,501)
|
|
Non-interest income
|
|
24,004
|
|
|
28,288
|
|
|
284
|
|
|
52,576
|
|
|
-
|
|
|
52,576
|
|
Non-interest expenses
|
|
(219,519)
|
|
|
(22,564)
|
|
|
(6,422)
|
|
|
(248,505)
|
|
|
-
|
|
|
(248,505)
|
|
Intersegment revenue
|
|
1,427
|
|
|
-
|
|
|
948
|
|
|
2,375
|
|
|
(2,375)
|
|
|
-
|
|
Intersegment expenses
|
|
(948)
|
|
|
(1,027)
|
|
|
(400)
|
|
|
(2,375)
|
|
|
2,375
|
|
|
-
|
|
Income before income taxes
|
$
|
(17,342)
|
|
$
|
4,792
|
|
$
|
(7,508)
|
|
$
|
(20,058)
|
|
$
|
-
|
|
$
|
(20,058)
|
|
Income tax expense
|
|
(6,763)
|
|
|
1,869
|
|
|
(12,660)
|
|
|
(17,554)
|
|
|
-
|
|
|
(17,554)
|
|
Net income
|
$
|
(10,579)
|
|
$
|
2,923
|
|
$
|
5,152
|
|
$
|
(2,504)
|
|
$
|
-
|
|
$
|
(2,504)
|
|
Total assets
|
$
|
5,867,874
|
|
$
|
22,349
|
|
$
|
2,126,921
|
|
$
|
8,017,144
|
|
$
|
(917,995)
|
|
$
|
7,099,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of years ended
December 31, 2017 and 2016
Banking
Oriental's
banking segment net income before taxes decreased $32.5 million to $39.5
million, reflecting:
·
A decrease in
net interest income by $8.8 million, mainly from the acquired BBVAPR and
Eurobank loan portfolios as such loans continue to be repaid;
·
The special
provision for loan and lease losses of $32.4 million related to hurricanes Irma
and Maria;
·
An increase
in the provision for loan and lease losses, excluding the aforementioned
special hurricane provision, of $15.6 million, which includes $4.3 million
recorded to charge-off the loss on sale of a municipal loan and another
provision of $5.9 million recorded for the general allowance on the municipal
loan portfolio during the second quarter of 2017;
·
Higher
non-interest income by $9.5 million, reflecting the termination of the FDIC
shared-loss agreement in the first quarter of 2017; and
·
Lower non-interest
expenses by $14.6 million mainly as a result of lower losses on the sale of
foreclosed real estate and other repossessed assets by $5.6 million, lower
insurance expenses by $3.9 million, lower loan servicing and clearing expenses
by $3.6 million, and to lower credit related expenses by $2.3 million.
Wealth
Management
Wealth management segment revenue, which consists of commissions and fees from
fiduciary activities, and securities brokerage and insurance activities,
decreased $1.1 million to $7.2 million mainly due to lower activity levels in
the third quarter of 2017 related to hurricanes Irma and Maria.
Treasury
Treasury
segment net income before taxes, which consists of Oriental's asset/liability
management activities, such as purchase and sale of investment securities,
interest rate risk management, derivatives, and borrowings, increased to $21.4
million, compared to $4.9 million, reflecting:
·
Lower
interest expenses on securities sold under agreements to repurchase as a result
of (i) the repayment at maturity of a $232.0 million repurchase agreement at
4.78% in March 2017, and (ii) the unwinding of $180.0 million repurchase
agreements during 2017; and
·
The sale of
$166.0 million mortgage-backed securities, generating a gain of $6.9 million
during 2017.
Comparison of year ended December 31,
2016 and 2015
Banking
Oriental's
banking segment net income before taxes increased $89.4 million 2016,
reflecting:
·
A decrease in net interest income by $45.2 million, mainly from
the acquired BBVAPR and Eurobank loan portfolios as such loans continue to be
repaid and a decrease of $15.3 million in cost recoveries on acquired
loans;
·
A decrease in provision for loan and lease losses of 59.7% or
$96.4 million. During 2015,
Oriental changed to non-accrual status the PREPA line of credit and recorded a
$53.3 million provision for loan and lease losses related thereto. In addition,
in 2015 the Company recognized a provision for loan and lease losses of $32.9
million related to the sale of certain non-performing acquired commercial
loans;
·
Higher
non-interest income by $11.7 million, reflecting the expiration of the FDIC
commercial and non-single family loans loss share coverage at June 30, 2015,
decreasing the FDIC shared-loss expense in 2016 to $13.6 million as compared to
$42.8 million; and
·
Lower non-interest expense by $26.3 million, primarily reflecting a
decrease in foreclosure,
repossession and other real estate expenses of $21.8 million as a result of the
bulk sale of non-performing assets in 2015. The year 2015 also included a $9.1
million increase in other real estate owned and other mortgage properties
markdowns, as part of 2015 de-risking efforts.
Wealth Management
Wealth management revenue increased $3.5 million, reflecting lower non-interest
expenses by $5.1 million, mainly due to a payment of $2.1 million required by
the broker-dealer's regulator during 2015 and a reduction in compensation expense
from lower commissions as a result of lower brokerage activity.
Treasury
Treasury segment net income before taxes
increased to $4.9 million, compared to a loss of $7.5 million, refecting:
·
Lower interest expenses on repurchases agreements and other borrowings
of $14.3 million, mainly from the partial unwinding of a repurchase agreement
amounting to $268.0 million, which carried a cost of 4.78%, and the repayment
of $227.0 million in short term FHLB advances at maturity; and
·
Higher
non-interest income as Oriental recovered $5.0 million in 2016 from a loss
related to a private label collateralized mortgage obligation.
ANALYSIS
OF FINANCIAL CONDITION
Assets Owned
At December 31, 2017, Oriental’s total assets amounted to $6.189 billion
representing a decrease of 4.8% when compared to $6.502 billion at December 31,
2016. This reduction is attributable to a decrease in the investment portfolio
of $196.5 million, a decrease in the loan portfolio of $91.4 million and a
decrease in cash and due from banks of $25.2 million.
Oriental's investment portfolio decreased 14.4% to $1.166 billion at
December 31, 2017, mainly attributed to the sale of $166.0 million
mortgage-backed securities available-for-sale during the second quarter of
2017, and to paydowns in the investment securities held-to-maturity portfolio
of $88.7 million.
Oriental’s loan portfolio is comprised of residential mortgage loans,
commercial loans collateralized by mortgages on real estate located in Puerto
Rico, other commercial and industrial loans, consumer loans, and auto loans. At
December 31, 2017, Oriental’s loan portfolio decreased 2.2%. Our loan portfolio
is transitioning as originated loans grow at a slower pace than acquired loans
decrease due to repayments and maturities. The BBVAPR acquired loan portfolio
decreased $182.0 million from December 31, 2016 to $825.9 million at December
31, 2017. The Eurobank acquired loan portfolio decreased $35.3 million from
December 31, 2016 to $99.3 million at December 31, 2017.
Cash and due from banks decreased 4.9% to $485.2 million, due to the
repayment of repurchase agreements which were cancelled or matured during 2017.
Accrued income receivable increased by $29.7 million mainly due to
interest accrued but not yet collected resulting from the loan payment
moratorium.
Financial Assets Managed
Oriental’s
financial assets include those managed by Oriental’s trust division, retirement
plan administration subsidiary, and assets gathered by its broker-dealer and
insurance subsidiaries. Oriental’s trust division offers various types of
individual retirement accounts ("IRAs") and manages 401(k) and Keogh
retirement plans and custodian and corporate trust accounts, while the
retirement plan administration subsidiary, OPC, manages private retirement
plans. At December 31, 2017, total assets managed by Oriental’s trust division
and OPC amounted to $3.040 billion, compared to $2.850 billion at December 31,
2016. Oriental Financial Services offers a wide array of investment
alternatives to its client base, such as tax-advantaged fixed income
securities, mutual funds, stocks, bonds and money management wrap-fee programs.
At December 31, 2017, total assets gathered by Oriental Financial Services and
Oriental Insurance from its customer investment accounts amounted to $2.250
billion, compared to $2.351 billion at December 31, 2016. Changes in trust and
broker-dealer related assets primarily reflect changes in portfolio balances
and differences in market values.
Goodwill
Goodwill recorded in connection with the BBVAPR Acquisition and
the FDIC-assisted Eurobank acquisition is not amortized to expense, but is
tested at least annually for impairment. A quantitative annual impairment test
is not required if, based on a qualitative analysis, Oriental determines that
the existence of events and circumstances indicate that it is more likely than
not that goodwill is not impaired. Oriental completes its annual goodwill
impairment test as of October 31 of each year. Oriental tests for impairment
by first allocating its goodwill and other assets and liabilities, as
necessary, to defined reporting units. A fair value is then determined for each
reporting unit. If the fair values of the reporting units exceed their book
values, no write-down of the recorded goodwill is necessary. If the fair values
are less than the book values, an additional valuation procedure is necessary
to assess the proper carrying value of the goodwill.
Reporting unit valuation is inherently subjective, with a number
of factors based on assumptions and management judgments or estimates. Actual
values may differ significantly from such estimates. Among these are future
growth rates for the reporting units, selection of comparable market
transactions, discount rates and earnings capitalization rates. Changes in
assumptions and results due to economic conditions, industry factors, and reporting
unit performance and cash flow projections could result in different
assessments of the fair values of reporting units and could result in
impairment charges. If an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount, an interim impairment test is required.
Relevant events and circumstances for evaluating whether it is
more likely than not that the fair value of a reporting unit is less than its
carrying amount may include macroeconomic conditions (such as a further
deterioration of the Puerto Rico economy or the liquidity for Puerto Rico
securities or loans secured by assets in Puerto Rico), adverse changes in legal
factors or in the business climate, adverse actions by a regulator,
unanticipated competition, the loss of key employees, or similar events.
Oriental’s loan portfolio, which is the largest component of its
interest-earning assets, is concentrated in Puerto Rico and is directly
affected by adverse local economic and fiscal conditions. Such conditions have
generally affected the market demand for non-conforming loans secured by assets
in Puerto Rico and, therefore, affect the valuation of Oriental’s assets.
As of December 31, 2017, Oriental had $86.1 million of goodwill
allocated as follows: $84.1 million to the Banking unit and $2.0 million to the
Wealth Management unit. During the last quarter of 2017, based on its annual
goodwill impairment test, Oriental determined that the Banking unit failed step
one of the two-step impairment test and that the Wealth Management unit passed
such step. As a result of step one, the Banking unit’s adjusted net book value
exceeded its fair value by approximately $204.2 million, or 22%. Accordingly,
Oriental proceeded to perform step two of the analysis. Based on the results of
step two, Oriental determined that the carrying value of the goodwill allocated
to the Banking unit was not impaired as of the valuation date. During the year
ended December 31, 2017, Oriental performed an assessment of events or
circumstances that could trigger reductions in the book value of the goodwill.
Based on this assessment, no events were identified that triggered changes in
the book value of goodwill at December 31, 2017. As indicated in Note 2 of the
consolidated financial statements, during the month of September Hurricanes
Irma and Maria made landfall and subsequently caused extensive destruction in
Puerto Rico, disrupting the markets in which Oriental does business. The
hurricanes have and may continue to impact Oriental’s financial results, which
may have an effect on Oriental’s estimated fair value. However, Oriental has
incorporated this into the step two analysis and determined, based on the
information currently available, that there is no indication of impairment of
goodwill. Oriental will continue monitoring the impact of the hurricanes as new
information becomes available.
|
TABLE 4 -
ASSETS SUMMARY AND COMPOSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
Variance
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
887,779
|
|
$
|
1,025,370
|
|
-13.4%
|
|
Obligations of US government-sponsored agencies
|
|
2,879
|
|
|
3,884
|
|
-25.9%
|
|
US Treasury securities
|
|
10,163
|
|
|
49,054
|
|
-79.3%
|
|
CMOs issued by US government-sponsored agencies
|
|
80,071
|
|
|
101,831
|
|
-21.4%
|
|
GNMA certificates
|
|
167,338
|
|
|
165,235
|
|
1.3%
|
|
Puerto Rico government and public instrumentalities
|
|
2,093
|
|
|
4,073
|
|
-48.6%
|
|
FHLB stock
|
|
13,995
|
|
|
10,793
|
|
29.7%
|
|
Other debt securities
|
|
1,538
|
|
|
1,921
|
|
-19.9%
|
|
Other investments
|
|
194
|
|
|
350
|
|
-44.6%
|
|
Total investments
|
|
1,166,050
|
|
|
1,362,511
|
|
-14.4%
|
|
Loans
|
|
4,056,329
|
|
|
4,147,692
|
|
-2.2%
|
|
Total investments and loans
|
|
5,222,379
|
|
|
5,510,203
|
|
-5.2%
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks (including restricted cash)
|
|
481,212
|
|
|
507,863
|
|
-5.2%
|
|
Money market investments
|
|
7,021
|
|
|
5,606
|
|
25.2%
|
|
FDIC indemnification asset
|
|
-
|
|
|
14,411
|
|
-100.0%
|
|
Foreclosed real estate
|
|
44,174
|
|
|
47,520
|
|
-7.0%
|
|
Accrued interest receivable
|
|
49,969
|
|
|
20,227
|
|
147.0%
|
|
Deferred tax asset, net
|
|
127,421
|
|
|
124,200
|
|
2.6%
|
|
Premises and equipment, net
|
|
67,860
|
|
|
70,407
|
|
-3.6%
|
|
Servicing assets
|
|
9,821
|
|
|
9,858
|
|
-0.4%
|
|
Derivative assets
|
|
771
|
|
|
1,330
|
|
-42.0%
|
|
Goodwill
|
|
86,069
|
|
|
86,069
|
|
0.0%
|
|
Other assets and customers' liability on acceptances
|
|
92,356
|
|
|
104,130
|
|
-11.3%
|
|
Total other assets
|
|
966,674
|
|
|
991,621
|
|
-2.5%
|
|
Total assets
|
$
|
6,189,053
|
|
$
|
6,501,824
|
|
-4.8%
|
|
Investment portfolio composition:
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
|
76.1%
|
|
|
75.2%
|
|
|
|
Obligations of US government-sponsored agencies
|
|
0.2%
|
|
|
0.3%
|
|
|
|
US Treasury securities
|
|
0.9%
|
|
|
3.6%
|
|
|
|
CMOs issued by US government-sponsored agencies
|
|
6.9%
|
|
|
7.5%
|
|
|
|
GNMA certificates
|
|
14.4%
|
|
|
12.1%
|
|
|
|
Puerto Rico government and public instrumentalities
|
|
0.2%
|
|
|
0.3%
|
|
|
|
FHLB stock
|
|
1.2%
|
|
|
0.8%
|
|
|
|
Other debt securities and other investments
|
|
0.1%
|
|
|
0.2%
|
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
TABLE 5 —
LOANS RECEIVABLE COMPOSITION
|
|
|
December 31
|
|
Variance
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(In thousands)
|
|
|
|
Originated and other loans and leases held for
investment:
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
683,607
|
|
$
|
721,494
|
|
-5.3%
|
|
Commercial
|
|
1,307,261
|
|
|
1,277,866
|
|
2.3%
|
|
Consumer
|
|
330,039
|
|
|
290,515
|
|
13.6%
|
|
Auto and leasing
|
|
883,985
|
|
|
756,395
|
|
16.9%
|
|
|
|
3,204,892
|
|
|
3,046,270
|
|
5.2%
|
|
Allowance for loan and lease losses on originated and
other loans and leases
|
|
(92,718)
|
|
|
(59,300)
|
|
-56.4%
|
|
|
|
3,112,174
|
|
|
2,986,970
|
|
4.2%
|
|
Deferred loan costs, net
|
|
6,695
|
|
|
5,766
|
|
16.1%
|
|
Total originated and other loans loans held for
investment, net
|
|
3,118,869
|
|
|
2,992,736
|
|
4.2%
|
|
Acquired loans:
|
|
|
|
|
|
|
|
|
Acquired BBVAPR loans:
|
|
|
|
|
|
|
|
|
Accounted for under ASC 310-20 (Loans with revolving
feature and/or
|
|
|
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
|
|
|
Commercial
|
|
4,380
|
|
|
5,562
|
|
-21.3%
|
|
Consumer
|
|
28,915
|
|
|
32,862
|
|
-12.0%
|
|
Auto
|
|
21,969
|
|
|
53,026
|
|
-58.6%
|
|
|
|
55,264
|
|
|
91,450
|
|
-39.6%
|
|
Allowance for loan and lease losses on acquired BBVAPR loans
accounted for under ASC 310-20
|
|
(3,862)
|
|
|
(4,300)
|
|
10.2%
|
|
|
|
51,402
|
|
|
87,150
|
|
-41.0%
|
|
Accounted for under ASC 310-30 (Loans acquired with
deteriorated
|
|
|
|
|
|
|
|
|
credit quality, including those by analogy)
|
|
|
|
|
|
|
|
|
Mortgage
|
|
532,053
|
|
|
569,253
|
|
-6.5%
|
|
Commercial
|
|
243,092
|
|
|
292,564
|
|
-16.9%
|
|
Consumer
|
|
1,431
|
|
|
4,301
|
|
-66.7%
|
|
Auto
|
|
43,696
|
|
|
85,676
|
|
-49.0%
|
|
|
|
820,272
|
|
|
951,794
|
|
-13.8%
|
|
Allowance for loan and lease losses on acquired BBVAPR
loans accounted for under ASC 310-30
|
|
(45,755)
|
|
|
(31,056)
|
|
-47.3%
|
|
|
|
774,517
|
|
|
920,738
|
|
-15.9%
|
|
Total acquired BBVAPR loans, net
|
|
825,919
|
|
|
1,007,888
|
|
-18.1%
|
|
Acquired Eurobank loans:
|
|
|
|
|
|
|
|
|
Loans secured by 1-4 family residential properties
|
|
69,538
|
|
|
73,018
|
|
-4.8%
|
|
Commercial
|
|
53,793
|
|
|
81,460
|
|
-34.0%
|
|
Consumer
|
|
1,112
|
|
|
1,372
|
|
-19.0%
|
|
|
|
124,443
|
|
|
155,850
|
|
-20.2%
|
|
Allowance for loan and lease losses on Eurobank loans
|
|
(25,174)
|
|
|
(21,281)
|
|
-18.3%
|
|
Total acquired Eurobank loans, net
|
|
99,269
|
|
|
134,569
|
|
-26.2%
|
|
Total acquired loans, net
|
|
925,188
|
|
|
1,142,457
|
|
-19.0%
|
|
Total held for investment, net
|
|
4,044,057
|
|
|
4,135,193
|
|
-2.2%
|
|
Mortgage loans held for sale
|
|
12,272
|
|
|
12,499
|
|
-1.8%
|
|
Total loans, net
|
$
|
4,056,329
|
|
$
|
4,147,692
|
|
-2.2%
|
Oriental’s loan
portfolio is composed of two segments, loans initially accounted for under the
amortized cost method (referred to as "originated and other" loans)
and loans acquired (referred to as "acquired" loans). Acquired loans
are further segregated between acquired BBVAPR loans and acquired Eurobank
loans. Acquired Eurobank loans were purchased subject to loss-sharing
agreements with the FDIC, which were terminated on
February 6, 2017.
As shown in Table 5 above, total loans, net, amounted
to $4.056 billion at December 31, 2017 and $4.148 billion at December 31, 2016.
Oriental’s originated and other loans held-for-investment portfolio composition
and trends were as follows:
·
Mortgage loan portfolio amounted to $683.6 million (21.3% of the
gross originated loan portfolio) compared to $721.5 million (23.7% of the gross
originated loan portfolio) at December 31, 2016. Mortgage loan production
totaled $137.8 million for the year December 31, 2017, which represents a
decrease of 33.8% from $208.2 million in 2016. Mortgage loans included
delinquent loans in the GNMA buy-back option program amounting to $8.3 million
and $9.7 million at December 31, 2017 and 2016, respectively. 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.
·
Commercial loan portfolio amounted to $1.307 billion (40.8% of
the gross originated loan portfolio) compared to $1.278 billion (42.0% of the
gross originated loan portfolio) at December 31, 2016. Commercial loan
production, including US Loan Programs production of $39.4 million, increased
1.8% to $300.2 million for the year ended December 31, 2017, from $295.0
million in 2016.
·
Consumer loan portfolio amounted to $330.0 million (10.3% of the
gross originated loan portfolio) compared to $290.5 million (9.5% of the gross
originated loan portfolio) at December 31, 2016. Consumer loan production
decreased 7.0% to $148.6 million for the year ended December 31, 2017 from $159.8
million in 2016.
·
Auto and leasing portfolio amounted to $884.0 million (27.6% of
the gross originated loan portfolio) compared to $756.4 million (24.8% of the
gross originated loan portfolio) at December 31, 2016. Auto and leasing
production increased by 16.3% to $331.2 million for the year ended December 31,
2017 compared to $284.8 million in 2016.
The following table summarizes
the remaining contractual maturities of Oriental’s total gross non-covered
loans, excluding loans accounted for under ASC 310-30, segmented to reflect
cash flows as of December 31, 2017. Contractual maturities do not necessarily
reflect the period of resolution of a loan, considering prepayments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
|
|
|
|
One Year or Less
|
From One to
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years
|
|
After Five Years
|
|
|
|
Balance Outstanding at
December 31, 2016
|
|
|
|
|
Fixed Interest Rates
|
|
|
Variable Interest Rates
|
|
|
Fixed Interest Rates
|
|
|
Variable Interest Rates
|
|
|
(Dollars in thousands)
|
|
Originated and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
683,607
|
|
$
|
2,732
|
|
$
|
11,040
|
|
$
|
-
|
|
$
|
669,835
|
|
$
|
-
|
|
Commercial
|
|
1,307,261
|
|
|
728,264
|
|
|
487,547
|
|
|
-
|
|
|
91,450
|
|
|
-
|
|
Consumer
|
|
330,039
|
|
|
36,060
|
|
|
232,679
|
|
|
-
|
|
|
61,300
|
|
|
-
|
|
Auto and leasing
|
|
883,985
|
|
|
2,847
|
|
|
407,809
|
|
|
-
|
|
|
473,329
|
|
|
-
|
|
Total
|
$
|
3,204,892
|
|
|
769,903
|
|
|
1,139,075
|
|
|
-
|
|
|
1,295,914
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired loans accounted under ASC 310-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
2,940
|
|
|
2,940
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial secured by real estate
|
|
1,440
|
|
|
1,299
|
|
|
141
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consumer
|
|
28,915
|
|
|
28,915
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Auto
|
|
21,969
|
|
|
7,128
|
|
|
14,841
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
55,264
|
|
$
|
40,282
|
|
$
|
14,982
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
TABLE 6 —
HIGHER RISK RESIDENTIAL MORTGAGE LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
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
|
$
|
9,209
|
|
$
|
291
|
|
3.16%
|
|
$
|
9,560
|
|
$
|
461
|
|
4.82%
|
|
$
|
70,475
|
|
$
|
1,606
|
|
2.28%
|
|
90 - 119 days
|
|
593
|
|
|
27
|
|
4.55%
|
|
|
136
|
|
|
6
|
|
4.41%
|
|
|
1,556
|
|
|
66
|
|
4.24%
|
|
120 - 179 days
|
|
21
|
|
|
2
|
|
9.52%
|
|
|
-
|
|
|
-
|
|
0.00%
|
|
|
326
|
|
|
14
|
|
4.29%
|
|
180 - 364 days
|
|
69
|
|
|
9
|
|
13.04%
|
|
|
-
|
|
|
-
|
|
0.00%
|
|
|
1,069
|
|
|
67
|
|
6.27%
|
|
365+ days
|
|
354
|
|
|
57
|
|
16.10%
|
|
|
2,435
|
|
|
360
|
|
14.78%
|
|
|
8,380
|
|
|
702
|
|
8.38%
|
|
Total
|
$
|
10,246
|
|
$
|
386
|
|
3.77%
|
|
$
|
12,131
|
|
$
|
827
|
|
6.82%
|
|
$
|
81,806
|
|
$
|
2,455
|
|
3.00%
|
|
Percentage of total loans excluding
acquired loans accounted for under ASC 310-30
|
|
0.31%
|
|
|
|
|
|
|
|
0.37%
|
|
|
|
|
|
|
|
2.51%
|
|
|
|
|
|
|
Refinanced or Modified Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
$
|
1,970
|
|
$
|
216
|
|
10.96%
|
|
$
|
535
|
|
$
|
58
|
|
10.84%
|
|
$
|
16,149
|
|
$
|
1,283
|
|
7.94%
|
|
Percentage of Higher-Risk Loan
Category
|
|
19.23%
|
|
|
|
|
|
|
|
4.41%
|
|
|
|
|
|
|
|
19.74%
|
|
|
|
|
|
|
Loan-to-Value Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 70%
|
$
|
6,787
|
|
$
|
254
|
|
3.74%
|
|
$
|
762
|
|
$
|
34
|
|
4.46%
|
|
$
|
-
|
|
$
|
-
|
|
-
|
|
70% - 79%
|
|
1,540
|
|
|
95
|
|
6.17%
|
|
|
3,047
|
|
|
162
|
|
5.32%
|
|
|
-
|
|
|
-
|
|
-
|
|
80% - 89%
|
|
515
|
|
|
18
|
|
3.50%
|
|
|
3,194
|
|
|
224
|
|
7.01%
|
|
|
-
|
|
|
-
|
|
-
|
|
90% and over
|
|
1,404
|
|
|
19
|
|
1.35%
|
|
|
5,128
|
|
|
407
|
|
7.94%
|
|
|
81,806
|
|
|
2,455
|
|
3.00%
|
|
|
$
|
10,246
|
|
$
|
386
|
|
3.77%
|
|
$
|
12,131
|
|
$
|
827
|
|
6.82%
|
|
$
|
81,806
|
|
$
|
2,455
|
|
3.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Loans may be included in more than one higher-risk loan
category and excludes acquired residential mortgage loans.
|
|
Deposits from the Puerto Rico government
totaled $153.1 million at December 31, 2017. The following table includes
Oriental's lending and investment exposure to the Puerto Rico government,
including its agencies, instrumentalities, municipalities and public
corporations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND
SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
Loans and Securities:
|
|
|
Carrying Value
|
|
|
Less than 1 Year
|
|
|
1 to 3 Years
|
|
|
More than 3 Years
|
|
Comments
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Municipalities
|
|
$
|
145,167
|
|
$
|
5,272
|
|
$
|
95,685
|
|
$
|
44,210
|
|
|
Secured by ad valorem taxation, without limitation as to rate or
amount, on all taxable property within the issuing municipalities. The good
faith, credit and unlimited taxing power of each issuing
municipality are pledged for the payment of its general
obligations.
|
|
Investment securities
|
|
|
2,093
|
|
|
2,093
|
|
|
-
|
|
|
-
|
|
|
The remaining position is a PRHTA security maturing July 1, 2018
issued for P3 Project Teodoro Moscoso Bridge operated by private companies
that have the payment obligation.
|
|
Total
|
|
$
|
147,260
|
|
$
|
7,365
|
|
$
|
95,685
|
|
$
|
44,210
|
|
|
|
|
|
Credit Risk Management
Allowance for Loan and Lease
Losses
Oriental 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.
Oriental’s allowance for loan and lease losses ("ALLL") policy provides
for a detailed quarterly analysis of probable losses. At December 31, 2017,
Oriental’s allowance for loan and lease losses amounted to $167.5 million, a $51.6
million increase from $115.9 million at December 31, 2016.
As discussed in Note 2 to the consolidated
financial statements, during 2017, hurricanes Irma and Maria caused
catastrophic damages throughout Puerto Rico. Although the effect of the
hurricanes on Oriental's loan portfolio is difficult to predict at this time,
management performed an evaluation of the loan portfolios in order to assess
the impact on repayment sources and underlying collateral that could result in
additional losses.
For the commercial portfolio, the
framework for the analysis was based on our current ALLL methodology with
additional considerations according to the estimated impact categorized as low,
medium or high. From this impact assessment, additional reserve levels were
estimated by increasing default probabilities (“PD”) and loss given default
expectations (“LGD”) of each allowance segment.
As part of the process, Oriental
contacted its clients to evaluate the impact of the hurricanes on their
business operations and collateral. The impact was then categorized as follows:
(i) low risk, for clients that had no business impact or relatively
insignificant impact; (ii) medium risk, for clients that had a business impact
on their primary or secondary sources of repayment, but had adequate cash flow
to cover operations and to satisfy their obligations; or (iii) high risk, for
clients that had potentially significant problems that affected primary,
secondary and tertiary (collateral) sources of repayment. This criterion was
used to model adjusted PDs and LGDs considering internal and external sources
of information available to support our estimation process and output.
During the fourth quarter, Oriental
performed an update of the initial estimate, taking into consideration the most
recent available information gathered through additional visits and interviews
with clients and the economic environment in Puerto Rico.
For the retail portfolios, mortgage,
consumer and auto, the assumptions established in the initial estimate were
based on the historical losses of each ALLL segment and then further adjusted
based on parameters used as key risk indicators, such as the industry of
employment for all portfolios and the location of the collateral for mortgage
loans. During the fourth quarter of 2017, Oriental performed additional
procedures to evaluate the reasonability of the initial estimate based on the
payment experience % of borrowers for which the deferral period expired. The
analysis took into consideration historical payment behavior and loss
experience of borrowers (PDs and LGDs) of each portfolio segment to develop a
range of estimated potential losses. Management understands that this approach
is reasonable given the lack of historical information related to the behavior
of local borrowers in such an unprecedented event. The amount used in the
analysis represents the average of potential outcomes of expected losses.
The documentation for the assessments
considers all information available at the moment. Oriental will continue to
assess the impact to our customers and our businesses as a result of the
hurricanes and refine our estimates as more information becomes available.
Based on the analysis above and in
accordance with ASC 450-20-25-2, we have increased our provision for loan
losses during 2017 by $32.4 million in relation to these events. The increase
in the allowance corresponding to our originated loan portfolio was $17.5
million: $3.8 million in mortgage loans, $7.3 million in commercial loans, $1.7
million in consumer loans, and $4.7 million in auto loans. The increase in the
allowance corresponding to our acquired loan portfolio was $14.9 million: $6.7
million in mortgage loans, $7.9 million in commercial loans, and $0.3 million
in auto loans.
The documentation for the assessments
considers all information available at the moment; gathered through visits or
interviews with our clients, inspections of collaterals, identification of most
affected areas and industries. Oriental will continue to assess the impact to
our customers and our businesses as a result of the hurricanes and refine our
estimates as more information becomes available.
Tables 8 through 10 set forth an
analysis of activity in the ALLL and present selected loan loss statistics. In
addition, Table 5 sets forth the composition of the loan portfolio.
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.
Non-performing
Assets
Oriental’s
non-performing assets include non-performing loans and foreclosed real estate
(see Tables 11 and 12). At December 31, 2017 and 2016, Oriental had $99.7
million and $104.1 million, respectively, of non-accrual loans, including
acquired BBVAPR loans accounted for under ASC 310-20 (loans with revolving
feature and/or acquired at a premium).
At December 31,
2017 and 2016, loans whose terms have been extended and which are classified as
troubled-debt restructuring that are not included in non-performing assets
amounted to $109.2 million and $98.1 million, respectively.
Delinquent
residential mortgage loans insured or guaranteed under applicable FHA and VA
programs are classified as non-performing loans when they become 90 days or
more past due, but are not placed in non-accrual status until they become 12
months or more past due, since they are insured loans. Therefore, these loans
are included as non-performing loans but excluded from non-accrual loans.
Acquired loans with credit deterioration
are considered to be performing due to the application of the accretion method
under ASC 310-30, in which these loans will accrete interest income over the
remaining life of the loans using estimated cash flow analyses. Credit related
decreases in expected cash flows, compared to those previously forecasted are
recognized by recording a provision for credit losses on these loans when it is
probable that all cash flows expected at acquisition will not be collected.
At December 31, 2017, Oriental’s
non-performing assets decreased by 0.2% to $156.7 million (2.61% of total
assets, excluding acquired loans with deteriorated credit quality) from $156.9
million (2.88% of total assets, excluding acquired loans with deteriorated
credit quality) at December 31, 2016. Oriental does not expect non-performing
loans to result in significantly higher losses. At December 31, 2017, the
allowance for originated loan and lease losses to non-performing loans coverage
ratio was 87.35% (56.30% at December 31, 2016).
Oriental 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, Oriental has never
been active in negative amortization loans or adjustable rate mortgage loans,
including those with teaser rates.
The following items comprise
non-performing assets:
·
Originated and other loans held
for investment:
Residential 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, except for FHA and
VA insured mortgage loans which are placed in non-accrual when they become 12
months or more past due. At December 31, 2017, Oriental’s originated
non-performing mortgage loans totaled $64.1 million (58.9% of Oriental’s
non-performing loans), a 14.0% decrease from $74.5 million (68.9% of Oriental’s
non-performing loans) at December 31, 2016.
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 December 31, 2017, Oriental’s originated non-performing commercial
loans amounted to $35.3 million (32.42% of Oriental’s non-performing loans), a
78.2% increase from $19.8 million at December 31, 2016 (18.3% of Oriental’s
non-performing loans).
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 December 31, 2017,
Oriental’s originated non-performing consumer loans amounted to $2.6 million
(2.4% of Oriental’s non-performing loans), a 29.5% increase from $2.0 million
at December 31, 2016 (1.8% of Oriental’s non-performing loans).
Auto loans and leases — are placed on non-accrual status when they become
90 days past due, partially written-off to collateral value when payments are
delinquent 120 days, and fully written-off when payments are delinquent 180
days. At December 31, 2017, Oriental’s originated non-performing auto loans and
leases amounted to $4.2 million (3.9% of Oriental’s total non-performing
loans), a decrease of 53.2% from $9.1 million at December 31, 2016 (8.4% of
Oriental’s total non-performing loans).
·
Acquired BBVAPR loans accounted
for under ASC 310-20 (loans with revolving features and/or acquired at
premium):
Commercial revolving lines of credit and credit cards — 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 December 31, 2017,
Oriental’s acquired non-performing commercial lines of credit accounted for
under ASC 310-20 amounted to $1.3 million (1.2% of Oriental’s non-performing
loans), a 10.2% decrease from $1.4 million at December 31, 2016 (1.3% of
Oriental’s non-performing loans).
Consumer revolving 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
December 31, 2017, Oriental’s acquired non-performing consumer lines of credit
and credit cards accounted for under ASC 310-20 totaled $1.4 million (1.2% of
Oriental’s non-performing loans), a 63.6% increase from $828 thousand at
December 31, 2016 (0.8% of Oriental’s non-performing loans).
Auto loans acquired at premium - are placed on non-accrual status when they become 90
days past due, partially written-off to collateral value when payments are
delinquent 120 days, and fully written-off when payments are delinquent 180
days. At December 31, 2017, Oriental’s acquired non-performing auto loans
accounted for under ASC 310-20 totaled $179 thousand (0.2% of Oriental’s
non-performing loans), a 67.6% decrease from $552 thousand at December 31, 2016
(0.5% of Oriental’s non-performing loans).
As a result of the devastation caused by hurricanes Irma and Maria,
Oriental offered an automatic three-month moratorium for the payment due on
auto and personal loans for customers whose payments were not over 89 days past
due at August 31, 2017. These payments, together with any additional accrued
interest, are payable in three installments after the original maturity of the
loans. Residential mortgage loans have the same moratorium, but the payments
subject to the moratorium on non-conforming loans are payable in aggregate as a
balloon payment at the maturity of the loan and on conforming mortgage loans
the repayment terms are established on a case by case basis at the end of the moratorium
period. For credit cards, that were not over 29 days past due at August 31,
2017, the minimum payment amount was waived until December 31, 2017. Oriental
also offered an automatic one-month moratorium for the payment of principal and
interest on commercial loans for customers whose payments were not over 30 days
past due at August 31, 2017, and the flexibility of extending it up to two
additional months, based on the customer's needs. Oriental had approximately 83
thousand loans under the moratorium program amounting to $2.6 billion at December
31, 2017. The level of delinquencies for mortgage and auto loans as of December
31, 2017 was impacted by the loan moratorium. Although the repayment schedule
was modified as part of the moratorium, certain borrowers continued to make
payments, having an impact on the respective delinquency status.
Oriental 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 Oriental’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, PRHFA, conventional loans
guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional
loans sold to FNMA and FHLMC, and conventional loans retained by Oriental. 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
under the credit underwriting guidelines of FHA/VA/FNMA/ FHLMC, and performing
loans not meeting secondary market guidelines processed pursuant Oriental’s
current credit and underwriting guidelines. Oriental 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.
In order to
apply for any of the loan modification programs, if the borrower is active in
Chapter 13 bankruptcy, it must request an authorization from the bankruptcy
trustee to allow for the loan modification. Borrowers with discharged
Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by
designated underwriters for troubled-debt restructuring classification if
Oriental grants a concession for legal or economic reasons due to the debtor’s
financial difficulties.
|
TABLE 8 —
ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Originated and other loans held for
investment
|
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
20,439
|
|
$
|
17,344
|
|
17.8%
|
|
Commercial
|
|
30,258
|
|
|
8,995
|
|
236.4%
|
|
Consumer
|
|
16,454
|
|
|
13,067
|
|
25.9%
|
|
Auto and leasing
|
|
25,567
|
|
|
19,463
|
|
31.4%
|
|
Unallocated allowance
|
|
-
|
|
|
431
|
|
-100.0%
|
|
Total allowance balance
|
$
|
92,718
|
|
$
|
59,300
|
|
56.4%
|
|
Allowance composition:
|
|
|
|
|
|
|
|
|
Mortgage
|
|
22.04%
|
|
|
29.24%
|
|
-24.6%
|
|
Commercial
|
|
32.63%
|
|
|
15.17%
|
|
115.1%
|
|
Consumer
|
|
17.75%
|
|
|
22.04%
|
|
-19.5%
|
|
Auto and leasing
|
|
27.58%
|
|
|
32.82%
|
|
-16.0%
|
|
Unallocated allowance
|
|
0.00%
|
|
|
0.73%
|
|
-100.0%
|
|
|
|
100.00%
|
|
|
100.00%
|
|
|
|
Allowance coverage ratio at end of period applicable to:
|
|
|
|
|
|
|
|
|
Mortgage
|
|
2.99%
|
|
|
2.40%
|
|
24.6%
|
|
Commercial
|
|
2.31%
|
|
|
0.70%
|
|
230.0%
|
|
Consumer
|
|
4.99%
|
|
|
4.50%
|
|
10.9%
|
|
Auto and leasing
|
|
2.89%
|
|
|
2.57%
|
|
12.5%
|
|
Total allowance to total originated loans
|
|
2.89%
|
|
|
1.95%
|
|
48.2%
|
|
Allowance coverage ratio to non-performing loans:
|
|
|
|
|
|
|
|
|
Mortgage
|
|
31.89%
|
|
|
23.28%
|
|
37.0%
|
|
Commercial
|
|
85.83%
|
|
|
45.46%
|
|
88.8%
|
|
Consumer
|
|
639.74%
|
|
|
657.96%
|
|
-2.8%
|
|
Auto and leasing
|
|
604.14%
|
|
|
215.01%
|
|
181.0%
|
|
Total
|
|
87.35%
|
|
|
56.30%
|
|
55.2%
|
|
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE
LOSSES BREAKDOWN (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Acquired BBVAPR loans accounted for
under ASC 310-20
|
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
42
|
|
$
|
169
|
|
-75.1%
|
|
Consumer
|
|
3,225
|
|
|
3,028
|
|
6.5%
|
|
Auto
|
|
595
|
|
|
1,103
|
|
-46.1%
|
|
Total allowance balance
|
$
|
3,862
|
|
$
|
4,300
|
|
-10.2%
|
|
Allowance composition:
|
|
|
|
|
|
|
|
|
Commercial
|
|
1.09%
|
|
|
3.93%
|
|
-72.3%
|
|
Consumer
|
|
83.50%
|
|
|
70.42%
|
|
18.6%
|
|
Auto
|
|
15.41%
|
|
|
25.65%
|
|
-39.9%
|
|
|
|
100.00%
|
|
|
100.00%
|
|
|
|
Allowance coverage ratio at end of period applicable to:
|
|
|
|
|
|
|
|
|
Commercial
|
|
0.96%
|
|
|
3.04%
|
|
-68.4%
|
|
Consumer
|
|
11.15%
|
|
|
9.21%
|
|
21.1%
|
|
Auto
|
|
2.71%
|
|
|
2.08%
|
|
30.3%
|
|
Total allowance to total acquired loans
|
|
6.99%
|
|
|
4.70%
|
|
48.7%
|
|
Allowance coverage ratio to non-performing loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
3.31%
|
|
|
11.94%
|
|
-72.3%
|
|
Consumer
|
|
238.01%
|
|
|
365.70%
|
|
-34.9%
|
|
Auto
|
|
332.40%
|
|
|
199.82%
|
|
66.3%
|
|
Total
|
|
137.73%
|
|
|
153.85%
|
|
-10.5%
|
|
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE
LOSSES BREAKDOWN (CONTINUED)
|
|
|
December 31,
|
|
Variance
|
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Acquired BBVAPR loans accounted for
under ASC 310-30
|
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
14,085
|
|
$
|
2,682
|
|
425.2%
|
|
Commercial
|
|
23,691
|
|
|
23,452
|
|
1.0%
|
|
Consumer
|
|
18
|
|
|
-
|
|
100.0%
|
|
Auto
|
|
7,961
|
|
|
4,922
|
|
61.7%
|
|
Total allowance balance
|
$
|
45,755
|
|
$
|
31,056
|
|
47.3%
|
|
Allowance composition:
|
|
|
|
|
|
|
|
|
Mortgage
|
|
30.78%
|
|
|
8.64%
|
|
256.3%
|
|
Commercial
|
|
51.78%
|
|
|
75.52%
|
|
-31.4%
|
|
Consumer
|
|
0.04%
|
|
|
-0.01%
|
|
-500.0%
|
|
Auto
|
|
17.40%
|
|
|
15.85%
|
|
9.8%
|
|
|
|
100.00%
|
|
|
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Eurobank loans accounted for
under ASC 310-30
|
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
15,187
|
|
$
|
11,947
|
|
27.1%
|
|
Commercial
|
|
9,982
|
|
|
9,328
|
|
7.0%
|
|
Consumer
|
|
5
|
|
|
6
|
|
-16.7%
|
|
Total allowance balance
|
$
|
25,174
|
|
$
|
21,281
|
|
18.3%
|
|
Allowance composition:
|
|
|
|
|
|
|
|
|
Mortgage
|
|
60.33%
|
|
|
56.14%
|
|
7.5%
|
|
Commercial
|
|
39.64%
|
|
|
43.83%
|
|
-9.6%
|
|
Consumer
|
|
0.02%
|
|
|
0.03%
|
|
-33.3%
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
TABLE 9 —
ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
Variance
|
|
|
|
|
2017
|
|
2016
|
|
%
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Originated and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
59,299
|
|
$
|
112,626
|
|
-47.3%
|
|
$
|
51,439
|
|
Provision for loan and lease losses
|
|
79,886
|
|
|
45,058
|
|
77.3%
|
|
|
99,336
|
|
Charge-offs
|
|
(61,856)
|
|
|
(112,497)
|
|
-45.0%
|
|
|
(53,001)
|
|
Recoveries
|
|
15,389
|
|
|
14,113
|
|
9.0%
|
|
|
14,852
|
|
Balance at end of year
|
$
|
92,718
|
|
$
|
59,300
|
|
56.4%
|
|
$
|
112,626
|
|
Acquired loans:
|
|
|
|
|
|
|
|
|
|
|
|
BBVAPR loans
|
|
|
|
|
|
|
|
|
|
|
|
Acquired loans accounted for
under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
4,300
|
|
$
|
5,542
|
|
-22.4%
|
|
$
|
4,597
|
|
Provision for loan and lease losses
|
|
1,847
|
|
|
2,255
|
|
-18.1%
|
|
|
7,469
|
|
Charge-offs
|
|
(4,156)
|
|
|
(5,816)
|
|
-28.5%
|
|
|
(9,345)
|
|
Recoveries
|
|
1,871
|
|
|
2,319
|
|
-19.3%
|
|
|
2,821
|
|
Balance at end of year
|
$
|
3,862
|
|
$
|
4,300
|
|
-10.2%
|
|
$
|
5,542
|
|
Acquired loans accounted for
under ASC 310-30:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
31,056
|
|
$
|
25,785
|
|
20.4%
|
|
$
|
13,481
|
|
Provision for loan and lease losses
|
|
24,681
|
|
|
15,508
|
|
59.2%
|
|
|
16,656
|
|
Loan pools fully charged off
|
|
-
|
|
|
(282)
|
|
-100.0%
|
|
|
(4,352)
|
|
Allowance de-recognition
|
|
(9,982)
|
|
|
(9,955)
|
|
0.3%
|
|
|
-
|
|
Balance at end of period
|
$
|
45,755
|
|
$
|
31,056
|
|
47.3%
|
|
$
|
25,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eurobank loans
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
21,281
|
|
$
|
90,178
|
|
-76.4%
|
|
$
|
64,245
|
|
Provision for loan and lease losses
|
|
6,725
|
|
|
2,255
|
|
198.2%
|
|
|
38,040
|
|
FDIC shared-loss portion on
provision for loan
and lease losses
|
|
-
|
|
|
3,391
|
|
-100.0%
|
|
|
2,503
|
|
Loan pools fully charged off
|
|
-
|
|
|
(134)
|
|
-100.0%
|
|
|
(14,610)
|
|
Allowance de-recognition
|
|
(2,832)
|
|
|
(74,409)
|
|
-96.2%
|
|
|
-
|
|
Balance at end of year
|
$
|
25,174
|
|
$
|
21,281
|
|
18.3%
|
|
$
|
90,178
|
|
TABLE 10
— NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED
FOR UNDER ASC 310-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
Variance
|
|
|
|
|
|
2017
|
|
2016
|
|
%
|
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Originated and other loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
$
|
(6,623)
|
|
$
|
(6,767)
|
|
-2.1%
|
|
$
|
(5,397)
|
|
Recoveries
|
|
585
|
|
|
330
|
|
77.3%
|
|
|
391
|
|
Total
|
|
(6,038)
|
|
|
(6,437)
|
|
-6.2%
|
|
|
(5,006)
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(7,684)
|
|
|
(62,445)
|
|
-87.7%
|
|
|
(5,546)
|
|
Recoveries
|
|
1,281
|
|
|
460
|
|
178.5%
|
|
|
432
|
|
Total
|
|
(6,403)
|
|
|
(61,985)
|
|
-89.7%
|
|
|
(5,114)
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(13,641)
|
|
|
(11,554)
|
|
18.1%
|
|
|
(8,683)
|
|
Recoveries
|
|
1,209
|
|
|
452
|
|
167.5%
|
|
|
871
|
|
Total
|
|
(12,432)
|
|
|
(11,102)
|
|
12.0%
|
|
|
(7,812)
|
|
Auto
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(33,908)
|
|
|
(31,731)
|
|
6.9%
|
|
|
(33,375)
|
|
Recoveries
|
|
12,314
|
|
|
12,871
|
|
-4.3%
|
|
|
13,158
|
|
Total
|
|
(21,594)
|
|
|
(18,860)
|
|
14.5%
|
|
|
(20,217)
|
|
Net credit losses
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
(61,856)
|
|
|
(112,497)
|
|
-45.0%
|
|
|
(53,001)
|
|
Total recoveries
|
|
15,389
|
|
|
14,113
|
|
9.0%
|
|
|
14,852
|
|
Total
|
$
|
(46,467)
|
|
$
|
(98,384)
|
|
-52.8%
|
|
$
|
(38,149)
|
|
Net credit losses to average
loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
0.87%
|
|
|
0.87%
|
|
0.5%
|
|
|
0.65%
|
|
Commercial
|
|
0.51%
|
|
|
4.47%
|
|
-88.6%
|
|
|
0.38%
|
|
Consumer
|
|
4.22%
|
|
|
4.39%
|
|
-3.8%
|
|
|
3.85%
|
|
Auto
|
|
2.64%
|
|
|
2.63%
|
|
0.3%
|
|
|
3.21%
|
|
Total
|
|
1.52%
|
|
|
3.18%
|
|
-52.1%
|
|
|
1.30%
|
|
Recoveries to charge-offs
|
|
24.88%
|
|
|
12.55%
|
|
98.3%
|
|
|
28.02%
|
|
Average originated loans:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
697,873
|
|
|
743,838
|
|
-6.2%
|
|
|
771,322
|
|
Commercial
|
|
1,251,051
|
|
|
1,385,421
|
|
-9.7%
|
|
|
1,336,510
|
|
Consumer
|
|
294,572
|
|
|
253,069
|
|
16.4%
|
|
|
202,971
|
|
Auto
|
|
818,155
|
|
|
716,373
|
|
14.2%
|
|
|
629,910
|
|
Total
|
$
|
3,061,651
|
|
$
|
3,098,701
|
|
-1.2%
|
|
$
|
$2,940,713
|
|
TABLE 10
— NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED
FOR UNDER ASC 310-30 (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Variance
|
|
|
|
|
|
2017
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Acquired loans accounted for under ASC
310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
$
|
(132)
|
|
$
|
(42)
|
|
|
214.3%
|
|
$
|
(42)
|
|
Recoveries
|
|
5
|
|
|
73
|
|
|
-93.2%
|
|
|
31
|
|
Total
|
|
(127)
|
|
|
31
|
|
|
-509.7%
|
|
|
(11)
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(3,048)
|
|
|
(3,619)
|
|
|
-15.8%
|
|
|
(4,755)
|
|
Recoveries
|
|
446
|
|
|
301
|
|
|
48.2%
|
|
|
680
|
|
Total
|
|
(2,602)
|
|
|
(3,318)
|
|
|
-21.6%
|
|
|
(4,075)
|
|
Auto
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(976)
|
|
|
(2,155)
|
|
|
-54.7%
|
|
|
(4,548)
|
|
Recoveries
|
|
1,420
|
|
|
1,945
|
|
|
-27.0%
|
|
|
2,110
|
|
Total
|
|
444
|
|
|
(210)
|
|
|
-311.4%
|
|
|
(2,438)
|
|
Net credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
(4,156)
|
|
|
(5,816)
|
|
|
-28.5%
|
|
|
(9,345)
|
|
Total recoveries
|
|
1,871
|
|
|
2,319
|
|
|
-19.3%
|
|
|
2,821
|
|
Total
|
$
|
(2,285)
|
|
$
|
(3,497)
|
|
|
-34.7%
|
|
$
|
(6,524)
|
|
Net credit losses to average
loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
32.82%
|
|
|
-5.78%
|
|
|
-667.4%
|
|
|
1.31%
|
|
Consumer
|
|
4.49%
|
|
|
5.55%
|
|
|
-19.1%
|
|
|
6.59%
|
|
Auto
|
|
-1.15%
|
|
|
0.28%
|
|
|
-507.8%
|
|
|
1.27%
|
|
Total
|
|
2.36%
|
|
|
2.60%
|
|
|
-9.2%
|
|
|
2.56%
|
|
Recoveries to charge-offs
|
|
45.02%
|
|
|
39.87%
|
|
|
12.9%
|
|
|
30.19%
|
|
Average loans accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
387
|
|
|
536
|
|
|
-27.8%
|
|
|
840
|
|
Consumer
|
|
57,971
|
|
|
59,772
|
|
|
-3.0%
|
|
|
61,842
|
|
Auto
|
|
38,587
|
|
|
74,431
|
|
|
-48.2%
|
|
|
192,058
|
|
Total
|
$
|
96,945
|
|
$
|
134,739
|
|
|
-28.0%
|
|
$
|
254,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 11
— NON-PERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
|
2017
|
|
2016
|
|
(%)
|
|
|
(Dollars in thousands)
|
|
|
|
Non-performing assets:
|
|
|
|
|
|
|
|
|
Non-accruing loans
|
|
|
|
|
|
|
|
|
Troubled-Debt Restructuring loans
|
$
|
25,354
|
|
$
|
32,408
|
|
-21.8%
|
|
Other loans
|
|
74,360
|
|
|
71,941
|
|
3.4%
|
|
Accruing loans
|
|
|
|
|
|
|
|
|
Troubled-Debt Restructuring loans
|
|
6,704
|
|
|
2,706
|
|
147.7%
|
|
Other loans
|
|
2,528
|
|
|
1,067
|
|
136.9%
|
|
Total non-performing loans
|
$
|
108,946
|
|
$
|
108,122
|
|
0.8%
|
|
Foreclosed real estate
|
|
44,174
|
|
|
45,587
|
|
-3.1%
|
|
Other repossessed assets
|
|
3,548
|
|
|
3,224
|
|
10.0%
|
|
|
$
|
156,668
|
|
$
|
156,933
|
|
-0.2%
|
|
Non-performing assets to total assets, excluding acquired
loans with deteriorated credit quality (including those by analogy)
|
|
2.95%
|
|
|
2.88%
|
|
2.4%
|
|
Non-performing assets to total capital
|
|
16.58%
|
|
|
17.05%
|
|
-2.8%
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Interest that would have been recorded in the period if the
loans had not been classified as non-accruing loans
|
$
|
3,181
|
|
$
|
2,917
|
|
$
|
3,118
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 12
— NON-PERFORMING LOANS
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Non-performing loans:
|
|
|
|
|
|
|
|
|
Originated and other loans held for investment
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
64,085
|
|
$
|
74,503
|
|
-14.0%
|
|
Commercial
|
|
35,253
|
|
|
19,786
|
|
78.2%
|
|
Consumer
|
|
2,572
|
|
|
1,986
|
|
29.5%
|
|
Auto and leasing
|
|
4,232
|
|
|
9,052
|
|
-53.2%
|
|
|
|
106,142
|
|
|
105,327
|
|
0.8%
|
|
Acquired loans accounted for under ASC 310-20 (Loans
with
revolving feature and/or acquired at a premium)
|
|
|
|
|
|
|
|
|
Commercial
|
|
1,270
|
|
|
1,415
|
|
-10.2%
|
|
Consumer
|
|
1,355
|
|
|
828
|
|
63.6%
|
|
Auto
|
|
179
|
|
|
552
|
|
-67.6%
|
|
|
|
2,804
|
|
|
2,795
|
|
0.3%
|
|
Total
|
$
|
108,946
|
|
$
|
108,122
|
|
0.8%
|
|
Non-performing loans composition percentages:
|
|
|
|
|
|
|
|
|
Originated loans
|
|
|
|
|
|
|
|
|
Mortgage
|
|
58.7%
|
|
|
68.9%
|
|
|
|
Commercial
|
|
32.4%
|
|
|
18.3%
|
|
|
|
Consumer
|
|
2.4%
|
|
|
1.8%
|
|
|
|
Auto and leasing
|
|
3.9%
|
|
|
8.4%
|
|
|
|
Acquired loans accounted for under ASC 310-20 (Loans
with
revolving feature and/or acquired at a premium)
|
|
|
|
|
|
|
|
|
Commercial
|
|
1.2%
|
|
|
1.3%
|
|
|
|
Consumer
|
|
1.2%
|
|
|
0.8%
|
|
|
|
Auto
|
|
0.2%
|
|
|
0.5%
|
|
|
|
Total
|
|
100.0%
|
|
|
100.0%
|
|
|
|
Non-performing loans to:
|
|
|
|
|
|
|
|
|
Total loans, excluding loans accounted for
under ASC 310-30 (including those by analogy)
|
|
3.34%
|
|
|
3.45%
|
|
-3.2%
|
|
Total assets, excluding loans accounted for
under ASC 310-30 (including those by analogy)
|
|
2.05%
|
|
|
1.99%
|
|
3.0%
|
|
Total capital
|
|
11.53%
|
|
|
11.75%
|
|
-1.9%
|
|
Non-performing loans with partial charge-offs to:
|
|
|
|
|
|
|
|
|
Total loans, excluding loans accounted for
under ASC 310-30 (including those by analogy)
|
|
1.15%
|
|
|
1.17%
|
|
-1.71%
|
|
Non-performing loans
|
|
34.49%
|
|
|
34.09%
|
|
1.2%
|
|
Other non-performing loans ratios:
|
|
|
|
|
|
|
|
|
Charge-off rate on non-performing loans to non-performing
loans
on which charge-offs have been taken
|
|
57.69%
|
|
|
63.58%
|
|
-9.3%
|
|
Allowance for loan and lease losses to non-performing
loans on which no charge-offs have been taken
|
|
134.26%
|
|
|
89.25%
|
|
50.4%
|
|
|
|
|
|
|
|
|
|
FDIC Indemnification Asset
Oriental recorded the FDIC indemnification
asset, measured separately from the covered loans, as part of the Eurobank
FDIC-assisted transaction. On February 6, 2017, the Bank and the FDIC agreed to
terminate the single family and commercial shared-loss agreements related to
the FDIC assisted acquisition.
|
TABLE 13 - ACTIVITY OF FDIC INDEMNIFICATION ASSET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
FDIC indemnification asset:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
14,411
|
|
$
|
22,599
|
|
$
|
97,378
|
|
Shared-loss agreements reimbursements from the FDIC
|
|
-
|
|
|
(1,573)
|
|
|
(55,723)
|
|
Increase in expected credit losses to be
covered under shared-loss agreements, net
|
|
-
|
|
|
3,391
|
|
|
2,503
|
|
FDIC indemnification asset benefit (expense)
|
|
1,403
|
|
|
(8,040)
|
|
|
(36,398)
|
|
Final settlement with FDIC on commercial loans
|
|
-
|
|
|
-
|
|
|
(1,589)
|
|
Net expenses incurred under shared-loss agreements
|
|
-
|
|
|
(1,966)
|
|
|
16,428
|
|
Shared-loss termination settlement
|
|
(15,814)
|
|
|
-
|
|
|
-
|
|
Balance at end of year
|
$
|
-
|
|
$
|
14,411
|
|
$
|
22,599
|
|
TABLE 14 -
ACTIVITY IN THE REMAINING FDIC INDEMNIFICATION ASSET DISCOUNT
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Balance at
beginning of year
|
$
|
8,670
|
|
$
|
4,814
|
|
$
|
21,682
|
|
Amortization
of negative discount
|
|
-
|
|
|
(8,040)
|
|
|
(36,417)
|
|
Impact of
lower projected losses
|
|
-
|
|
|
11,896
|
|
|
19,549
|
|
Shared-loss
termination
|
|
(8,670)
|
|
|
-
|
|
|
-
|
|
Balance at end of year
|
$
|
-
|
|
$
|
8,670
|
|
$
|
4,814
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 15
- LIABILITIES SUMMARY AND COMPOSITION
|
|
|
December 31,
|
|
Variance
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
$
|
969,525
|
|
$
|
848,502
|
|
14.3%
|
|
NOW accounts
|
|
1,069,572
|
|
|
1,091,237
|
|
-2.0%
|
|
Savings and money market accounts
|
|
1,251,396
|
|
|
1,196,231
|
|
4.6%
|
|
Certificates of deposit
|
|
1,507,101
|
|
|
1,526,805
|
|
-1.3%
|
|
Total deposits
|
|
4,797,594
|
|
|
4,662,775
|
|
2.9%
|
|
Accrued interest payable
|
|
1,888
|
|
|
1,712
|
|
10.3%
|
|
Total deposits and accrued interest payable
|
|
4,799,482
|
|
|
4,664,487
|
|
2.9%
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
192,869
|
|
|
653,756
|
|
-70.5%
|
|
Advances from FHLB
|
|
99,643
|
|
|
105,454
|
|
-5.5%
|
|
Subordinated capital notes
|
|
36,083
|
|
|
36,083
|
|
0.0%
|
|
Other term notes
|
|
153
|
|
|
61
|
|
150.8%
|
|
Total borrowings
|
|
328,748
|
|
|
795,354
|
|
-58.7%
|
|
Total deposits and borrowings
|
|
5,128,230
|
|
|
5,459,841
|
|
-6.1%
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
1,281
|
|
|
2,437
|
|
-47.4%
|
|
Acceptances outstanding
|
|
27,644
|
|
|
23,765
|
|
16.3%
|
|
Other liabilities
|
|
86,791
|
|
|
95,370
|
|
-9.0%
|
|
Total liabilities
|
$
|
5,243,946
|
|
$
|
5,581,413
|
|
-6.0%
|
|
Deposits portfolio composition percentages:
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
20.2%
|
|
|
18.2%
|
|
|
|
NOW accounts
|
|
22.3%
|
|
|
23.4%
|
|
|
|
Savings and money market accounts
|
|
26.1%
|
|
|
25.7%
|
|
|
|
Certificates of deposit
|
|
31.4%
|
|
|
32.7%
|
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
Borrowings portfolio composition percentages:
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
58.7%
|
|
|
82.2%
|
|
|
|
Advances from FHLB
|
|
30.3%
|
|
|
13.3%
|
|
|
|
Other term notes
|
|
0.0%
|
|
|
0.0%
|
|
|
|
Subordinated capital notes
|
|
11.0%
|
|
|
4.5%
|
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
Securities sold under agreements to repurchase (excluding
accrued interest)
|
|
|
|
|
|
|
|
|
Amount outstanding at period-end
|
$
|
192,500
|
|
$
|
652,229
|
|
|
|
Daily average outstanding balance
|
$
|
393,133
|
|
$
|
663,845
|
|
|
|
Maximum outstanding balance at any month-end
|
$
|
606,210
|
|
$
|
902,500
|
|
|
Liabilities
and Funding Sources
As shown in Table 15 above, at December
31, 2017, Oriental’s total liabilities were $5.244
billion, 6.0% less than the $5.581 billion reported at December 31, 2016. Deposits and borrowings, Oriental’s funding sources,
amounted to $5.128 billion at December 31, 2017
versus $5.460 billion at December 31, 2016, a
6.1% decrease.
Borrowings consist mainly of
repurchase agreements, FHLB-NY advances and subordinated capital notes. At December
31, 2017, borrowings amounted to $328.7 million,
representing a decrease of 58.7% when compared with the $795.4 million reported
at December 31, 2016. The decrease in
borrowings is mainly attributed to a decrease in repurchase agreements of
$460.9 million, reflecting:
·
The
repayment at maturity of a $232.0 million repurchase agreement with a rate of 4.78% on March 2, 2017; and
·
The unwinding of $180.0 million
repurchase agreements during 2017.
At December
31, 2017, deposits
represented 94% and borrowings represented 6% of interest-bearing liabilities.
At December 31, 2017, deposits, the largest
category of Oriental’s interest-bearing liabilities, were $4.798 billion, an
increase of 3.0% from $4.664 billion at December
31, 2016.
Stockholders’ Equity
At December
31, 2017,
Oriental’s total stockholders’ equity was $945.1 million, a 2.7% increase when
compared to $920.4 million at December
31, 2016. This
increase in stockholders’ equity reflects increases in retained earnings of
$23.1 million, legal surplus of $5.2 million, additional paid-in capital of
$652 thousand, and a decrease in treasury stock, at cost, of $358 thousand,
partially offset by a decrease in accumulated other comprehensive income, net
of tax of $4.5 million. Book value per share was $17.73 at December 31, 2017 compared to $17.18 at December 31, 2016.
From December 31, 2016 to December 31, 2017,
tangible common equity to total assets increased to 11.12% from 10.19%,
Leverage capital ratio increased to 13.92% from 12.99%, Common Equity Tier 1
capital ratio increased to 14.59% from 14.05%, Tier 1 Risk-Based capital ratio
increased to 19.05% from 18.35%, and Total Risk-Based capital ratio increased
to 20.34% from 19.62%.
New Capital Rules to Implement Basel III Capital Requirements
OFG Bancorp and the Bank are subject to regulatory capital requirements
established by the Federal Reserve Board and the FDIC. The current risk-based
capital standards applicable to OFG Bancorp and the Bank (“Basel III capital
rules”), which have been effective since January 1, 2015, are based on the
final capital framework for strengthening international capital standards,
known as Basel III, of the Basel Committee on Banking Supervision. As of December
31, 2017, OFG Bancorp's and the Bank’s capital ratios continue to exceed the
minimum requirements for being “well-capitalized” under the Basel III capital
rules.
The risk-based
capital ratios presented in Table 16, which include common equity tier 1, tier
1 capital, total capital and leverage capital as of December 31, 2017 and 2016,
are calculated based on the Basel III capital rules related to the measurement
of capital, risk-weighted assets and average assets.
The following are the consolidated capital ratios
of Oriental under the Basel III capital rules at December 31, 2017 and 2016:
|
TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA
|
|
|
December 31,
|
|
Variance
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands,
except per share data)
|
|
|
|
Capital data:
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
$
|
945,107
|
|
$
|
920,411
|
|
2.7%
|
|
Regulatory Capital Ratios data:
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio
|
|
14.59%
|
|
|
14.05%
|
|
3.8%
|
|
Minimum common equity tier 1 capital ratio required
|
|
4.50%
|
|
|
4.50%
|
|
0.0%
|
|
Actual common equity tier 1 capital
|
$
|
644,804
|
|
|
627,733
|
|
2.7%
|
|
Minimum common equity tier 1 capital required
|
$
|
198,930
|
|
|
201,040
|
|
-1.0%
|
|
Minimum capital conservation buffer required
|
$
|
55,258
|
|
|
27,922
|
|
97.9%
|
|
Excess over regulatory requirement
|
$
|
390,615
|
|
|
398,770
|
|
-2.0%
|
|
Risk-weighted assets
|
$
|
4,420,667
|
|
|
4,467,556
|
|
-1.0%
|
|
Tier 1 risk-based capital ratio
|
|
19.05%
|
|
|
18.35%
|
|
3.8%
|
|
Minimum tier 1 risk-based capital ratio required
|
|
6.00%
|
|
|
6.00%
|
|
0.0%
|
|
Actual tier 1 risk-based capital
|
$
|
842,133
|
|
$
|
819,662
|
|
2.7%
|
|
Minimum tier 1 risk-based capital required
|
$
|
265,240
|
|
$
|
268,053
|
|
-1.0%
|
|
Excess over regulatory requirement
|
$
|
576,893
|
|
$
|
551,608
|
|
4.6%
|
|
Risk-weighted assets
|
$
|
4,420,667
|
|
$
|
4,467,556
|
|
-1.0%
|
|
Total risk-based capital ratio
|
|
20.34%
|
|
|
19.62%
|
|
3.7%
|
|
Minimum total risk-based capital ratio required
|
|
8.00%
|
|
|
8.00%
|
|
0.0%
|
|
Actual total risk-based capital
|
$
|
899,258
|
|
$
|
876,657
|
|
2.6%
|
|
Minimum total risk-based capital required
|
$
|
353,653
|
|
$
|
357,404
|
|
-1.0%
|
|
Excess over regulatory requirement
|
$
|
545,604
|
|
$
|
519,252
|
|
5.1%
|
|
Risk-weighted assets
|
$
|
4,420,667
|
|
$
|
4,467,556
|
|
-1.0%
|
|
Leverage capital ratio
|
|
13.92%
|
|
|
12.99%
|
|
7.1%
|
|
Minimum leverage capital ratio required
|
|
4.00%
|
|
|
4.00%
|
|
0.0%
|
|
Actual tier 1 capital
|
$
|
842,133
|
|
$
|
819,662
|
|
2.7%
|
|
Minimum tier 1 capital required
|
$
|
242,057
|
|
$
|
252,344
|
|
-4.1%
|
|
Excess over regulatory requirement
|
$
|
600,076
|
|
$
|
567,318
|
|
5.8%
|
|
Tangible common equity to total assets
|
|
11.12%
|
|
|
10.19%
|
|
9.1%
|
|
Tangible common equity to risk-weighted assets
|
|
15.57%
|
|
|
14.82%
|
|
5.1%
|
|
Total equity to total assets
|
|
15.27%
|
|
|
14.16%
|
|
7.8%
|
|
Total equity to risk-weighted assets
|
|
21.38%
|
|
|
20.60%
|
|
3.8%
|
|
Stock data:
|
|
|
|
|
|
|
|
|
Outstanding common shares
|
|
43,947,442
|
|
|
43,914,844
|
|
0.1%
|
|
Book value per common share
|
$
|
17.73
|
|
$
|
17.18
|
|
3.2%
|
|
Tangible book value per common share
|
$
|
15.67
|
|
$
|
15.08
|
|
3.9%
|
|
Market price at end of year
|
$
|
9.40
|
|
$
|
13.10
|
|
-28.2%
|
|
Market capitalization at end of year
|
$
|
413,106
|
|
$
|
575,284
|
|
-28.2%
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
2017
|
|
2016
|
|
%
|
|
2015
|
|
|
(Dollars in thousands)
|
|
Common dividend data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
$
|
10,553
|
|
$
|
10,544
|
|
0.1%
|
|
$
|
15,932
|
|
Cash dividends declared per share
|
$
|
0.24
|
|
$
|
0.24
|
|
0.0%
|
|
$
|
0.36
|
|
Payout ratio
|
|
27.91%
|
|
|
23.30%
|
|
19.8%
|
|
|
-97.30%
|
|
Dividend yield
|
|
2.55%
|
|
|
1.83%
|
|
39.3%
|
|
|
4.92%
|
The following table presents a reconciliation of Oriental’s total
stockholders’ equity to tangible common equity and total assets to tangible
assets at December 31, 2017, and 2016:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands, except
share or per
share information)
|
|
Total stockholders' equity
|
$
|
945,107
|
|
$
|
920,411
|
|
Preferred stock
|
|
(176,000)
|
|
|
(176,000)
|
|
Preferred stock issuance costs
|
|
10,130
|
|
|
10,130
|
|
Goodwill
|
|
(86,069)
|
|
|
(86,069)
|
|
Core deposit intangible
|
|
(3,339)
|
|
|
(4,260)
|
|
Customer relationship intangible
|
|
(1,348)
|
|
|
(1,900)
|
|
Total tangible common equity
|
$
|
688,481
|
|
$
|
662,312
|
|
Total assets
|
|
6,189,053
|
|
|
6,501,824
|
|
Goodwill
|
|
(86,069)
|
|
|
(86,069)
|
|
Core deposit intangible
|
|
(3,339)
|
|
|
(4,260)
|
|
Customer relationship intangible
|
|
(1,348)
|
|
|
(1,900)
|
|
Total tangible assets
|
$
|
6,098,297
|
|
$
|
6,409,595
|
|
Tangible common equity to tangible assets
|
|
11.29%
|
|
|
10.33%
|
|
Common shares outstanding at end of period
|
|
43,947,442
|
|
|
43,914,844
|
|
Tangible book value per common share
|
$
|
15.67
|
|
$
|
15.08
|
The tangible common equity ratio and tangible book value per common share
are non-GAAP measures and, unlike Tier 1 capital and Common Equity Tier 1
capital, are not codified in the federal banking regulations. 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
Oriental calculates its tangible common equity, tangible assets and any other
related measures may differ from that of other companies reporting measures
with similar names.
Non-GAAP financial measures have inherent limitations, are not required
to be uniformly applied, and are not audited. To mitigate these limitations, Oriental
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.
The following
table presents Oriental’s capital adequacy information under the Basel III capital
rules:
|
|
December 31,
|
|
Variance
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Risk-based capital:
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital
|
$
|
644,804
|
|
$
|
627,733
|
|
2.7%
|
|
Additional tier 1 capital
|
|
197,329
|
|
|
191,929
|
|
2.8%
|
|
Tier 1 capital
|
|
842,133
|
|
|
819,662
|
|
2.7%
|
|
Additional Tier 2 capital
|
|
57,125
|
|
|
56,995
|
|
0.2%
|
|
Total risk-based capital
|
$
|
899,258
|
|
$
|
876,657
|
|
2.6%
|
|
Risk-weighted assets:
|
|
|
|
|
|
|
|
|
Balance sheet items
|
$
|
4,249,042
|
|
$
|
4,307,817
|
|
-1.4%
|
|
Off-balance sheet items
|
|
171,625
|
|
|
159,739
|
|
7.4%
|
|
Total risk-weighted assets
|
$
|
4,420,667
|
|
$
|
4,467,556
|
|
-1.0%
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital (minimum required - 4.5%)
|
|
14.59%
|
|
|
14.05%
|
|
3.8%
|
|
Tier 1 capital (minimum required - 6%)
|
|
19.05%
|
|
|
18.35%
|
|
3.8%
|
|
Total capital (minimum required - 8%)
|
|
20.34%
|
|
|
19.62%
|
|
3.7%
|
|
Leverage ratio (minimum required - 4%)
|
|
13.92%
|
|
|
12.99%
|
|
7.1%
|
|
Equity to assets
|
|
15.27%
|
|
|
14.16%
|
|
7.8%
|
|
Tangible common equity to assets
|
|
11.12%
|
|
|
10.19%
|
|
9.1%
|
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 December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
|
2017
|
|
2016
|
|
%
|
|
|
(Dollars in thousands)
|
|
|
|
Oriental Bank Regulatory Capital Ratios:
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital to Risk-Weighted Assets
|
|
18.63%
|
|
|
17.96%
|
|
3.7%
|
|
Actual common equity tier 1 capital
|
$
|
822,776
|
|
$
|
800,544
|
|
2.8%
|
|
Minimum capital requirement (4.5%)
|
$
|
198,712
|
|
$
|
200,585
|
|
-0.9%
|
|
Minimum capital conservation buffer requirement (1.25% at
June 30, 2017 - 0.625% at December 31, 2016)
|
$
|
55,198
|
|
$
|
27,859
|
|
98.1%
|
|
Minimum to be well capitalized (6.5%)
|
$
|
287,028
|
|
$
|
289,734
|
|
-0.9%
|
|
Tier 1 Capital to Risk-Weighted Assets
|
|
18.63%
|
|
|
17.96%
|
|
3.7%
|
|
Actual tier 1 risk-based capital
|
$
|
822,776
|
|
$
|
800,544
|
|
2.8%
|
|
Minimum capital requirement (6%)
|
$
|
264,949
|
|
$
|
267,447
|
|
-0.9%
|
|
Minimum to be well capitalized (8%)
|
$
|
353,265
|
|
$
|
356,596
|
|
-0.9%
|
|
Total Capital to Risk-Weighted Assets
|
|
19.92%
|
|
|
19.23%
|
|
3.6%
|
|
Actual total risk-based capital
|
$
|
879,648
|
|
$
|
857,259
|
|
2.6%
|
|
Minimum capital requirement (8%)
|
$
|
353,265
|
|
$
|
356,596
|
|
-0.9%
|
|
Minimum to be well capitalized (10%)
|
$
|
441,581
|
|
$
|
445,745
|
|
-0.9%
|
|
Total Tier 1 Capital to Average Total Assets
|
|
13.63%
|
|
|
12.75%
|
|
6.9%
|
|
Actual tier 1 capital
|
$
|
822,776
|
|
$
|
800,544
|
|
2.8%
|
|
Minimum capital requirement (4%)
|
$
|
241,417
|
|
$
|
251,200
|
|
-3.9%
|
|
Minimum to be well capitalized (5%)
|
$
|
301,771
|
|
$
|
314,000
|
|
-3.9%
|
Oriental’s
common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol
“OFG.” At December 31, 2017 and 2016, Oriental’s market capitalization for its
outstanding common stock was $413.1 million ($9.40 per share) and $575.3
million ($13.10 per share), respectively.
The following table provides the high and low prices and dividends
per share of Oriental’s common stock for each quarter of the last three
calendar years:
|
|
|
|
|
|
|
|
Cash
|
|
|
Price
|
|
Dividend
|
|
|
High
|
|
Low
|
|
Per share
|
|
2017
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
$
|
10.25
|
|
$
|
7.90
|
|
$
|
0.06
|
|
September 30, 2017
|
$
|
10.40
|
|
$
|
8.40
|
|
$
|
0.06
|
|
June 30, 2017
|
$
|
12.03
|
|
$
|
9.19
|
|
$
|
0.06
|
|
March 31, 2017
|
$
|
13.80
|
|
$
|
10.90
|
|
$
|
0.06
|
|
2016
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
$
|
14.30
|
|
$
|
9.56
|
|
$
|
0.06
|
|
September 30, 2016
|
$
|
11.09
|
|
$
|
8.07
|
|
$
|
0.06
|
|
June 30, 2016
|
$
|
9.14
|
|
$
|
6.32
|
|
$
|
0.06
|
|
March 31, 2016
|
$
|
7.32
|
|
$
|
4.77
|
|
$
|
0.06
|
|
2015
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
$
|
10.52
|
|
$
|
6.39
|
|
$
|
0.06
|
|
September 30, 2015
|
$
|
10.20
|
|
$
|
6.63
|
|
$
|
0.10
|
|
June 30, 2015
|
$
|
17.04
|
|
$
|
10.67
|
|
$
|
0.10
|
|
March 31, 2015
|
$
|
17.70
|
|
$
|
14.88
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Under Oriental’s current stock repurchase program, it is
authorized to purchase in the open market up to $7.7 million of its outstanding
shares of common stock. The shares of common stock repurchased are to be held
by Oriental as treasury shares. There were no repurchases during the year ended
December 31,
2017.
At December 31, 2017, the
number of shares that may yet be purchased under such program is estimated at 822,431 and was calculated by dividing
the remaining balance of $7.7 million by $9.40 (closing price of
Oriental's common stock at December 31, 2017).
Contractual Obligations and Commercial Commitments
As disclosed in the notes to the consolidated
financial statements, Oriental has certain obligations and commitments to make
future payments under contracts. At December 31, 2017, the aggregate
contractual obligations and commercial commitments, excluding accrued interest
and unamortized premiums (discounts), are as follows:
|
|
Payments Due by Period
|
|
|
Total
|
|
Less than 1 year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
After 5 years
|
|
CONTRACTUAL OBLIGATIONS:
|
(In thousands)
|
|
Securities sold under agreements to repurchase
|
$
|
192,500
|
|
$
|
82,500
|
|
$
|
110,000
|
|
$
|
-
|
|
$
|
-
|
|
Advances from FHLB
|
|
99,321
|
|
|
90,113
|
|
|
9,208
|
|
|
-
|
|
|
-
|
|
Subordinated capital notes
|
|
35,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35,000
|
|
Annual rental commitments under noncancelable
operating leases
|
|
34,319
|
|
|
7,251
|
|
|
12,024
|
|
|
15,044
|
|
|
-
|
|
Certificates of deposits
|
|
1,507,101
|
|
|
824,667
|
|
|
607,686
|
|
|
74,748
|
|
|
-
|
|
Total
|
$
|
1,868,241
|
|
$
|
1,004,531
|
|
$
|
738,918
|
|
$
|
89,792
|
|
$
|
35,000
|
Loan commitments, which represent unused
lines of credit and letters of credit provided to customers, decreased to
$485.0 million and $494 thousand, respectively, for 2017, as compared to
$492.9 million and $2.7 million, respectively, at December 31, 2016.
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates, bear variable interest rate and may
require payment of a fee. Since the commitments may expire unexercised, the
total commitment amounts do not necessarily represent future cash requirements.
Oriental evaluates each customer’s credit-worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by Oriental upon
extension of credit, is based on management’s credit evaluation of the
customer.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein
(except for certain non-GAAP measures as previously indicated) have been
prepared in accordance with GAAP which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution’s performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services since
such prices are affected by inflation.
QUARTERLY FINANCIAL DATA
The following is
a summary of the quarterly results of operations:
TABLE 17 — SELECTED
QUARTERLY FINANCIAL DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Total
|
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
EARNINGS DATA:
|
(In thousands, except per share data)
|
|
Interest income
|
$
|
86,178
|
|
$
|
85,940
|
|
$
|
90,355
|
|
$
|
83,174
|
|
$
|
345,647
|
|
Interest expense
|
|
11,560
|
|
|
10,377
|
|
|
9,877
|
|
|
9,661
|
|
|
41,475
|
|
Net
interest income
|
|
74,618
|
|
|
75,563
|
|
|
80,478
|
|
|
73,513
|
|
|
304,172
|
|
Provision for
loan and lease losses
|
|
17,654
|
|
|
26,536
|
|
|
44,042
|
|
|
24,907
|
|
|
113,139
|
|
Net
interest income after provision for loan
and lease losses
|
|
56,964
|
|
|
49,027
|
|
|
36,436
|
|
|
48,606
|
|
|
191,033
|
|
Non-interest
income
|
|
19,074
|
|
|
24,886
|
|
|
17,912
|
|
|
16,815
|
|
|
78,687
|
|
Non-interest
expenses
|
|
51,684
|
|
|
52,816
|
|
|
50,469
|
|
|
46,662
|
|
|
201,631
|
|
Income
before taxes
|
|
24,354
|
|
|
21,097
|
|
|
3,879
|
|
|
18,759
|
|
|
68,089
|
|
Income tax
expense
|
|
9,204
|
|
|
3,993
|
|
|
560
|
|
|
1,686
|
|
|
15,443
|
|
Net income
|
|
15,150
|
|
|
17,104
|
|
|
3,319
|
|
|
17,073
|
|
|
52,646
|
|
Less: dividends
on preferred stock
|
|
(3,465)
|
|
|
(3,466)
|
|
|
(3,465)
|
|
|
(3,466)
|
|
|
(13,862)
|
|
Income available
to common shareholders
|
$
|
11,685
|
|
$
|
13,638
|
|
$
|
(146)
|
|
$
|
13,607
|
|
$
|
38,784
|
|
PER SHARE
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.27
|
|
$
|
0.30
|
|
$
|
-
|
|
$
|
0.31
|
|
$
|
0.88
|
|
Diluted
|
$
|
0.26
|
|
$
|
0.30
|
|
$
|
-
|
|
$
|
0.30
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Total
|
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
EARNINGS DATA:
|
(In thousands, except per share data)
|
|
|
|
|
Interest income
|
$
|
91,306
|
|
$
|
87,908
|
|
$
|
90,584
|
|
$
|
86,794
|
|
$
|
356,592
|
|
Interest expense
|
|
16,331
|
|
|
14,596
|
|
|
13,657
|
|
|
12,581
|
|
|
57,165
|
|
Net
interest income
|
|
74,975
|
|
|
73,312
|
|
|
76,927
|
|
|
74,213
|
|
|
299,427
|
|
Provision for
loan and lease losses
|
|
13,789
|
|
|
14,445
|
|
|
23,469
|
|
|
13,373
|
|
|
65,076
|
|
Net
interest income after provision for loan
and lease losses
|
|
61,186
|
|
|
58,867
|
|
|
53,458
|
|
|
60,840
|
|
|
234,351
|
|
Non-interest
income
|
|
13,503
|
|
|
15,155
|
|
|
20,215
|
|
|
17,946
|
|
|
66,819
|
|
Non-interest
expenses
|
|
54,857
|
|
|
53,825
|
|
|
54,926
|
|
|
52,382
|
|
|
215,990
|
|
(Loss)
income before taxes
|
|
19,832
|
|
|
20,197
|
|
|
18,747
|
|
|
26,404
|
|
|
85,180
|
|
Income tax
expense (benefit)
|
|
5,661
|
|
|
5,858
|
|
|
3,627
|
|
|
10,848
|
|
|
25,994
|
|
Net (loss)
income
|
|
14,171
|
|
|
14,339
|
|
|
15,120
|
|
|
15,556
|
|
|
59,186
|
|
Less: dividends
on preferred stock
|
|
(3,465)
|
|
|
(3,466)
|
|
|
(3,465)
|
|
|
(3,466)
|
|
|
(13,862)
|
|
(Loss)
income available to common shareholders
|
$
|
10,706
|
|
$
|
10,873
|
|
$
|
11,655
|
|
$
|
12,090
|
|
$
|
45,324
|
|
PER SHARE
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.24
|
|
$
|
0.25
|
|
$
|
0.27
|
|
$
|
0.28
|
|
$
|
1.03
|
|
Diluted
|
$
|
0.24
|
|
$
|
0.25
|
|
$
|
0.26
|
|
$
|
0.27
|
|
$
|
1.03
|
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Background
Oriental’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. Oriental 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 Oriental’s business activities are susceptible to risk.
Consequently, risk identification and monitoring are essential to risk
management. As more fully discussed below, Oriental’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. Oriental evaluates
market risk together with interest rate risk. Oriental’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 Oriental
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 Oriental is within the parameters
established in such policies.
Interest Rate
Risk
Interest
rate risk is the exposure of Oriental’s earnings or capital to adverse movements
in interest rates. It is a predominant market risk in terms of its potential
impact on earnings. Oriental 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
executing 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 quarterly basis, Oriental 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 five-year time horizon, assuming certain gradual upward and downward
interest rate movements, achieved during a twelve-month period. Instantaneous
interest rate movements are also modeled. Simulations are carried out in two
ways:
(i) using a static
balance sheet as Oriental 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.
Oriental
uses a software application to project future movements in Oriental’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.
These
simulations are complex, and use many assumptions that are intended to reflect
the general behavior of Oriental 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 December 31,
2017 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
|
$
|
11,063
|
|
3.88%
|
|
$
|
10,548
|
|
3.81%
|
|
+ 100 Basis points
|
$
|
5,528
|
|
1.94%
|
|
$
|
5,269
|
|
1.90%
|
|
- 50 Basis points
|
$
|
(5,403)
|
|
-1.89%
|
|
$
|
(5,072)
|
|
-1.83%
|
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 Oriental’s
investments in callable securities, prepayment risk related to mortgage loans
and mortgage-backed securities, and any structured repurchase agreements and
advances from the FHLB-NY in which it may enter into from time to time. As part
of the strategy to limit the interest rate risk and reduce the re-pricing gaps
of Oriental’s assets and liabilities, Oriental has executed certain
transactions which include extending the maturity and the re-pricing frequency
of the liabilities to longer terms reducing the amounts of its structured
repurchase agreements and entering into hedge-designated swaps to hedge the
variability of future interest cash flows of forecasted wholesale borrowings
that only consist of advances from the FHLB-NY as of December 31, 2017.
Oriental 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. Oriental’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 Oriental’s gains and losses on the derivative instruments that are
linked to the forecasted cash flows of these hedged assets and liabilities.
Oriental 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 Oriental’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 Oriental’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 Oriental the right to enter into
interest rate swaps and cap and floor agreements with the writer of the option.
In addition, Oriental 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
11 to the accompanying consolidated financial statements for further
information concerning Oriental’s derivative activities.
Following is a summary of certain
strategies, including derivative activities, currently used by Oriental to
manage interest rate risk:
Interest rate swaps — Oriental entered into hedge-designated 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
fixes Oriental’s interest payments on an amount of forecasted interest expense
attributable to the one-month LIBOR rate corresponding to the swap notional
stated rate. A derivative liability of $510 thousand (notional amount of $35.1
million) was recognized at December 31, 2017 related to the valuation of these
swaps.
In addition, Oriental has certain derivative contracts, including
interest rate swaps not designated as hedging instruments, which are utilized
to convert certain variable-rate loans to fixed-rate loans, and the
mirror-images of these interest rate swaps in which Oriental enters 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 December 31, 2017, interest rate swaps offered to clients not
designated as hedging instruments represented a derivative asset of $618
thousand (notional amounts of $12.5 million), and the mirror-image interest rate
swaps in which Oriental entered into represented a derivative liability of $618
thousand (notional amounts of $12.5 million).
Wholesale borrowings — Oriental uses interest rate swaps to hedge the variability of
interest cash flows of certain advances from the FHLB-NY that are tied to a
variable rate index. The interest rate swaps effectively fix Oriental’s
interest payments on these borrowings. As of December 31, 2017, Oriental had
$35.1 million in interest rate swaps at an average rate of 2.4% designated as
cash flow hedges for $35.1 million in advances from the FHLB-NY that reprice or
are being rolled over on a monthly basis.
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 Oriental is its lending
activities. In Puerto Rico, Oriental’s principal market, economic conditions
are very challenging, as they have been for the last twelve years, due to a
shrinking population, a protracted economic recession, a housing sector that
remains under pressure, the Puerto Rico government’s fiscal and liquidity
crisis, and the payment defaults on various Puerto Rico government bonds, with
severe austerity measures expected for the Puerto Rico government to be able to
restructure its debts under the supervision of the federally-created Fiscal
Oversight and Management Board of Puerto Rico. In addition, as was demonstrated
with hurricanes Irma and Maria during the month of September 2017, Puerto Rico
is susceptible to natural disasters, such as hurricanes and earthquakes, which
can have a disproportionate impact on Puerto Rico because of the logistical
difficulties of bringing relief to an island far from the United States main
land. Moreover, the Puerto Rico government's fiscal challenges and Puerto
Rico's unique relationship with the United States also complicate any relief
efforts after a natural disaster. These events increase credit risk as debtors
may no longer be capable of operating their businesses and the collateral
securing Oriental's loans may suffer significant damages.
Oriental 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. Oriental also employs proactive collection and loss
mitigation practices.
Oriental may also encounter risk of default in relation to its
securities portfolio. The securities held by Oriental 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.
Oriental’s executive Credit Risk Committee, composed of its Chief
Executive Officer, Chief Operating Officer, Chief Credit Officer, Chief Risk
Officer, and other senior executives, has primary responsibility for setting strategies
to achieve Oriental’s credit risk goals and objectives. Those goals and
objectives are set forth in Oriental’s Credit Policy as approved by the Board.
Liquidity Risk
Liquidity risk is the risk of Oriental 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. Oriental’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.
Oriental’s business requires continuous access to various
funding sources. While Oriental is able to fund its operations through deposits
as well as through advances from the FHLB-NY and other alternative sources,
Oriental’s business is dependent upon other external wholesale funding sources.
Oriental has selectively reduced its use of certain wholesale funding sources,
such as repurchase agreements and brokered deposits. As of December 31, 2017,
Oriental had $192.5 million in repurchase agreements, excluding accrued
interest, and $518.5 million in brokered deposits.
Brokered deposits are typically offered through an intermediary to
small retail investors. Oriental’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, Oriental’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.
Although Oriental 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 Oriental, the availability and cost of Oriental’s funding sources
could be adversely affected. In that event, Oriental’s cost of funds may
increase, thereby reducing its net interest income, or Oriental 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 any such dispositions. Oriental’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 Oriental or market-related events. In the event that
such sources of funds are reduced or eliminated and Oriental is not able to replace
these on a cost-effective basis, Oriental 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 December 31, 2017, Oriental had approximately $485.2 million
in unrestricted cash and cash equivalents, $921.6 million in investment
securities that are not pledged as collateral, $919.9 million in borrowing
capacity at the FHLB-NY.
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 Oriental are susceptible to operational
risk.
Oriental faces ongoing and emerging risk and regulatory pressure
related to the activities that surround the delivery of banking and financial
products and services. Coupled with external influences such as the risk of
natural disasters, market conditions, security risks, and legal risks, the
potential for operational and reputational loss has increased. In order to
mitigate and control operational risk, Oriental 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 Oriental’s business operations are functioning within
established limits.
Oriental 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, Oriental has specialized groups, such as Information Security,
Enterprise Risk Management, Corporate Compliance, Information Technology, Legal
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 Executive
Risk and Compliance Committee. Oriental also has a Business Continuity Plan to
address situations where its capacity to perform critical functions is
affected. Under such circumstances, a Crisis Management Team is activated to
restore such critical functions within established timeframes.
Oriental is subject to extensive United States federal and Puerto
Rico regulations, and this regulatory scrutiny has been significantly
increasing over the last several years. Oriental 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. Oriental has a corporate compliance function headed by
a Chief Compliance Officer who reports to the Chief Executive Officer and
supervises the BSA Officer and Regulatory Compliance Officer. The Chief
Compliance Officer is responsible for the oversight of regulatory compliance
and implementation of a company-wide compliance program, including the Bank
Secrecy Act/Anti-Money Laundering compliance program.
Concentration Risk
Substantially all of Oriental’s business activities and a
significant portion of its credit exposure are concentrated in Puerto Rico. As
a consequence, Oriental’s profitability and financial condition may be
adversely affected by an extended economic slowdown, adverse political, fiscal
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 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
OFG Bancorp
FORM 10-K
FINANCIAL DATA INDEX
| |
Page
|
| |
Management’s
Annual Report on Internal Controls Over Financial Reporting
|
89
|
| |
Report of Independent Registered Public
Accounting Firm
|
90
|
| |
Report of
Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
|
91
|
|
|
Consolidated
Statements of Financial Condition at December 31, 2017 and 2016
|
93
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2017, 2016, and
2015
|
95
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the years ended December 31,
2017, 2016, and 2015
|
97
|
|
|
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended December 31,
2017, 2016, and 2015
|
98
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2017, 2016, and
2015
|
99
|
|
|
|
|
|
|
Notes to the Consolidated
Financial Statements
|
|
|
|
|
Note 1– Summary of Significant Accounting
Policies
|
102
|
|
|
|
Note 2 – Significant events
|
118
|
|
|
|
Note 3 – Restricted Cash
|
119
|
|
|
|
Note 4 – Investment Securities
|
119
|
|
|
|
Note 5 – Pledged
Assets
|
127
|
|
|
|
Note 6 – Loans
|
128
|
|
|
|
Note 7 – Allowance for Loan and Lease
Losses
|
154
|
|
|
|
Note 8 – FDIC
Indemnification Asset and True-up Payment Obligation and FDIC Shared-loss
Expense
|
162
|
|
|
|
Note 9 – Foreclosed Real Estate
|
164
|
|
|
|
Note 10 – Premises and Equipment
|
165
|
|
|
|
Note 11 – Servicing Assets
|
165
|
|
|
|
Note 12 – Derivatives
|
167
|
|
|
|
Note 13 – Accrued Interest Receivable and
Other Assets
|
169
|
|
|
|
Note 14 – Deposits
and Related Interest
|
170
|
|
|
|
Note 15 –
Borrowings and Related Interest
|
171
|
|
|
|
Note 16 –
Offsetting of Financial Assets and Liabilities
|
174
|
|
|
|
Note 17 – Employee Benefit Plan
|
177
|
|
|
|
Note 18 – Related Party Transactions
|
177
|
|
|
|
Note 20 – Regulatory Capital
Requirements
|
181
|
|
|
|
Note 21 – Equity- Based Compensation Plan
|
183
|
|
|
|
Note 22 – Stockholders’ Equity
|
185
|
|
|
|
Note 23 –
Accumulated Other Comprehensive Income
|
186
|
|
|
|
Note 24 – Earnings (Loss) per Common
Share
|
190
|
|
|
|
Note 25 –
Guarantees
|
191
|
|
|
|
Note 26 –
Commitments and Contingencies
|
192
|
|
|
|
Note 27 – Fair
Value of Financial Instruments
|
194
|
|
|
|
Note 28 – Business
Segments
|
202
|
|
|
|
Note 29 – OFG
Bancorp (Holding Company Only) Financial Information
|
205
|
|
|
|
|
|
OFG Bancorp
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
To the Board of Directors and
stockholders of OFG Bancorp:
The management of OFG Bancorp ("Oriental")
is responsible for establishing and maintaining effective internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, and for the assessment of internal control
over financial reporting. Oriental’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.
Oriental’s internal control over
financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of Oriental;
(2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of Oriental are
being made only in accordance with authorization of management and directors of
Oriental; and
(3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of Oriental’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
As called for by Section 404 of the
Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of
Oriental’s internal control over financial reporting as of December 31, 2017.
Management made its assessment using the criteria set forth in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO Criteria”).
Based on its assessment, management has concluded that
Oriental maintained effective internal control over financial reporting as of
December 31, 2017 based on the COSO Criteria.
The
effectiveness of Oriental’s internal control over financial reporting as of
December 31, 2017, has been audited by KPMG LLP, Oriental’s independent
registered public accounting firm, as stated in their report dated March 12,
2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ José Rafael
Fernández
|
|
By:
|
/s/ Maritza
Arizmendi
|
|
José Rafael Fernández
|
|
Maritza Arizmendi
|
|
President and Chief Executive
Officer
|
|
Executive Vice President and
Chief Financial Officer
|
|
Date: March 12, 2018
|
|
Date: March 12, 2018
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OFG Bancorp:
Opinion on the Consolidated Financial Statements
We have audited the consolidated
financial statements and the related notes (collectively, the consolidated
financial statements) of OFG Bancorp and subsidiaries as listed in the
accompanying index. In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2017 and 2016, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 12, 2018 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial
reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor
since 2005.
/s/ KPMG LLP
San Juan, Puerto Rico
March 12, 2018
Stamp No. E304093 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OFG Bancorp:
Opinion on Internal Control Over Financial Reporting
We have audited OFG Bancorp and subsidiaries’ (the Company)
internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated statements of financial condition of the Company as of
December 31, 2017 and 2016, the related consolidated statements of
operations, comprehensive income, changes in stockholders’ equity, and cash
flows for each of the years in the three-year period ended December 31,
2017,and the related notes (collectively, the consolidated financial
statements), and our report dated March 12, 2018 expressed an unqualified
opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal
control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control Over Financial
Reporting
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ KPMG LLP
San Juan, Puerto Rico
March 12, 2018
Stamp No. E304094 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report
OFG BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2017 AND 2016
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
478,182
|
|
$
|
504,833
|
|
Money market
investments
|
|
|
7,021
|
|
|
5,606
|
|
Total
cash and cash equivalents
|
|
|
485,203
|
|
|
510,439
|
|
Restricted
cash
|
|
|
3,030
|
|
|
3,030
|
|
Investments:
|
|
|
|
|
|
|
|
Trading
securities, at fair value, with amortized cost of $647 (December 31, 2016 -
$667)
|
|
|
191
|
|
|
347
|
|
Investment
securities available-for-sale, at fair value, with amortized cost of $648,800
(December 31, 2016 - $749,867)
|
|
|
645,797
|
|
|
751,484
|
|
Investment
securities held-to-maturity, at amortized cost, with fair value of $497,681
(December 31, 2016 - $592,763)
|
|
|
506,064
|
|
|
599,884
|
|
Federal Home
Loan Bank (FHLB) stock, at cost
|
|
|
13,995
|
|
|
10,793
|
|
Other
investments
|
|
|
3
|
|
|
3
|
|
Total
investments
|
|
|
1,166,050
|
|
|
1,362,511
|
|
Loans:
|
|
|
|
|
|
|
|
Loans
held-for-sale, at lower of cost or fair value
|
|
|
12,272
|
|
|
12,499
|
|
Loans held
for investment, net of allowance for loan and lease losses of $167,509
(December 31, 2016 - $115,937)
|
|
|
4,044,057
|
|
|
4,135,193
|
|
Total
loans
|
|
|
4,056,329
|
|
|
4,147,692
|
|
Other assets:
|
|
|
|
|
|
|
|
FDIC
indemnification asset
|
|
|
-
|
|
|
14,411
|
|
Foreclosed
real estate
|
|
|
44,174
|
|
|
47,520
|
|
Accrued
interest receivable
|
|
|
49,969
|
|
|
20,227
|
|
Deferred tax
asset, net
|
|
|
127,421
|
|
|
124,200
|
|
Premises and
equipment, net
|
|
|
67,860
|
|
|
70,407
|
|
Customers'
liability on acceptances
|
|
|
27,663
|
|
|
23,765
|
|
Servicing
assets
|
|
|
9,821
|
|
|
9,858
|
|
Derivative
assets
|
|
|
771
|
|
|
1,330
|
|
Goodwill
|
|
|
86,069
|
|
|
86,069
|
|
Other assets
|
|
|
64,693
|
|
|
80,365
|
|
Total
assets
|
|
$
|
6,189,053
|
|
$
|
6,501,824
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
|
OFG BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2017 AND 2016 (CONTINUED)
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Demand
deposits
|
|
$
|
2,039,126
|
|
$
|
1,939,764
|
|
Savings
accounts
|
|
|
1,251,398
|
|
|
1,196,232
|
|
Time
deposits
|
|
|
1,508,958
|
|
|
1,528,491
|
|
Total
deposits
|
|
|
4,799,482
|
|
|
4,664,487
|
|
Borrowings:
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
|
192,869
|
|
|
653,756
|
|
Advances
from FHLB
|
|
|
99,643
|
|
|
105,454
|
|
Subordinated
capital notes
|
|
|
36,083
|
|
|
36,083
|
|
Other
borrowings
|
|
|
153
|
|
|
61
|
|
Total
borrowings
|
|
|
328,748
|
|
|
795,354
|
|
Other
liabilities:
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
1,281
|
|
|
2,437
|
|
Acceptances
executed and outstanding
|
|
|
27,644
|
|
|
23,765
|
|
Accrued
expenses and other liabilities
|
|
|
86,791
|
|
|
95,370
|
|
Total
liabilities
|
|
|
5,243,946
|
|
|
5,581,413
|
|
Commitments
and contingencies (See Note 20)
|
|
|
|
|
|
|
|
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, 2016 - 1,340,000 shares; 1,380,000 shares; and 960,000
shares) $25 liquidation value
|
|
|
92,000
|
|
|
92,000
|
|
84,000
shares of Series C issued and outstanding (December 31, 2016 -
84,000 shares); $1,000 liquidation value
|
|
|
84,000
|
|
|
84,000
|
|
Common
stock, $1 par value; 100,000,000 shares authorized; 52,625,869 shares
issued:
43,947,442 shares outstanding (December 31, 2016 - 52,625,869;
|
|
|
|
|
|
|
|
43,914,844)
|
|
|
52,626
|
|
|
52,626
|
|
Additional
paid-in capital
|
|
|
541,600
|
|
|
540,948
|
|
Legal
surplus
|
|
|
81,454
|
|
|
76,293
|
|
Retained
earnings
|
|
|
200,878
|
|
|
177,808
|
|
Treasury
stock, at cost, 8,678,427 shares (December 31, 2016 - 8,711,025
shares)
|
|
|
(104,502)
|
|
|
(104,860)
|
|
Accumulated
other comprehensive income, net of tax of $564 (December 31, 2016 $983)
|
|
|
(2,949)
|
|
|
1,596
|
|
Total stockholders’ equity
|
|
|
945,107
|
|
|
920,411
|
|
Total liabilities and stockholders’ equity
|
|
$
|
6,189,053
|
|
$
|
6,501,824
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
|
OFG BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND
2015
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands, except
per share data)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
312,421
|
|
$
|
321,945
|
|
$
|
367,622
|
|
Mortgage-backed securities
|
|
26,994
|
|
|
30,522
|
|
|
35,338
|
|
Investment securities and other
|
|
6,232
|
|
|
4,125
|
|
|
3,608
|
|
Total interest income
|
|
345,647
|
|
|
356,592
|
|
|
406,568
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
30,298
|
|
|
29,253
|
|
|
27,034
|
|
Securities sold under agreements to repurchase
|
|
7,223
|
|
|
18,805
|
|
|
29,567
|
|
Advances from FHLB and other borrowings
|
|
2,398
|
|
|
6,186
|
|
|
9,072
|
|
Subordinated capital notes
|
|
1,556
|
|
|
2,921
|
|
|
3,523
|
|
Total interest expense
|
|
41,475
|
|
|
57,165
|
|
|
69,196
|
|
Net interest income
|
|
304,172
|
|
|
299,427
|
|
|
337,372
|
|
Provision for loan and lease losses, net
|
|
113,139
|
|
|
65,076
|
|
|
161,501
|
|
Net interest income after provision for loan and lease
losses
|
|
191,033
|
|
|
234,351
|
|
|
175,871
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
Banking service revenue
|
|
39,468
|
|
|
41,647
|
|
|
41,466
|
|
Wealth management revenue
|
|
25,790
|
|
|
27,433
|
|
|
29,040
|
|
Mortgage banking activities
|
|
4,050
|
|
|
5,021
|
|
|
6,128
|
|
Total banking and financial service
revenues
|
|
69,308
|
|
|
74,101
|
|
|
76,634
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
-
|
|
|
-
|
|
|
(1,490)
|
|
FDIC shared-loss benefit (expense), net
|
|
1,403
|
|
|
(13,581)
|
|
|
(42,808)
|
|
Reimbursement from FDIC shared-loss coverage in sale of
loans and foreclosed real estate
|
|
-
|
|
|
-
|
|
|
20,000
|
|
Net gain (loss) on:
|
|
|
|
|
|
|
|
|
|
Sale of securities
|
|
6,896
|
|
|
12,207
|
|
|
2,572
|
|
Derivatives
|
|
132
|
|
|
(71)
|
|
|
(190)
|
|
Early extinguishment of debt
|
|
(80)
|
|
|
(12,000)
|
|
|
-
|
|
Other non-interest income
|
|
1,028
|
|
|
6,163
|
|
|
(2,142)
|
|
Total non-interest income, net
|
|
78,687
|
|
|
66,819
|
|
|
52,576
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND
2015 (CONTINUED)
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands, except
per share data)
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
79,751
|
|
|
76,761
|
|
|
78,999
|
|
Professional and service fees
|
|
12,406
|
|
|
12,235
|
|
|
14,973
|
|
Occupancy and equipment
|
|
32,557
|
|
|
30,300
|
|
|
33,466
|
|
Insurance
|
|
5,223
|
|
|
9,109
|
|
|
9,567
|
|
Electronic banking charges
|
|
19,322
|
|
|
20,707
|
|
|
21,893
|
|
Information technology expenses
|
|
8,010
|
|
|
7,116
|
|
|
5,648
|
|
Advertising, business promotion, and strategic
initiatives
|
|
5,616
|
|
|
5,485
|
|
|
6,452
|
|
Loss on sale of foreclosed real estate and other
repossessed assets
|
|
4,634
|
|
|
10,282
|
|
|
30,546
|
|
Loan servicing and clearing expenses
|
|
4,693
|
|
|
8,247
|
|
|
9,198
|
|
Taxes, other than payroll and income taxes
|
|
9,187
|
|
|
9,782
|
|
|
9,460
|
|
Communication
|
|
3,415
|
|
|
3,379
|
|
|
3,808
|
|
Printing, postage, stationary and supplies
|
|
2,437
|
|
|
2,558
|
|
|
2,575
|
|
Director and investor relations
|
|
1,072
|
|
|
1,087
|
|
|
1,091
|
|
Credit related expenses
|
|
7,992
|
|
|
10,267
|
|
|
11,091
|
|
Other
|
|
5,316
|
|
|
8,675
|
|
|
9,738
|
|
Total non-interest expense
|
|
201,631
|
|
|
215,990
|
|
|
248,505
|
|
Income (loss) before income taxes
|
|
68,089
|
|
|
85,180
|
|
|
(20,058)
|
|
Income tax expense (benefit)
|
|
15,443
|
|
|
25,994
|
|
|
(17,554)
|
|
Net income (loss)
|
|
52,646
|
|
|
59,186
|
|
|
(2,504)
|
|
Less: dividends on preferred stock
|
|
(13,862)
|
|
|
(13,862)
|
|
|
(13,862)
|
|
Income (loss) available to common shareholders
|
$
|
38,784
|
|
$
|
45,324
|
|
$
|
(16,366)
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
|
Diluted
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
|
Average common shares outstanding and equivalents
|
|
51,096
|
|
|
51,088
|
|
|
51,455
|
|
Cash dividends per share of common stock
|
$
|
0.24
|
|
$
|
0.24
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements
|
OFG BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND
2015
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
|
52,646
|
|
$
|
59,186
|
|
$
|
(2,504)
|
|
Other
comprehensive income before tax:
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on securities available-for-sale
|
|
2,276
|
|
|
(5,023)
|
|
|
(8,814)
|
|
Realized
gain on investment securities included in net income
|
|
(6,896)
|
|
|
(12,207)
|
|
|
(2,572)
|
|
Other-than-temporary
impairment included in net income
|
|
-
|
|
|
-
|
|
|
1,490
|
|
Unrealized
gain on cash flow hedges
|
|
494
|
|
|
3,303
|
|
|
4,278
|
|
Other
comprehensive income before taxes
|
|
(4,126)
|
|
|
(13,927)
|
|
|
(5,618)
|
|
Income tax
effect
|
|
(419)
|
|
|
1,526
|
|
|
(96)
|
|
Other
comprehensive (loss) after taxes
|
|
(4,545)
|
|
|
(12,401)
|
|
|
(5,714)
|
|
Comprehensive
income (loss)
|
$
|
48,101
|
|
$
|
46,785
|
|
$
|
(8,218)
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
|
OFG BANCORP
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND
2015
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of year
|
$
|
176,000
|
|
$
|
176,000
|
|
$
|
176,000
|
|
Balance at end of year
|
|
176,000
|
|
|
176,000
|
|
|
176,000
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of year
|
|
52,626
|
|
|
52,626
|
|
|
52,626
|
|
Balance at end of year
|
|
52,626
|
|
|
52,626
|
|
|
52,626
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of year
|
|
540,948
|
|
|
540,512
|
|
|
539,311
|
|
Stock-based
compensation expense
|
|
1,109
|
|
|
1,270
|
|
|
1,637
|
|
Stock-based
compensation excess tax benefit recognized in income
|
|
(99)
|
|
|
-
|
|
|
-
|
|
Lapsed restricted
stock units
|
|
(358)
|
|
|
(834)
|
|
|
(436)
|
|
Balance at end of year
|
|
541,600
|
|
|
540,948
|
|
|
540,512
|
|
Legal
surplus:
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of year
|
|
76,293
|
|
|
70,435
|
|
|
70,467
|
|
Transfer from
retained earnings
|
|
5,161
|
|
|
5,858
|
|
|
(32)
|
|
Balance at end of year
|
|
81,454
|
|
|
76,293
|
|
|
70,435
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of year
|
|
177,808
|
|
|
148,886
|
|
|
181,152
|
|
Net income
|
|
52,646
|
|
|
59,186
|
|
|
(2,504)
|
|
Cash dividends
declared on common stock
|
|
(10,553)
|
|
|
(10,544)
|
|
|
(15,932)
|
|
Cash dividends
declared on preferred stock
|
|
(13,862)
|
|
|
(13,862)
|
|
|
(13,862)
|
|
Transfer to
legal surplus
|
|
(5,161)
|
|
|
(5,858)
|
|
|
32
|
|
Balance at end of year
|
|
200,878
|
|
|
177,808
|
|
|
148,886
|
|
Treasury
stock:
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of year
|
|
(104,860)
|
|
|
(105,379)
|
|
|
(97,070)
|
|
Stock
repurchased
|
|
-
|
|
|
-
|
|
|
(8,950)
|
|
Lapsed
restricted stock units
|
|
358
|
|
|
519
|
|
|
641
|
|
Balance at end of year
|
|
(104,502)
|
|
|
(104,860)
|
|
|
(105,379)
|
|
Accumulated
other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of year
|
|
1,596
|
|
|
13,997
|
|
|
19,711
|
|
Other
comprehensive loss, net of tax
|
|
(4,545)
|
|
|
(12,401)
|
|
|
(5,714)
|
|
Balance at end of year
|
|
(2,949)
|
|
|
1,596
|
|
|
13,997
|
|
Total
stockholders’ equity
|
$
|
945,107
|
|
$
|
920,411
|
|
$
|
897,077
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
|
|
|
|
OFG BANCORP
CONSOLIDATED STATEMENTS
OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER
31, 2017, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
52,646
|
|
$
|
59,186
|
|
$
|
(2,504)
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Amortization of
deferred loan origination fees, net of costs
|
|
3,529
|
|
|
3,509
|
|
|
3,396
|
|
Amortization of
fair value premiums, net of discounts, on acquired loans
|
|
8
|
|
|
39
|
|
|
3,106
|
|
Amortization of
investment securities premiums, net of accretion of discounts
|
|
7,865
|
|
|
8,540
|
|
|
12,109
|
|
Amortization of
core deposit and customer relationship intangibles
|
|
1,473
|
|
|
1,677
|
|
|
1,906
|
|
Amortization of
fair value premiums on acquired deposits
|
|
-
|
|
|
340
|
|
|
660
|
|
FDIC shared-loss
(benefit) expense, net
|
|
(1,403)
|
|
|
13,581
|
|
|
42,808
|
|
Other-than-temporary
impairment on securities
|
|
-
|
|
|
-
|
|
|
1,490
|
|
Depreciation and
amortization of premises and equipment
|
|
8,986
|
|
|
9,420
|
|
|
11,100
|
|
Deferred income
tax expense, net
|
|
(3,658)
|
|
|
23,226
|
|
|
(37,329)
|
|
Provision for
loan and lease losses, net
|
|
113,139
|
|
|
65,076
|
|
|
161,501
|
|
Stock-based
compensation
|
|
1,109
|
|
|
1,270
|
|
|
1,637
|
|
Stock-based
compensation excess tax benefit recognized in income
|
|
(99)
|
|
|
-
|
|
|
-
|
|
(Gain) loss on:
|
|
|
|
|
|
|
|
|
|
Sale of
securities
|
|
(6,896)
|
|
|
(12,207)
|
|
|
(2,572)
|
|
Sale of
mortgage loans held-for-sale
|
|
(955)
|
|
|
(1,570)
|
|
|
(3,135)
|
|
Derivatives
|
|
(103)
|
|
|
181
|
|
|
(81)
|
|
Early
extinguishment of debt
|
|
80
|
|
|
12,000
|
|
|
-
|
|
Foreclosed
real estate
|
|
4,964
|
|
|
11,934
|
|
|
33,998
|
|
Sale of other
repossessed assets
|
|
57
|
|
|
(1,623)
|
|
|
4,828
|
|
Sale of
premises and equipment
|
|
(539)
|
|
|
12
|
|
|
192
|
|
Originations of
loans held-for-sale
|
|
(116,020)
|
|
|
(179,430)
|
|
|
(211,352)
|
|
Proceeds from
sale of mortgage loans held-for-sale
|
|
75,637
|
|
|
69,862
|
|
|
102,383
|
|
Net (increase)
decrease in:
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
156
|
|
|
(59)
|
|
|
1,306
|
|
Accrued
interest receivable
|
|
(29,742)
|
|
|
410
|
|
|
708
|
|
Servicing
assets
|
|
37
|
|
|
(2,403)
|
|
|
610
|
|
Other assets
|
|
13,675
|
|
|
(7,941)
|
|
|
(14,849)
|
|
Net increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accrued
interest on deposits and borrowings
|
|
(937)
|
|
|
(862)
|
|
|
(250)
|
|
Accrued
expenses and other liabilities
|
|
28,431
|
|
|
4,344
|
|
|
(14,584)
|
|
Net cash
provided by operating activities
|
|
151,440
|
|
|
78,512
|
|
|
97,082
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
|
|
|
|
OFG BANCORP
CONSOLIDATED STATEMENTS
OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER
31, 2017, 2016 AND 2015 (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale
|
|
(182,054)
|
|
|
(119,544)
|
|
|
(1,939)
|
|
Investment
securities held-to-maturity
|
|
-
|
|
|
(86,478)
|
|
|
(499,317)
|
|
FHLB stock
|
|
(31,950)
|
|
|
(20,421)
|
|
|
-
|
|
Maturities and
redemptions of:
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale
|
|
105,169
|
|
|
145,512
|
|
|
238,003
|
|
Investment
securities held-to-maturity
|
|
88,726
|
|
|
101,965
|
|
|
39,310
|
|
FHLB stock
|
|
28,748
|
|
|
30,411
|
|
|
386
|
|
Proceeds from
sales of:
|
|
|
|
|
|
|
|
|
|
Investment
securities available-for-sale
|
|
256,996
|
|
|
300,483
|
|
|
103,831
|
|
Foreclosed
real estate and other repossessed assets, including write-offs
|
|
40,051
|
|
|
47,507
|
|
|
117,050
|
|
Proceeds from
sale of loans held-for-sale
|
|
-
|
|
|
123,137
|
|
|
-
|
|
Premises and
equipment
|
|
569
|
|
|
48
|
|
|
-
|
|
Mortgage
servicing rights
|
|
-
|
|
|
-
|
|
|
5,927
|
|
Origination and
purchase of loans, excluding loans held-for-sale
|
|
(801,766)
|
|
|
(768,353)
|
|
|
(802,572)
|
|
Principal
repayment of loans, including covered loans
|
|
699,409
|
|
|
817,199
|
|
|
861,891
|
|
(Repayments to)
reimbursements from the FDIC on shared-loss agreements, net
|
|
(10,125)
|
|
|
1,573
|
|
|
90,697
|
|
Additions to
premises and equipment
|
|
(6,469)
|
|
|
(5,297)
|
|
|
(5,283)
|
|
Net change in
restricted cash
|
|
-
|
|
|
319
|
|
|
5,058
|
|
Net cash
provided by investing activities
|
|
187,304
|
|
|
568,061
|
|
|
153,042
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
|
|
|
|
OFG BANCORP
CONSOLIDATED STATEMENTS
OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER
31, 2017, 2016 AND 2015 – (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
125,991
|
|
|
(61,078)
|
|
|
(198,052)
|
|
Securities
sold under agreements to repurchase
|
|
(459,815)
|
|
|
(292,264)
|
|
|
(45,315)
|
|
FHLB
advances, federal funds purchased, and other borrowings
|
|
(5,741)
|
|
|
(228,633)
|
|
|
(4,155)
|
|
Subordinated
capital notes
|
|
-
|
|
|
(66,550)
|
|
|
1,049
|
|
Exercise of
stock options and restricted units lapsed, net
|
|
-
|
|
|
(315)
|
|
|
204
|
|
Purchase of
treasury stock
|
|
-
|
|
|
-
|
|
|
(8,950)
|
|
Dividends paid
on preferred stock
|
|
(13,862)
|
|
|
(13,862)
|
|
|
(13,862)
|
|
Dividends paid
on common stock
|
|
(10,553)
|
|
|
(10,141)
|
|
|
(17,761)
|
|
Net cash used
in financing activities
|
$
|
(363,980)
|
|
$
|
(672,843)
|
|
$
|
(286,842)
|
|
Net change in
cash and cash equivalents
|
|
(25,236)
|
|
|
(26,270)
|
|
|
(36,718)
|
|
Cash and cash
equivalents at beginning of year
|
|
510,439
|
|
|
536,709
|
|
|
573,427
|
|
Cash and cash
equivalents at end of year
|
$
|
485,203
|
|
$
|
510,439
|
|
$
|
536,709
|
|
Supplemental
Cash Flow Disclosure and Schedule of Non-cash Activities:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
40,570
|
|
$
|
56,302
|
|
$
|
67,766
|
|
Income taxes
paid
|
$
|
30
|
|
$
|
10,051
|
|
$
|
13,966
|
|
Mortgage loans
securitized into mortgage-backed securities
|
$
|
74,919
|
|
$
|
112,071
|
|
$
|
116,319
|
|
Transfer from
loans to foreclosed real estate and other repossessed assets
|
$
|
43,163
|
|
$
|
45,538
|
|
$
|
67,345
|
|
Reclassification
of loans held-for-investment portfolio to held-for-sale portfolio
|
$
|
33,647
|
|
$
|
123,137
|
|
$
|
3,445
|
|
Reclassification
of loans held-for-sale portfolio to held-for-investment portfolio
|
$
|
293
|
|
$
|
182
|
|
$
|
156
|
|
Financed sales
of foreclosed real estate
|
$
|
1,113
|
|
$
|
2,212
|
|
$
|
4,760
|
|
Loans booked
under the GNMA buy-back option
|
$
|
8,268
|
|
$
|
9,681
|
|
$
|
7,945
|
|
Interest
capitalized on loans subject to the temporary payment moratorium
|
$
|
39,701
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements
|
|
|
|
OFG
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of OFG Bancorp (Oriental) conform with
GAAP and to banking industry practices. The following is a description of Oriental’s
most significant accounting policies:
Nature of Operations
Oriental is a publicly-owned financial holding company
incorporated under the laws of the Commonwealth of Puerto Rico. Oriental operates through various subsidiaries
including, a commercial bank, Oriental Bank (the “Bank”), a securities
broker-dealer, Oriental Financial Services Corp. (“Oriental Financial
Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”),
and a retirement plan administrator, Oriental Pension Consultants, Inc.
(“OPC”). Oriental also has a
special purpose entity, Oriental Financial (PR) Statutory Trust II (the
“Statutory Trust II”). Through these subsidiaries and their respective divisions,
Oriental 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.
The main offices of Oriental and its subsidiaries are
located in San Juan, Puerto Rico, except for OPC, which is located in Boca
Raton, Florida. Oriental is subject to supervision and regulation by the Board
of Governors of the Federal Reserve System (the “Federal Reserve Board”) under
the U.S. Bank Holding Company Act of 1956, as amended, and the Dodd-Frank Act.
The Bank is subject to the supervision, examination and
regulation of the Office of the Commissioner of Financial Institutions of
Puerto Rico (“OCFI”) and the Federal Deposit Insurance Corporation ( “FDIC”).
The Bank offers banking services such as commercial and consumer lending,
leasing, auto loans, savings and time deposit products, financial planning, and
corporate and individual trust services, and capitalizes on its commercial
banking network to provide mortgage lending products to its clients. The Bank
has an operating subsidiary, OFG USA, which is a commercial lender organized in
Delaware and based in Cornelius, North Carolina. Oriental International Bank
Inc. (“OIB”), a wholly-owned subsidiary of the Bank, and Oriental Overseas, a
division of the Bank, are international banking entities licensed pursuant to
the International Banking Center Regulatory Act of Puerto Rico, as amended. OIB
and Oriental Overseas offer the Bank certain Puerto Rico tax advantages. Their
activities are limited under Puerto Rico law to persons located in Puerto Rico
with assets/liabilities located outside of Puerto Rico.
Oriental Financial Services is a securities broker-dealer
and is subject to the supervision, examination and regulation of the Financial
Industry Regulatory Authority (“FINRA”), the SEC, and the OCFI. Oriental
Financial Services is also a member of the Securities Investor Protection
Corporation. Oriental Insurance is an insurance agency and is subject to the
supervision, examination and regulation of the Office of the Commissioner of
Insurance of Puerto Rico.
Oriental’s mortgage banking activities are conducted
through a division of the Bank. The mortgage banking activities include the
origination of mortgage loans for the Bank’s own portfolio, and the sale of
loans directly in the secondary market or the securitization of conforming
loans into mortgage-backed securities. The Bank originates Federal Housing
Administration (“FHA”) insured and Veterans Administration (“VA”) guaranteed
mortgages that are primarily securitized for issuance of Government National
Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to
individual or institutional investors in the secondary market. Conventional
loans that meet the underwriting requirements for sale or exchange under
certain Federal National Mortgage Association (“FNMA”) or Federal Home Loan
Mortgage Corporation (“FHLMC”) programs are referred to as conforming mortgage
loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed
securities. The Bank is an approved seller of FNMA, as well as FHLMC, mortgage
loans for issuance of FNMA and FHLMC mortgage-backed securities. The Bank is
also an approved issuer of GNMA mortgage-backed securities. The Bank is the
master servicer of the GNMA, FNMA and FHLMC pools that it issues and of its
mortgage loan portfolio, and has a subservicing arrangement with a third party
for a portion of its acquired loan portfolio. During 2016, Oriental began
servicing most of its mortgage loan portfolio.
On December 18, 2012, Orienal 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”), a
subsidiary offering insurance services, and (ii) BBVA Securities of Puerto
Rico, Inc. (“BBVA 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.”
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of OFG Bancorp and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
The Statutory Trust II is exempt from the consolidation requirements of GAAP.
Use
of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity
with GAAP requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate
mainly to the determination of the allowance for loan and lease losses, the
valuation of securities and derivative instruments, revisions to expected cash
flows in acquired loans, accounting for the indemnification asset, the
valuation of the true up payment obligation, the determination of income taxes,
other-than-temporary impairment of securities, and goodwill valuation and impairment
assessment.
Cash Equivalents
Oriental 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.
Earnings (Loss) per Common Share
Basic earnings (loss) per share is calculated by
dividing income (loss) available to common shareholders (net income (loss)
reduced (increased) by dividends on preferred stock) by the weighted average of
outstanding common shares. Diluted earnings (loss) per share is similar to the
computation of basic earnings (loss) per share except that the weighted average
of common shares is increased to include the number of additional common shares
that would have been outstanding if the potentially dilutive common shares
underlying stock options and restricted units had been issued, assuming that
proceeds from exercise are used to repurchase shares in the market (treasury
stock method). Any stock splits and dividends are retroactively recognized in
all periods presented in the consolidated financial statements.
Securities Purchased/Sold Under Agreements to
Resell/Repurchase
Oriental purchases securities under
agreements to resell the same or similar securities. Amounts advanced under
these agreements represent short-term loans and are reflected as assets in the
consolidated statements of financial condition. It is Oriental’s policy to take
possession of securities purchased under resale agreements while the
counterparty retains effective control over the securities. Oriental monitors
the fair value of the underlying securities as compared to the related
receivable, including accrued interest, and requests additional collateral when
deemed appropriate.
Oriental also sells securities under
agreements to repurchase the same or similar securities. Oriental retains
effective control over the securities sold under these agreements. Accordingly,
such agreements are treated as financing arrangements, and the obligations to
repurchase the securities sold are reflected as liabilities. The securities
underlying the financing agreements remain included in the asset accounts. The
counterparty to repurchase agreements generally has the right to repledge the
securities received as collateral.
Investment Securities
Securities are classified as held-to-maturity,
available-for-sale or trading. Securities for which Oriental has the intent and
ability to hold until maturity are classified as held-to-maturity and are
carried at amortized cost. Securities that might be sold prior to maturity
because of interest rate changes to meet liquidity needs or to better match the
repricing characteristics of funding sources are classified as
available-for-sale. These securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported net of tax in
other comprehensive income (loss).
Oriental classifies as trading those securities that
are acquired and held principally for the purpose of selling them in the near
future. These securities are carried at fair value with realized and unrealized
changes in fair value included in earnings in the period in which the changes
occur.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental’s investment in
the Federal Home Loan Bank of New York (“FHLB-NY”) stock, a restricted
security, has no readily determinable fair value and can only be sold back to
the FHLB-NY at cost. Therefore, these stock shares are deemed to be
nonmarketable equity securities and are carried at cost.
Premiums and discounts are amortized to interest
income over the life of the related securities using the interest method. Net
realized gains or losses on sales of investment securities and unrealized gains
and losses valuation adjustments considered other than temporary, if any, on
securities classified as either available-for-sale or held-to-maturity are
reported separately in the statements of operations. The cost of securities
sold is determined by the specific identification method.
Financial Instruments
Certain financial instruments, including derivatives,
trading securities and investment securities available-for-sale, are recorded
at fair value and unrealized gains and losses are recorded in other
comprehensive income (loss) or as part of non-interest income, as appropriate.
Fair values are based on listed market prices, if available. If listed market
prices are not available, fair value is determined based on other relevant factors,
including price quotations for similar instruments. The fair values of certain
derivative contracts are derived from pricing models that consider current
market and contractual prices for the underlying financial instruments as the
well as time value and yield curve or volatility factors underlying the
positions.
Oriental determines the fair value of its
financial instruments based on the fair value measurement framework, which
establishes a fair value hierarchy that prioritizes the inputs of valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). The three levels of the fair value hierarchy are
described below:
Level
1 — Level 1 assets and liabilities
include equity securities that are traded in an active exchange market.
Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level
2 — Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are observable or
can be corroborated by observable market data for substantially the full term
of the assets or liabilities. Level 2 assets and liabilities include
(i) mortgage-backed securities for which the fair value is estimated based
on valuations obtained from third-party pricing services for identical or
comparable assets, (ii) debt securities with quoted prices that are traded
less frequently than exchange-traded instruments and (iii) derivative
contracts and financial liabilities whose value is determined using a pricing
model with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data.
Level
3 — Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models for which
the determination of fair value requires significant management judgment or
estimation.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impairment of Investment Securities
Oriental conducts periodic reviews to identify and
evaluate each investment in an unrealized loss position for
other-than-temporary impairment. Oriental separates the amount of total
impairment into credit and noncredit-related amounts. The term
“other-than-temporary impairment” is not intended to indicate that the decline
is permanent, but indicates that the prospects for a near-term recovery of
value is not favorable, or that there is a lack of evidence to support a realizable
value equal to or greater than the carrying value of the investment. Any
portion of a decline in value associated with a credit loss is recognized in
income, while the remaining noncredit-related component is recognized in other
comprehensive income (loss). A credit loss is determined by assessing whether
the amortized cost basis of the security will be recovered by comparing it to
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.”
Oriental’s review for impairment
generally entails, but is not limited to:
• the identification and evaluation of investments
that have indications of possible other-than-temporary impairment;
• the analysis of individual investments that have
fair values less than amortized cost, including consideration of the length of
time the investment has been in an unrealized loss position, and the expected
recovery period;
• the financial condition of the issuer or issuers;
• the creditworthiness of the obligor of the
security;
• actual collateral attributes;
• any rating changes by a rating agency;
• current analysts’ evaluations;
• the payment structure of the debt security and the
likelihood of the issuer being able to make payments;
• current market conditions;
• adverse conditions specifically related to the
security, industry, or a geographic area;
• Oriental’s intent to sell the debt security;
• whether it is more-likely-than-not that Oriental
will be required to sell the debt security before its anticipated recovery; and
• other qualitative factors that could support or not
an other-than-temporary impairment.
Derivative
Instruments and Hedging Activities
Oriental’s overall interest rate risk-management
strategy incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility.
Oriental’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
Oriental’s gains and losses on the derivative instruments that are linked to
the forecasted cash flows of these hedged assets and liabilities. Oriental
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 Oriental’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
Oriental’s interest rate risk-management strategy include interest rate swaps,
caps, forward-settlement swaps, and futures contracts. 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 exchange-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 Oriental the right to enter into interest rate swaps and
cap and floor agreements with the writer of the option. In addition, Oriental
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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
When using derivative
instruments, Oriental exposes itself to credit and market risk. If a
counterparty fails to fulfill its performance obligations under a derivative
contract due to insolvency or any other event of default, Oriental’s credit
risk will equal the fair value gain in a derivative plus any cash or securities
that may have been delivered to the counterparty as part of the transaction
terms. Generally, when the fair value of a derivative contract is positive,
this indicates that the counterparty owes Oriental, thus creating a repayment
risk for Oriental. This risk is generally mitigated by requesting cash or
securities from the counterparty to cover the positive fair value. When the fair
value of a derivative contract is negative, Oriental owes the counterparty and,
therefore, assumes no credit risk other than to the extent that the cash or
value of the collateral delivered as part of the transactions exceeds the fair
value of the derivative. Oriental minimizes the credit (or repayment) risk in
derivative instruments by entering into transactions with high-quality
counterparties.
Oriental uses forward-settlement swaps to hedge the
variability of future interest cash flows of forecasted wholesale borrowings
attributable to changes in LIBOR. Once the forecasted wholesale borrowing
transactions occur, the interest rate swap will effectively lock-in Oriental’s
interest rate payments on an amount of forecasted interest expense attributable
to the one-month LIBOR corresponding to the swap notional amount. By employing
this strategy, Oriental minimizes its exposure to volatility in LIBOR.
As part of this hedging strategy, Oriental formally
documents all relationships between hedging instruments and hedged items, as
the well as its risk-management objective and strategy for undertaking various
hedging transactions. This process includes linking all derivatives that are
designated as cash flow hedges to (i) specific assets and liabilities on
the balance sheet or (ii) specific firm commitments or forecasted
transactions. Oriental also formally assesses (both at the hedge’s inception
and on an ongoing basis) whether the derivatives that are used in hedging
transactions have been highly effective in offsetting changes in the fair value
or cash flows of hedged items and whether those derivatives may be expected to
remain highly effective in future periods. The changes in fair value of the
forward-settlement swaps are recorded in accumulated other comprehensive income
(loss) to the extent there is no significant ineffectiveness.
Oriental discontinues hedge accounting prospectively
when (i) it determines that the derivative is no longer effective in
offsetting changes in the cash flows of a hedged item (including hedged items
such as firm commitments or forecasted transactions); (ii) the derivative
expires or is sold, terminated, or exercised; (iii) it is no longer
probable that the forecasted transaction will occur; (iv) a hedged firm commitment
no longer meets the definition of a firm commitment; or (v) management
determines that designating the derivative as a hedging instrument is no longer
appropriate or desired.
Oriental’s derivative activities are monitored by its
Asset/Liability Management Committee which is also responsible for approving
hedging strategies that are developed through its analysis of data derived from
financial simulation models and other internal and industry sources. The
resulting hedging strategies are then incorporated into Oriental’s overall
interest rate risk-management.
Off-Balance Sheet Instruments
In the ordinary course of business, Oriental enters
into off-balance sheet instruments consisting of commitments to extend credit,
further discussed in Note 26 hereto. Such financial instruments are
recorded in the financial statements when these are funded or related fees are
incurred or received. Oriental periodically evaluates the credit risks inherent
in these commitments and establishes accruals for such risks if and when these
are deemed necessary.
Mortgage
Banking Activities and Loans Held-For-Sale
The residential mortgage loans reported as
held-for-sale are stated at the lower of cost or fair value, cost being
determined on the outstanding loan balance less unearned income, and fair value
determined in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income. Realized gains or losses on these
loans are determined using the specific identification method. Loans held-for-sale
include all conforming mortgage loans originated and purchased, which from time
to time Oriental sells to other financial institutions or securitizes
conforming mortgage loans into GNMA, FNMA and FHLMC pass-through certificates.
Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities
Oriental recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. Oriental is not engaged in sales of mortgage loans and
mortgage-backed securities subject to recourse provisions except for those
provisions that allow for the repurchase of loans as a result
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
of a breach of certain representations and warranties
other than those related to the credit quality of the loans included in the
sale transactions.
The transfer of an entire financial asset, a group of
entire financial assets, or a participating interest in an entire financial
asset in which Oriental surrenders control over the assets is accounted for as
a sale if all of the following conditions set forth in Accounting Standards
Codification ("ASC") Topic 860 are met: (i) the assets must be
isolated from creditors of the transferor, (ii) the transferee must obtain
the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (iii) the
transferor cannot maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. When Oriental
transfers financial assets and the transfer fails any one of these criteria,
Oriental is prevented from derecognizing the transferred financial assets and
the transaction is accounted for as a secured borrowing. For federal and Puerto
Rico income tax purposes, Oriental treats the transfers of loans which do not
qualify as “true sales” under the applicable accounting guidance, as sales,
recognizing a deferred tax asset or liability on the transaction. For transfers
of financial assets that satisfy the conditions to be accounted for as sales,
Oriental derecognizes all assets sold; recognizes all assets obtained and
liabilities incurred in consideration as proceeds of the sale, including
servicing assets and servicing liabilities, if applicable; initially measures
at fair value assets obtained and liabilities incurred in a sale; and
recognizes in earnings any gain or loss on the sale. The guidance on transfer
of financial assets requires a true sale analysis of the treatment of the
transfer under state law as if Oriental was a debtor under the bankruptcy code.
A true sale legal analysis includes several legally relevant factors, such as
the intent of the parties, the nature and level of recourse to the transferor,
and the nature of retained interests in the loans sold. The analytical
conclusion as to a true sale is never absolute and unconditional, but contains
qualifications based on the inherent equitable powers of a bankruptcy court, as
well as the unsettled state of the common law. Once the legal isolation test
has been met, other factors concerning the nature and extent of the
transferor’s control over the transferred assets are taken into account in
order to determine whether derecognition of assets is warranted.
When Oriental sells or securitizes mortgage loans, it
generally makes customary representations and warranties regarding the
characteristics of the loans sold. Conforming conventional mortgage loans are
combined into pools which are exchanged for FNMA and GNMA mortgage-backed
securities, which are generally sold to private investors, or sold directly to
FNMA or other private investors for cash. To the extent the loans do not meet
the specified characteristics, investors are generally entitled to require
Oriental to repurchase such loans or indemnify the investor against losses if
the assets do not meet certain guidelines. GNMA programs allow financial
institutions to buy back individual delinquent mortgage loans that meet certain
criteria from the securitized loan pool for which Oriental provides servicing.
At Oriental’s option and without GNMA prior authorization, Oriental may
repurchase such delinquent loans for an amount equal to 100% of the loan’s
remaining principal balance. This buy-back option is considered a conditional
option until the delinquency criteria is met, at which time the option becomes
unconditional. When the loans backing a GNMA security are initially
securitized, Oriental treats the transaction as a sale for accounting purposes
because the conditional nature of the buy-back option means that Oriental does
not maintain effective control over the loans, and therefore these are
derecognized from the statement of financial condition. When individual loans
later meet GNMA’s specified delinquency criteria and are eligible for
repurchase, Oriental is deemed to have regained effective control over these
loans, and these must be brought back onto Oriental’s books as assets,
regardless of whether Oriental intends to exercise the buy-back option. Quality
review procedures are performed by Oriental as required under the government
agency programs to ensure that asset guideline qualifications are met. Oriental
has not recorded any specific contingent liability in the consolidated
financial statements for these customary representation and warranties related
to loans sold by Oriental, and management believes that, based on historical
data, the probability of payments and expected losses under these
representation and warranty arrangements is not significant.
Oriental has liability for residential
mortgage loans sold subject to credit recourse, principally loans associated with FNMA residential mortgage loan
sales and securitization programs. In the
event of any customer default, pursuant to the credit recourse provided,
Oriental is required to repurchase the loan or reimburse the third party
investor for the incurred loss. The maximum potential amount of future payments
that Oriental would be required to make under the recourse arrangements in the
event of nonperformance by the borrowers is equivalent to the total outstanding
balance of the residential mortgage loans serviced with recourse and interest,
if applicable. In the event of nonperformance by the borrower, Oriental has
rights to the underlying collateral securing the mortgage loan. Oriental
suffers ultimate losses on these loans when the proceeds from a foreclosure
sale of the property underlying a defaulted mortgage loan are less than the
outstanding principal balance of the loan plus any uncollected interest
advanced and the costs of holding and disposing the related property. Oriental
has established a liability to cover the estimated credit loss exposure related
to loans sold with credit recourse.
The estimated losses to be absorbed under the credit
recourse arrangements are recorded as a liability when the loans are sold or
credit recourse is assumed as part of acquired servicing rights, and are
updated by accruing or reversing expense (categorized in the line item
"mortgage banking activities" in the consolidated statements of
operations) throughout the life of the loan, as necessary, when
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
additional relevant information becomes available. The
methodology used to estimate the recourse liability is a function of the
recourse arrangements given and considers a variety of factors, which include
actual defaults and historical loss experience, foreclosure rate, estimated
future defaults and the probability that a loan would be delinquent.
Statistical methods are used to estimate the recourse liability. The expected
loss, which represents the amount expected to be lost on a given loan,
considers the probability of default and loss severity. The probability of
default represents the probability that a loan in good standing would become 120
days delinquent within the following twelve-month period.
Servicing Assets
Oriental periodically sells or securitizes mortgage
loans while retaining the obligation to perform the servicing of such loans. In
addition, Oriental may purchase or assume the right to service mortgage loans
originated by others. Whenever Oriental undertakes an obligation to service a
loan, management assesses whether a servicing asset and/or liability should be
recognized. A servicing asset is recognized whenever the compensation for
servicing is expected to more than adequately compensate Oriental for servicing
the loans. Likewise, a servicing liability would be recognized in the event
that servicing fees to be received are not expected to adequately compensate
Oriental for its expected cost.
All separately recognized servicing assets are
recognized at fair value using the fair value measurement method. Under the
fair value measurement method, Oriental measures servicing rights at fair value
at each reporting date and reports changes in fair value of servicing asset in
the statement of operations in the period in which the changes occur, and
includes these changes, if any, with mortgage banking activities in the
consolidated statement of operations. The fair value of servicing rights is
subject to fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses.
The fair value of servicing rights 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.
Loans and Leases
Originated and Other Loans and Leases Held in
Portfolio
Loans that Oriental originates and intends to hold in
portfolio are stated at the principal amount outstanding, adjusted for
unamortized deferred fees and costs which are amortized to interest income over
the expected life of the loan using the interest method. Oriental discontinues
accrual of interest on originated loans after payments become more than 90 days past due or earlier if Oriental does not
expect the full collection of principal or interest. The delinquency status is
based upon the contractual terms of the loans.
Loans for which the recognition of interest income has
been discontinued are designated as non-accruing. Collections are accounted for
on the cash method thereafter, until qualifying to return to accrual status.
Such loans are not reinstated to accrual status until interest is received on a
current basis and other factors indicative of doubtful collection cease to
exist. The determination as to the ultimate collectability of the loan’s
balance may involve management’s judgment in the evaluation of the borrower’s
financial condition and prospects for repayment.
Oriental follows a systematic methodology
to establish and evaluate the adequacy of the allowance for loan and lease
losses to provide for inherent losses in the loan portfolio. This methodology
includes the consideration of factors such as economic conditions, portfolio
risk characteristics, prior loss experience, and results of periodic credit
reviews of individual loans. The provision for loan and lease losses charged to
current operations is based on such methodology. Loan and lease losses are
charged and recoveries are credited to the allowance for loan and lease losses
on originated and other loans.
Larger commercial loans that exhibit
potential or observed credit weaknesses are subject to individual review and
grading. Where appropriate, allowances are allocated to individual loans based
on management’s estimate of the borrower’s ability to repay the loan given the
availability of collateral, other sources of cash flow, and legal options
available to Oriental.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Included in
the review of individual loans are those that are impaired. A loan is
considered impaired when, based on current information and events, it is
probable that Oriental will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan’s effective interest rate, or as a
practical expedient, at the observable market price of the loan or the fair
value of the collateral, if the loan is collateral dependent. Loans are
individually evaluated for impairment, except large groups of small balance
homogeneous loans that are collectively evaluated for impairment and loans that
are recorded at fair value or at the lower of cost or fair value. Oriental
measures for impairment all commercial loans over $250 thousand (i) that are
either over 90 days past due or adversely classified, (ii) that are
troubled-debt restructurings (each a "TDR’s”), or (iii) when deemed
necessary by management. The portfolios of mortgage loans, auto and leasing,
and consumer loans are considered homogeneous and are evaluated collectively
for impairment.
Oriental uses a rating system to apply an
overall allowance percentage to each originated and other loan portfolio
segment based on historical credit losses adjusted for current conditions and
trends. The historical loss experience is determined by portfolio segment and
is based on the actual loss history experienced by Oriental over a determined
look back period for each segment. The actual loss factor is adjusted by the
appropriate loss emergence period as calculated for each portfolio. Then, the adjusted
loss experience is supplemented with other qualitative factors based on the
risks present for each portfolio segment. These qualitative factors include
consideration of the following: the credit grading assigned to commercial
loans; levels of and trends in delinquencies and impaired loans; levels of and
trends in charge-offs and recoveries; trends in volume and terms of loans;
effects of any changes in risk selection and underwriting standards; other
changes in lending policies, procedures, and practices; experience, ability,
and depth of lending management and other relevant staff, including the bank’s
loan review system as graded by regulatory agencies in their last examination;
local economic trends and conditions; industry conditions; effects of external
factors such as competition and regulatory requirements on the level of
estimated credit losses in the current portfolio; and effects of changes in
credit concentrations and collateral value. An additional impact from the historical loss experience is applied
based on levels of delinquency, loan classification, FICO score and/or
origination date, depending on the portfolio.
At origination, a
determination is made whether a loan will be held in our portfolio or is
intended for sale in the secondary market. Loans that will be held in
Oriental’s portfolio are carried at amortized cost. Residential mortgage loans
held for sale are recorded at the lower of the aggregate cost or market value
(“LOCOM”).
Acquired Loans and Leases
Loans that Oriental acquires
in acquisitions are recorded at fair value with no carryover of the related
allowance for loan losses. Determining the fair value of the loans involves
estimating the amount and timing of principal and interest cash flows expected
to be collected on the loans and discounting those cash flows at a market rate
of interest.
Oriental has acquired loans
in two separate acquisitions, the BBVAPR Acquisition in December 2012 and the
FDIC-assisted Eurobank acquisition in April 2010. For each acquisition, Oriental
considered the following factors as indicators that an acquired loan had
evidence of deterioration in credit quality and was therefore in the scope of
ASC 310-30:
·
Loans that were 90 days or more
past due;
·
Loans that had an internal risk
rating of substandard or worse (substandard is consistent with regulatory
definitions and is defined as having a well-defined weakness that jeopardizes
liquidation of the loan);
·
Loans that were classified as
nonaccrual by the acquired bank at the time of acquisition; and
·
Loans that had been previously
modified in a TDR.
Any acquired loans that were
not individually in the scope of ASC 310-30 because they did not meet the
criteria above were either (i) pooled into groups of similar loans based on the
borrower type, loan purpose, and collateral type and accounted for under ASC
310-30 by analogy or (ii) accounted for under ASC 310-20 (non-refundable fees
and other costs).
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired Loans Accounted for under ASC 310-20 (loans
with revolving feature and/or acquired at a premium)
Revolving credit facilities such as credit cards,
retail and commercial lines of credit and floor plans which are specifically
scoped out of ASC 310-30 are accounted for under the provisions of ASC 310-20.
Also, performing auto loans with FICO scores over 660 acquired at a premium in
the BBVAPR Acquisition are accounted for under this guidance. Auto loans with
FICO scores below 660 were acquired at a discount and are accounted for under
the provisions of ASC 310-30. The provisions of ASC 310-20 require that any
differences between the contractually required loan payments in excess of
Oriental’s initial investment in the loans be accreted into interest income on
a level-yield basis over the life of the loan. Loans acquired in the BBVAPR Acquisition
that were accounted for under the provisions of ASC 310-20 which had fully
amortized their premium or discount, recorded at the date of acquisition, are
removed from the acquired loan category. Loans accounted for under ASC 310-20
are placed on non-accrual status when past due in accordance with Oriental’s
non-accruing policy and any accretion of discount is discontinued. These assets
were recorded at estimated fair value on their acquisition date, incorporating
an estimate of future expected cash flows. Such fair value includes a credit
discount which accounts for expected loan losses over the estimated life of
these loans. Management takes into consideration this credit discount when
determining the necessary allowance for acquired loans that are accounted for
under the provisions of ASC 310-20.
The allowance for loan and lease losses model for
acquired loans accounted for under ASC 310-20 is the same as for the originated
and other loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including
those accounted for under ASC 310-30 by analogy)
Oriental performed a fair
market valuation of each of the loan pools, and each pool was recorded at a
discount. Oriental determined that at least part of the discount on the
acquired individual or pools of loans was attributable to credit quality by
reference to the valuation model used to estimate the fair value of these pools
of loans. The valuation model incorporated lifetime expected credit losses into
the loans’ fair valuation in consideration of factors such as evidence of
credit deterioration since origination and the amounts of contractually
required principal and interest that Oriental did not expect to collect as of
the acquisition date. Based on the guidance included in the December 18, 2009
letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply
ASC 310-30 by analogy to all of these acquired pools of loans as they all (i)
were acquired in a business combination or asset purchase, (ii) resulted in
recognition of a discount attributable, at least in part, to credit quality;
and (iii) were not subsequently accounted for at fair value.
The excess of expected cash
flows from acquired loans over the estimated fair value of acquired loans at
acquisition is referred to as the accretable discount and is recognized into
interest income over the remaining life of the acquired loans using the
interest method. The difference between contractually required payments at
acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount
represents estimated future credit losses expected to be incurred over the life
of the acquired loans. Subsequent decreases to the expected cash flows require
Oriental to evaluate the need for an addition to the allowance for loan losses.
Subsequent improvements in expected cash flows result in the reversal of the
associated allowance for loan losses, if any and the reversal of a
corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income
over the remaining life of the loan using the interest method. Oriental’s evaluation
of the amount of future cash flows that it expects to collect takes into
account actual credit performance of the acquired loans to date and Oriental’s
best estimates for the expected lifetime credit performance of the loans using
currently available information. Charge-offs of the principal amount on
acquired loans would be first applied to the nonaccretable discount portion of
the fair value adjustment.
In accordance with ASC
310-30, recognition of income is dependent on having a reasonable expectation
about the timing and amount of cash flows expected to be collected. Oriental
performs such an evaluation on a quarterly basis on both its acquired loans
individually accounted for under ASC 310-30 and those in pools accounted for
under ASC 310-30 by analogy.
Cash flows for acquired
loans individually accounted for under ASC 310-30 are estimated on a quarterly
basis. Based on this evaluation, a determination is made as to whether or not
Oriental has a reasonable expectation about the timing and amount of cash
flows. Such an expectation includes cash flows from normal customer repayment,
collateral value, foreclosure or other collection efforts. Cash flows for
acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are
also estimated on a quarterly basis. For residential real estate, home equity
and other consumer loans, cash flow loss estimates are calculated based on a
model that incorporates a projected probability of default and loss. For
commercial loans, lifetime loss rates are assigned to each pool with
consideration given for pool make-up, including risk rating profile. Lifetime
loss rates are developed from internally generated historical loss data and are
applied to each pool.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
To the extent that
Oriental cannot reasonably estimate cash flows, interest income recognition is
discontinued. The unit of account for loans in pools accounted for under ASC
310-30 by analogy is the pool of loans. Accordingly, as long as Oriental can
reasonably estimate cash flows for the pool as a whole, accretable yield on the
pool is recognized and all individual loans within the pool - even those more
than 90 days past due - would be considered to be accruing interest in
Oriental’s financial statement disclosures, regardless of whether or not Oriental
expects any principal or interest cash flows on an individual loan 90 days or
more past due.
Oriental writes-off the loan’s
recorded investment and derecognizes the associated allowance for loan and
lease losses for loans that exit the acquired pools.
Effective February 6, 2017, Oriental and the FDIC
agreed to terminate the loss and recovery sharing agreements in connection with
a portfolio of loans acquired in the Eurobank FDIC assisted transaction.
Allowance for Loan and Lease Losses
Oriental follows a systematic
methodology to establish and evaluate the adequacy of the allowance for loan
and lease losses to provide for inherent losses in loan portfolio. This
methodology includes the consideration of factors such as economic conditions,
portfolio risk characteristics, prior loss experience, and results of periodic
credit reviews of individual loans.
Oriental’s assessment of
the allowance for loan losses is determined in accordance with the guidance of
loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC
Section 310-10-35. Also, Oriental determines the allowance for loan losses on purchased
impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by
analogy, by evaluating decreases in expected cash flows after the acquisition
date.
The loss factor used for the general
reserve of these loans is established considering Oriental’s historical loss
experience adjusted for an estimated loss emergence period and the
consideration of environmental factors. Environmental factors considered are:
change in non-performing loans; migration in classification; trends in charge
offs; trends in volume of loans; changes in collateral values; changes in risk
selections and underwriting standards, and other changes in lending policies,
procedures and practices; experience, ability and depth of lending management
and other relevant staff, including Oriental’s loan review system; national and
local economic trends and industry conditions; and effect of external factors
such as competition and regulatory requirements on the level of estimated
credit losses. The sum of the adjusted loss experience factors and the
environmental factors will be the general valuation reserve (“GVA”) factor to
be used for the determination of the allowance for loan and lease losses in
each category.
Originated and Other Loans and Leases Held for
Investment and Acquired Loans Accounted for under ASC 310-20 (Loans
with revolving feature and/or acquired at a premium)
Oriental determines the allowance for loan
and lease losses by portfolio segment, which consist of mortgage loans,
commercial loans, consumer loans, and auto and leasing, as follows:
Mortgage loans: These loans are divided into four classes: traditional
mortgages, non-traditional mortgages, loans in loan modification programs and
home equity secured personal loans. Traditional mortgage loans include loans
secured by a dwelling, fixed coupons and regular amortization schedules.
Non-traditional mortgages include loans with interest-first amortization
schedules and loans with balloon considerations as part of their terms.
Mortgages in loan modification programs are loans that are being serviced under
such programs. Home equity loans are mainly equity lines of credit. The
allowance factor on mortgage loans is impacted by the adjusted historical loss
factors on the sub-segments and the environmental risk factors described above
and by delinquency buckets. The traditional mortgage loan portfolio is further
segregated by vintages and then by delinquency buckets.
Commercial
loans: The commercial portfolio is segmented by business line (corporate,
institutional, middle market, corporate retail, floor plan, and real estate)
and by collateral type (secured by real estate and other commercial and industrial
assets). The loss factor used for the GVA of these loans is established
considering Oriental's past 36 month historical loss experience of each segment
adjusted for the loss realization period and the consideration of environmental
factors. The sum of the adjusted loss experience and the environmental factors
is the GVA factor used for the determination of the allowance for loan and
lease losses on each segment.
Consumer loans: The consumer portfolio consists of smaller retail loans
such as retail credit cards, overdrafts, unsecured personal lines of credit,
and personal unsecured loans. The allowance factor, consisting of the adjusted
historical loss factor and the environmental risk factors, will be calculated
for each sub-class of loans by delinquency bucket.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Auto
and Leasing: The auto and leasing portfolio consists of financing for the
purchase of new or used motor vehicles for private or public use. The allowance
factor is impacted by the adjusted historical loss factor and the environmental
risk factors. For the determination of the allowance factor, the portfolio is
segmented by FICO score, which is updated on a quarterly basis and then by
delinquency bucket
Oriental
establishes its allowance for loan losses through a provision for credit losses
based on our evaluation of the credit quality of the loan portfolio. This
evaluation, which includes a review of loans on which full collectability may
not be reasonably assured, considers, among other matters, the estimated fair
value of the underlying collateral, economic conditions, historical net loan
loss experience, and other factors that warrant recognition in determining our
allowance for loan losses. Oriental continues to monitor and modify the level
of the allowance for loan losses to ensure it is adequate to cover losses
inherent in our loan portfolio.
Our allowance for
loan losses consists of the following elements: (i) specific valuation
allowances based on probable losses on specifically identified impaired loans;
and (ii) valuation allowances based on net historical loan loss experience for
similar loans with similar inherent risk characteristics and performance
trends, adjusted, as appropriate, for qualitative risk factors specific to
respective loan types.
When current
information and events indicate that it is probable that we will be unable to
collect all amounts of principal and interest due under the original terms of a
business or commercial real estate loan greater than $250 thousand, such loan
will be classified as impaired. Additionally, all loans modified in a TDR are
considered impaired. The need for specific valuation allowances are determined
for impaired loans and recorded as necessary. For impaired loans, we consider
the fair value of the underlying collateral, less estimated costs to sell, if
the loan is collateral dependent, or we use the present value of estimated
future cash flows in determining the estimates of impairment and any related
allowance for loan losses for these loans. Confirmed losses are charged off immediately.
Loan loss ratios
and credit risk categories, for commercial loans, are updated at least
quarterly and are applied in the context of GAAP. Management uses current
available information in estimating possible loan and lease losses, factors
beyond Oriental’s control, such as those affecting general economic conditions,
may require future changes to the allowance.
Acquired Loans Accounted for under ASC 310-30
(including those accounted for under ASC 310-30 by analogy)
For our acquired loans
accounted for under ASC 310-30, our allowance for loan losses is estimated
based upon our expected cash flows for these loans. To the extent that we
experience a deterioration in borrower credit quality resulting in a decrease
in the net present value of our expected cash flows (which are used as a proxy
to identify probable incurred losses) subsequent to the acquisition of the
loans, an allowance for loan losses is established based on our estimate of
future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC Subtopic 310-30
are not considered non-performing and continue to have an accretable yield as
long as there is a reasonable expectation about the timing and amount of cash
flows expected to be collected. Also, loans charged-off against the
non-accretable difference established in purchase accounting are not reported
as charge-offs. Charge-offs on loans accounted under ASC Subtopic 310-30 are
recorded only to the extent that losses exceed the non-accretable difference established
with purchase accounting.
For the principal enhancements management made to its
methodology, refer to Note 7.
Lease
Financing
Oriental leases vehicles for personal and commercial
use to individual and corporate customers. The direct finance lease method of
accounting is used to recognize revenue on leasing contracts that meet the
criteria specified in the guidance for leases in ASC Topic 840. Aggregate
rentals due over the term of the leases, less unearned income, are included in
lease financing contracts receivable. Unearned income is amortized using a
method over the average life of the leases as an adjustment to the interest
yield.
Troubled Debt Restructuring
A TDR is the restructuring of a receivable in which
Oriental, as creditor, grants a concession for legal or economic reasons due to
the debtor’s financial difficulties. A concession is granted when, as a result
of the restructuring, Oriental does not expect to collect all
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
amounts due, including interest accrued at the original
contract rate. These concessions may include a reduction of the interest rate,
principal or accrued interest, extension of the maturity date or other actions
intended to minimize potential losses.
To assess whether the debtor is having financial
difficulties, Oriental evaluates whether it is probable that the debtor will
default on any of its debt in the foreseeable future.
Receivables that are restructured in a TDR are
presumed to be impaired and are subject to a specific impairment-measurement
method. If the payment of principal at original maturity is primarily dependent
on the value of collateral, Oriental considers the current value of that
collateral in determining whether the principal will be paid. For non-collateral
dependent loans, the specific reserve is calculated based on the present value
of expected cash flows discounted at the loan’s effective interest rate. An
accruing loan that is modified in a TDR can remain in accrual status if, based
on a current, well-documented credit analysis, collection of principal and
interest in accordance with the modified terms is reasonably assured, and the
borrower has demonstrated sustained historical repayment performance for a
reasonable period before the modification.
Reserve for Unfunded Commitments
The reserve for
unfunded commitments is maintained at a level believed by management to be
sufficient to absorb estimated probable losses related to unfunded credit
facilities and is included in other liabilities in the consolidated statements
of financial condition. The determination of the adequacy of the reserve is
based upon an evaluation of the unfunded credit facilities. Net adjustments to
the reserve for unfunded commitments are included in other operating expenses in
the consolidated statements of operations.
FDIC
Indemnification Asset and True-up Payment Obligation
The FDIC indemnification asset was
accounted for and measured separately from the covered loans acquired in the
FDIC-assisted acquisition as it was not contractually embedded in any of the
covered loans. The indemnification asset was recorded at fair value at the
acquisition date and represented the present value of the estimated cash
payments expected to be received from the FDIC for future losses on covered
assets based on the credit adjustment estimated for each covered asset and the
shared-loss percentages. This balance also included incurred expenses under the
shared-loss agreements. These cash flows were then discounted at a market-based
rate to reflect the uncertainty of the timing and receipt of the shared-loss
reimbursements from the FDIC. The time value of money incorporated into the
present value computation was accreted into earnings over the shorter of the
life of the shared-loss agreements or the holding period of the covered assets.
The FDIC indemnification asset was reduced
as shared-loss payments were received from the FDIC. Realized credit losses in
excess of acquisition-date estimates resulted in an increase in the FDIC
indemnification asset. Conversely, if realized credit losses were less than
acquisition-date estimates, the FDIC indemnification asset was amortized
through the term of the shared-loss agreements.
The true-up
payment obligation associated with the loss share agreements was accounted for
at fair value in accordance with ASC Section 805-30-25-6 as it was considered
contingent consideration. The true-up payment obligation was included as part
of other liabilities in the consolidated statements of financial condition. Any
changes in the carrying value of the obligation were included in the category
of FDIC loss share income (expense) in the consolidated statements of
operations.
On February 6,
2017, the Bank and the FDIC agreed to terminate the single family and
commercial shared-loss agreements related to the FDIC assisted acquisition of
Eurobank on April 30, 2010. As part of the loss share termination transaction,
the Bank made a payment of $10.1 million to the FDIC and recorded a net benefit
of $1.4 million. Such termination payment took into account the anticipated
reimbursements over the life of the shared-loss agreements and the true-up
payment liability of the Bank anticipated at the end of the ten-year term of
the single family shared-loss agreement. All rights and obligations of the
parties under the shared-loss agreements terminated as of the closing date of
the agreement.
Goodwill and Intangible Assets
Oriental’s
goodwill and other identifiable intangible assets having an indefinite useful
life are tested for impairment. Intangibles with indefinite lives are evaluated
for impairment at least annually, and on a more frequent basis, if events or
circumstances indicate impairment could have taken place. Such events could
include, among others, a significant adverse change in the business climate, an
adverse action by a regulator, an unanticipated change in the competitive
environment and a decision to change the operations or dispose of a reporting
unit.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Under applicable accounting standards, goodwill
impairment analysis is a two-step test. Oriental has the option to first assess
qualitative factors to determine whether there are events or circumstances that
exist that make it more likely than not that the fair value of the reporting
unit is less than its carrying amount. If it is more likely than not that the
fair value of the reporting unit is less than its carrying amount, or if
Oriental chooses to bypass the qualitative assessment, Oriental compares each
reporting unit's fair value to its carrying value to identify potential
impairment. If the estimated fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered impaired.
However, if the carrying amount of the reporting unit were to exceed its
estimated fair value, a second step would be performed that would compare the
implied fair value of the reporting unit's goodwill with the carrying amount.
The implied fair value of goodwill is determined in the same manner as goodwill
that is recognized in a business combination. Significant judgment and
estimates are involved in estimating the fair value of the assets and
liabilities of the reporting units. Oriental performs annual goodwill
impairment test as of October 31 and monitors for interim triggering events on
an ongoing basis. Oriental performed its annual impairment review of goodwill
during the fourth quarter of 2017 and 2016 using October 31, 2017 and 2016 as
the annual evaluation dates and concluded that there was no impairment at
December 31, 2017 and 2016.
Foreclosed
Real Estate and Other Repossessed Property
Foreclosed real estate and other repossessed property
are initially recorded at the fair value of the real estate or repossessed
property less the cost of selling it at the date of foreclosure or repossession.
At the time properties are acquired in full or partial satisfaction of loans,
any excess of the loan balance over the estimated fair value of the property is
charged against the allowance for loan and lease losses on non-covered loans.
After foreclosure or repossession, these properties are carried at the lower of
cost or fair value less estimated cost to sell based on recent appraised values
or options to purchase the foreclosed or repossessed property. Any excess of
the carrying value over the estimated fair value, less estimated costs to sell,
is charged to non-interest expense. The costs and expenses associated to
holding these properties in portfolio are expensed as incurred.
Premises and Equipment
Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful life of each type of asset. Amortization of
leasehold improvements is computed using the straight-line method over the
terms of the leases or estimated useful lives of the improvements, whichever is
shorter.
Impairment
of Long-Lived Assets
Oriental periodically reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, an estimate of the future cash flows expected to result
from the use of the asset and its eventual disposition is made. If the sum of
the future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the assets, an impairment loss is recognized. The amount
of the impairment is the excess of the carrying amount over the fair value of
the asset. As of December 31, 2017 and 2016, there was no indication of impairment
as a result of such review.
Income Taxes
In preparing the consolidated financial statements,
Oriental is required to estimate income taxes. This involves an estimate of
current income tax expense together with an assessment of temporary differences
resulting from differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. The determination of current income tax expense involves
estimates and assumptions that require Oriental to assume certain positions
based on its interpretation of current tax laws and regulations. Changes in
assumptions affecting estimates may be required in the future, and estimated
tax assets or liabilities may need to be increased or decreased accordingly.
The accrual for tax contingencies is adjusted in light of changing facts and
circumstances, such as the progress of tax audits, case law and emerging
legislation. When particular matters arise, a number of years may elapse before
such matters are audited and finally resolved. Favorable resolution of such
matters could be recognized as a reduction to Oriental’s effective tax rate in
the year of resolution. Unfavorable settlement of any particular issue could
increase the effective tax rate and may require the use of cash in such year.
The determination of deferred tax expense or benefit
is based on changes in the carrying amounts of assets and liabilities that
generate temporary differences. The carrying value of Oriental’s net deferred tax
assets assumes that Oriental will be able to generate sufficient future taxable
income based on estimates and assumptions. If these estimates and related
assumptions change in the future, Oriental may be required to record valuation
allowances against its deferred tax assets resulting in additional income tax
expense in the consolidated statements of operations.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Management evaluates on a regular basis whether the
deferred tax assets can be realized and assesses the need for a valuation
allowance. A valuation allowance is established when management believes that
it is more likely than not that some portion of its deferred tax assets will
not be realized. Changes in valuation allowance from period to period are
included in Oriental’s tax provision in the period of change.
In addition to valuation allowances, Oriental
establishes accruals for uncertain tax positions when, despite the belief that
Oriental’s tax return positions are fully supported, Oriental believes that
certain positions are likely to be challenged. The accruals for uncertain tax
positions are adjusted in light of changing facts and circumstances, such as
the progress of tax audits, case law, and emerging legislation. The accruals
for Oriental’s uncertain tax positions are reflected as income tax payable as a
component of accrued expenses and other liabilities. These accruals are reduced
upon expiration of the applicable statute of limitations.
Oriental follows a two-step approach for recognizing
and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon ultimate settlement.
Oriental’s policy is to include interest and penalties
related to unrecognized income tax benefits within the provision for income
taxes on the consolidated statements of operations.
Oriental is potentially subject to income tax audits
in the Commonwealth of Puerto Rico for taxable years 2014 to 2017, until the
applicable statute of limitations expires. Tax audits by their nature are often
complex and can require several years to complete.
Equity-Based Compensation Plan
Oriental’s 2007 Omnibus Performance Incentive Plan, as
amended and restated (the “Omnibus Plan”), provides for equity-based compensation
incentives through the grant of stock options, stock appreciation rights,
restricted stock, restricted units and dividend equivalents, as well as
equity-based performance awards. The Omnibus Plan was adopted in 2007, amended
and restated in 2008, and further amended in 2010 and 2013.
The purpose of the Omnibus Plan is to provide
flexibility to Oriental to attract, retain and motivate directors, officers,
and key employees through the grant of awards based on performance and to
adjust its compensation practices to the best compensation practice and
corporate governance trends as they develop from time to time. The Omnibus Plan
is further intended to motivate high levels of individual performance coupled
with increased shareholder returns. Therefore, awards under the Omnibus Plan
(each, an “Award”) are intended to be based upon the recipient’s individual
performance, level of responsibility and potential to make significant
contributions to Oriental. Generally, the Omnibus Plan will terminate as of
(a) the date when no more of Oriental’s shares of common stock are
available for issuance under the Omnibus Plan or, (b) if earlier, the date the
Omnibus Plan is terminated by Oriental’s Board of Directors.
The Board’s Compensation Committee (the “Committee”),
or such other committee as the Board may designate, has full authority to
interpret and administer the Omnibus Plan in order to carry out its provisions
and purposes. The Committee has the authority to determine those persons
eligible to receive an Award and to establish the terms and conditions of any
Award. The Committee may delegate, subject to such terms or conditions or
guidelines as it shall determine, to any employee or group of employees any
portion of its authority and powers under the Omnibus Plan with respect to
participants who are not directors or executive officers subject to the
reporting requirements under Section 16(a) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Only the Committee may exercise authority
in respect to Awards granted to such participants.
The expected term of stock options granted represents
the period of time that such options are expected to be outstanding. Expected
volatilities are based on historical volatility of Oriental’s shares of common
stock over the most recent period equal to the expected term of the stock
options. For stock options issued during 2015, the expected volatilities are
based on both historical and implied volatility of Oriental’s shares of common
stock.
Oriental follows the fair value method of recording
stock-based compensation. Oriental used the modified prospective transition
method, which requires measurement of the cost of employee services received in
exchange for an award of equity instruments based on the grant date fair value
of the award with the cost to be recognized over the service period. It applies
to all awards unvested and granted after the effective date and awards
modified, repurchased, or cancelled after that date.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances, except for those resulting from investments by owners
and distributions to owners. GAAP requires that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities and on derivative activities that qualify and are designated for
cash flows hedge accounting, net of taxes, are reported as a separate component
of the stockholders’ equity section of the consolidated statements of financial
condition, such items, along with net income, are components of comprehensive
income (loss).
Commitments and Contingencies
Liabilities for loss contingencies, arising from
claims, assessments, litigation, fines, and penalties and other sources are
recorded when it is probable that a liability has been incurred and the amount
of the assessment can be reasonably estimated. Legal costs incurred in
connection with loss contingencies are expensed as incurred.
Subsequent Events
Oriental has evaluated other events subsequent to the
balance sheet date and prior to the filing of this annual report on Form
10-K for the year ended December 31, 2017, and has
adjusted and disclosed those events that have occurred that would require
adjustment or disclosure in the consolidated financial statements.
New Accounting Updates Not Yet Adopted
Scope of Modification
Accounting. In May 2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2017-09 that clarifies when
changes to the terms or conditions of a share-based payment award must be
accounted for as modifications. Entities will apply the modification accounting
guidance if the value, vesting conditions or classification of the award
changes. ASU No. 2017-08 is effective for fiscal years, and interim periods,
beginning after December 15, 2018, with early adoption permitted. Oriental's
Omnibus Plan provides for equity-based compensation incentives through the
grant of stock options, stock appreciation rights, restricted stock, restricted
stock units, and dividend equivalents, as well as equity-based performance
awards. If any change occurs in the future to the Omnibus Plan, Oriental will
evaluate it under this guideline.
Premium Amortization on Purchased Callable Debt Securities
Receivables. In March 2017, the FASB issued ASU No. 2017-08, which requires
the amortization of the premium on callable debt securities to the earliest
call date. The amortization period for callable debt securities purchased at a
discount would not be impacted by the ASU. This ASU will be applied
prospectively for annual and interim periods in fiscal years beginning after
December 15, 2018. The ASU is not expected to have a material impact on
Oriental's consolidated financial position or results of operations. At
December 31, 2017, Oriental does not have callable debt securities.
Plan
Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution
Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965):
Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging
Issues Task Force). In February 2017, the FASB issued ASU No. 2017-06, which
intended to reduce diversity and improve the usefulness of information provided
by employee benefit plans that hold interests in master trusts. This ASU will
be applied prospectively for annual and interim periods in fiscal years
beginning after December 15, 2018. The ASU is not expected to have a material
impact on Oriental's consolidated financial position or results of operations.
Simplifying the Test for Goodwill Impairment. In
January 2017, the FASB issued ASU No. 2017-04, which simplifies the measurement
of goodwill impairment. An entity will no longer perform a hypothetical
purchase price allocation to measure goodwill impairment. Instead, impairment
will be measured using the difference between the carrying amount and the fair
value of the reporting unit. This ASU will be applied prospectively for annual
and interim periods in fiscal years beginning after December 15, 2019. We will
assess the impact that the adoption of ASU 2017-04 will have on our
consolidated financial statements and related disclosures beginning next year.
Restricted Cash. In November 2016, the FASB issued
ASU No. 2016-18, which amends Topic 230 (Statement of Cash Flows) and requires
that a statement of cash flows explain the change during the period in the
total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. ASU No. 2016-18 is intended to reduce
diversity in practice in
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
how restricted cash or
restricted cash equivalents are presented and classified in the statement of
cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods,
beginning after December 15, 2017, with early adoption permitted. The standard
requires application using a retrospective transition method. The adoption of
ASU No. 2016-18 will change the presentation and classification of restricted
cash and restricted cash equivalents in our consolidated statements of cash
flows.
Measurement of Credit Losses on Financial Instruments.
In June 2016, the FASB issued ASU No. 2016-13, which includes an impairment
model (known as the current expected credit loss (CECL) model) that is based on
expected losses rather than incurred losses. Under the new guidance, an entity
recognizes as an allowance its estimate of expected credit losses. ASU No.
2016-13 is effective for fiscal years, and interim periods, beginning after
December 15, 2019. Oriental will implement ASU No. 2016-13 on January 1, 2020.
While we continue to assess the impact of ASU No. 2016-13, we have developed a
roadmap with time schedules in place from 2016 to implementation date.
Oriental's cross-functional implementation team has developed a project plan to
ensure we comply with all updates from this ASU at the time of adoption. We are
in the process of assessing the methodology and the software to be used in
order to develop an acceptable model to estimate the expected credit losses.
After the model has been developed, reviewed and validated in accordance with our
governance policies, Oriental will provide further disclosure regarding the
estimated impact on our allowance for loan and lease losses. Also, we are
assessing the additional disclosure requirements from this update. Although
Oriental expects the allowance for credit losses to increase upon adoption with
a corresponding adjustment to retained earnings, the ultimate amount of the
increase will depend on the portfolio composition, credit quality, economic
conditions and reasonable and supportable forecasts at that time.
Leases. In February 2016, the FASB issued ASU
No. 2016-02, the FASB issued ASU No. 2016-02, which requires lessees to
recognize a right-of-use asset and related lease liability for leases
classified as operating leases at the commencement date that have lease terms
of more than 12 months. This ASU retains the classification distinction between
finance leases and operating leases. ASU No. 2016-02 is effective for fiscal
years, and interim periods, beginning after December 15, 2018. Oriental plans
to adopt this guidance effective January 1, 2019 using the required modified
retrospective approach, which includes presenting the cumulative effect of
initial application along with supplementary disclosures. As a lessor and
lessee, we do not anticipate the classification of our leases to change, but we
expect to recognize right-of-use assets and lease liabilities for substantially
virtually all of our operating lease commitments leases for which we are the
lessee as a lease liability and corresponding right-of-use asset on our
consolidated financial statements. We have made substantial progress in
reviewing contractual arrangements for embedded leases in an effort to identify
Oriental’s full lease population and is presently evaluating all of its leases,
as well as contracts that may contain embedded leases, for compliance with the
new lease accounting rules. Oriental’s leases primarily consist of leased
office space, and information technology equipment. At December 31, 2017,
Oriental had $34.3 million of minimum lease commitments from these operating
leases (refer to Note 25). Although Oriental is still evaluating the impact
that the adoption of this accounting pronouncement will have on its
consolidated financial statements, preliminarily it expects that the amounts to
be recognized as ROU assets and lease liabilities will be less than 1% of its
total assets and will not have a material impact on its regulatory capital.
Revenue from Contracts with Customers. In
May 2014, the FASB issued ASU No. 2014-09, which supersedes the revenue
recognition requirements Topic 605 (Revenue Recognition), and most
industry-specific guidance. ASU No. 2014-09 is based on the principle that
revenue is recognized to depict the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. ASU No. 2014-09 also requires
additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. ASU No. 2014-09 permits two methods of adoption:
retrospectively to each prior reporting period presented (full retrospective
method), or retrospectively with the cumulative effect of initially applying
the guidance recognized at the date of initial application (modified
retrospective method). In August 2015, the FASB issued ASU No. 2015-14 to defer
the effective date of ASU No. 2014-09 by one year to fiscal years beginning
after December 15, 2017. ASU No. 2015-14 also permits early adoption of ASU No.
2014-09, but not before the original effective date, which was for fiscal years
beginning after December 15, 2016. Oriental will adopt this ASU effective
January 1, 2018 using the modified retrospective method. The Company’s
implementation efforts included the identification of revenue streams that are
within the scope of the new guidance and the review of related contracts with
customers to determine their effect on certain non-interest income items
presented in our consolidated statements of operations and the additional
presentation disclosures required. We concluded that substantially all of Oriental’s
revenues are generated from activities that are outside the scope of this ASU,
and the adoption will not have a material impact on our consolidated financial
statements.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
New Accounting Updates Adopted During the Current Year
Improvements
to Employee Share-Based Payment Accounting. In March 2016, the FASB issued ASU No.
2016-09, which simplifies the accounting for share-based payment transactions,
including income tax consequences, classification of awards as either equity or
liabilities, and the classification on the statement of cash flows. ASU No.
2016-09 is effective for fiscal years, and interim periods, beginning after
December 15, 2016. The adoption of ASU No. 2016-09 on January 1, 2017 did not
have a material impact on our consolidated financial statements and related
disclosures.
Simplifying
the Transition to the Equity Method of Accounting. In March of 2016, the FASB issued
ASU 2016-07, which eliminates the requirement that, when an investment
qualifies for use of the equity method of accounting as a result of an increase
in the level of ownership interest or degree of influence, an investor must
adjust the investment, results of operations, and retained earnings
retroactively on a step-by-step basis as if the equity method of accounting had
been in effect during all previous periods that the investment had been held.
The ASU requires that an entity that has available-for-sale securities
recognize, through earnings, the unrealized holding gain or loss in accumulated
other comprehensive income at the date the investment becomes qualified for use
of the equity method of accounting. The amendment in this ASU became effective
prospectively for Oriental for fiscal periods beginning January 1, 2017. We
have adopted this ASU as of January 1, 2017 and concluded that it does not have
an impact on our consolidated financial statements.
Accounting Changes and Error Corrections. In
January of 2017, the FASB issued ASU 2017-03 to enhance the footnote disclosure
guidelines for ASUs 2014-09, 2016-02, and 2016-13. The amendments to this
transition guidance became effective for Oriental for fiscal years beginning
January 1, 2017. We have adopted this ASU as of January 1, 2017 on a
prospective basis. We concluded that this ASU does not have a material impact
on our consolidated financial statements.
NOTE 2 –
SIGNIFICANT EVENTS
Hurricanes Irma and Maria
During 2017, Oriental was impacted by hurricanes Irma and Maria,
which struck the Island on September 7, 2017 and September 20, 2017,
respectively. Hurricane Maria caused catastrophic damages throughout Puerto
Rico, including homes, businesses, roads, bridges, power lines, commercial
establishments, and public facilities. It caused an unprecedented crisis when
it ravaged the Island’s electric power grid less than two weeks after hurricane
Irma left over a million Puerto Rico residents without power. For several
months after the hurricanes, a large part of Puerto Rico was and some areas
still remain without electricity, many businesses were unable to operate, and
government authorities struggled to deliver emergency supplies and clean
drinking water to many communities outside the San Juan metropolitan area. Further,
payment and delivery systems, including the U.S. Post Office, were unable to
operate for weeks after hurricane Maria.
Almost all of Oriental’s operations and clients are located in
Puerto Rico. Although Oriental’s business operations were disrupted by major
damages to Puerto Rico’s critical infrastructure, including its electric power
grid and telecommunications network, Oriental’s digital channels, core banking
and electronic funds transfer systems continued to function uninterrupted during
and after the hurricanes. Within days after hurricane Maria, and upon securing
a continuing supply of diesel fuel for its electric power generators, Oriental
was able to open its main offices and many of its branches and ATMs in addition
to its digital and phone trade channels.
As a result of this event, and based on current assessments of information
available for the impact of the hurricanes on our credit portfolio, 2017 results
included an additional $32.4 million in loan loss provision, pre-tax. Refer to
Note 7 for further disclosure associated to this significant event.
Oriental implemented its disaster response plan as these storms
approached its service areas. To operate in disaster response mode, the
Oriental incurred expenses for, among other things, buying diesel and
generators for electric power, debris removal, security matters, property
damages, and emergency communication with customers regarding the status of
Bank operations. The total estimated total losses as of December 31, 2017
amounted to $6.6 million.
Oriental maintains insurance for casualty losses as well as for
disaster response costs and certain revenue lost through business interruption.
Management believes that recovery of $2.2 million incurred costs as
of December 31, 2017 is probable. Oriental received a $1.0 million partial payment
from the insurance company during December 2017. Accordingly, a receivable of $1.2 million was included in
other assets as of December 31, 2017 for the expected recovery.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 3 – RESTRICTED CASH
The following table includes the composition of Oriental’s
restricted cash:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Cash pledged as
collateral to other financial institutions to secure:
|
|
|
|
|
|
|
Derivatives
|
$
|
1,980
|
|
$
|
1,980
|
|
Obligations
under agreement of loans sold with recourse
|
|
1,050
|
|
|
1,050
|
|
|
$
|
3,030
|
|
$
|
3,030
|
At December 31, 2017, the Bank’s international banking entities,
Oriental International Bank Inc. (“OIB”) and Oriental Overseas, a division of
the Bank, held an unencumbered certificate of deposit and other short-term
highly liquid securities in the amount of $300 thousand and $325 thousand, respectively, as
the legal reserve required for international banking entities under Puerto Rico
law. At December 31, 2016, each held an unencumbered
certificate of deposit in the amount of $300 thousand. These instruments cannot be withdrawn or transferred by OIB
or Oriental Overseas without prior written approval of the Office of the
Commissioner of Financial Institutions of Puerto Rico (the "OCFI").
As part of its derivative activities, Oriental has entered into
collateral agreements with certain financial counterparties. At both December
31, 2017 and 2016, Oriental had delivered approximately $2.0 million of cash as
collateral for such derivatives activities.
As part of the BBVA Acquisition, Oriental assumed a contract with
FNMA which required collateral to guarantee the repurchase, if necessary, of
loans sold with recourse. At both December 31, 2017 and 2016, Oriental
delivered as collateral cash amounting to approximately $1.1 million.
The Bank is required by Puerto Rico law to maintain average weekly
reserve balances to cover demand deposits. The amount of those minimum average
reserve balances for the week that covered December 31, 2017 was $189.2 million (December 31, 2016
- $161.0 million). At December 31,
2017 and 2016, the Bank complied with the requirement. Cash and due from bank
as well as other short-term, highly liquid securities are used to cover the
required average reserve balances.
NOTE 4 – INVESTMENT SECURITIES
Money Market Investments
Oriental 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 December 31, 2017 and 2016, money market
instruments included as part of cash and cash equivalents amounted to $7.0
million and $5.6 million, respectively.
Investment Securities
The amortized cost, gross unrealized gains and losses, fair value,
and weighted average yield of the securities owned by Oriental at December 31,
2017 and 2016 were as follows:
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
|
|
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
|
$
|
383,194
|
|
$
|
1,402
|
|
$
|
2,881
|
|
$
|
381,715
|
|
2.39%
|
|
GNMA certificates
|
|
166,436
|
|
|
1,486
|
|
|
584
|
|
|
167,338
|
|
2.94%
|
|
CMOs issued by US government-sponsored agencies
|
|
82,026
|
|
|
-
|
|
|
1,955
|
|
|
80,071
|
|
1.90%
|
|
Total mortgage-backed securities
|
|
631,656
|
|
|
2,888
|
|
|
5,420
|
|
|
629,124
|
|
2.47%
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities
|
|
10,276
|
|
|
-
|
|
|
113
|
|
|
10,163
|
|
1.25%
|
|
Obligations of US government-sponsored agencies
|
|
2,927
|
|
|
-
|
|
|
48
|
|
|
2,879
|
|
1.38%
|
|
Obligations of Puerto Rico government and
public instrumentalities
|
|
2,455
|
|
|
-
|
|
|
362
|
|
|
2,093
|
|
5.55%
|
|
Other debt securities
|
|
1,486
|
|
|
52
|
|
|
-
|
|
|
1,538
|
|
2.97%
|
|
Total investment securities
|
|
17,144
|
|
|
52
|
|
|
523
|
|
|
16,673
|
|
2.04%
|
|
Total securities available for sale
|
$
|
648,800
|
|
$
|
2,940
|
|
$
|
5,943
|
|
$
|
645,797
|
|
2.46%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
506,064
|
|
$
|
-
|
|
$
|
8,383
|
|
$
|
497,681
|
|
2.07%
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
|
|
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
|
$
|
422,168
|
|
$
|
6,354
|
|
$
|
3,036
|
|
$
|
425,486
|
|
2.59%
|
|
GNMA certificates
|
|
163,614
|
|
|
2,241
|
|
|
620
|
|
|
165,235
|
|
2.95%
|
|
CMOs issued by US government-sponsored agencies
|
|
103,990
|
|
|
64
|
|
|
2,223
|
|
|
101,831
|
|
1.88%
|
|
Total mortgage-backed securities
|
|
689,772
|
|
|
8,659
|
|
|
5,879
|
|
|
692,552
|
|
2.57%
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities
|
|
49,672
|
|
|
-
|
|
|
618
|
|
|
49,054
|
|
1.73%
|
|
Obligations of US government-sponsored agencies
|
|
3,903
|
|
|
-
|
|
|
19
|
|
|
3,884
|
|
1.38%
|
|
Obligations of Puerto Rico government and
public instrumentalities
|
|
4,680
|
|
|
-
|
|
|
607
|
|
|
4,073
|
|
5.55%
|
|
Other debt securities
|
|
1,840
|
|
|
81
|
|
|
-
|
|
|
1,921
|
|
3.00%
|
|
Total investment securities
|
|
60,095
|
|
|
81
|
|
|
1,244
|
|
|
58,932
|
|
2.04%
|
|
Total securities available-for-sale
|
$
|
749,867
|
|
$
|
8,740
|
|
$
|
7,123
|
|
$
|
751,484
|
|
2.53%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
599,884
|
|
$
|
145
|
|
$
|
7,266
|
|
$
|
592,763
|
|
2.15%
|
The amortized cost and fair value of Oriental’s investment
securities at December 31, 2017, 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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
Available-for-sale
|
|
Held-to-maturity
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
|
(In thousands)
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from 1
to 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and
FHLMC certificates
|
$
|
6,405
|
|
$
|
6,430
|
|
$
|
-
|
|
$
|
-
|
|
Total due from 1 to 5 years
|
|
6,405
|
|
|
6,430
|
|
|
-
|
|
|
-
|
|
Due after 5
to 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOs
issued by US government-sponsored agencies
|
$
|
72,562
|
|
$
|
70,705
|
|
$
|
-
|
|
$
|
-
|
|
FNMA and
FHLMC certificates
|
|
126,096
|
|
|
124,446
|
|
|
-
|
|
|
-
|
|
Total due after 5 to 10 years
|
|
198,658
|
|
|
195,151
|
|
|
-
|
|
|
-
|
|
Due after 10
years
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and
FHLMC certificates
|
$
|
250,693
|
|
$
|
250,839
|
|
$
|
506,064
|
|
$
|
497,681
|
|
GNMA
certificates
|
|
166,436
|
|
|
167,338
|
|
|
-
|
|
|
-
|
|
CMOs
issued by US government-sponsored agencies
|
|
9,464
|
|
|
9,366
|
|
|
-
|
|
|
-
|
|
Total due after 10 years
|
|
426,593
|
|
|
427,543
|
|
|
506,064
|
|
|
497,681
|
|
Total mortgage-backed securities
|
|
631,656
|
|
|
629,124
|
|
|
506,064
|
|
|
497,681
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Due less
than one year
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Treasury securities
|
$
|
325
|
|
$
|
324
|
|
$
|
-
|
|
$
|
-
|
|
Obligations of Puerto Rico government and
public instrumentalities
|
|
2,455
|
|
|
2,093
|
|
|
-
|
|
|
-
|
|
Total due in less than one year
|
|
2,780
|
|
|
2,417
|
|
|
-
|
|
|
-
|
|
Due from 1
to 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Treasury securities
|
$
|
9,951
|
|
$
|
9,839
|
|
$
|
-
|
|
$
|
-
|
|
Obligations of US government and sponsored agencies
|
|
2,927
|
|
|
2,879
|
|
|
-
|
|
|
-
|
|
Total due from 1 to 5 years
|
|
12,878
|
|
|
12,718
|
|
|
-
|
|
|
-
|
|
Due from 5
to 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
debt securities
|
|
1,486
|
|
|
1,538
|
|
|
-
|
|
|
-
|
|
Total due after 5 to 10 years
|
|
1,486
|
|
|
1,538
|
|
|
-
|
|
|
-
|
|
Total investment securities
|
|
17,144
|
|
|
16,673
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
648,800
|
|
$
|
645,797
|
|
$
|
506,064
|
|
$
|
497,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During
the year ended December 31,
2017 Oriental
retained securitized GNMA pools totaling $74.9 million amortized cost, at
a yield of 3.14% from its own originations
while during the year ended December
31, 2016 that
amount totaled $112.2 million, amortized cost, at
a yield of 2.89%.
During the year ended December 31, 2017, Oriental sold $166.0 million of mortgage-backed securities and
$84.1 million of US Treasury securities, and recorded a net gain on sale of
securities of $6.9 million. During the year ended December 31, 2016, Oriental sold $277.2 million on
mortgage-backed securities and $11.1 million of Puerto Rico government bonds,
and recorded a net gain on sale of securities of $12.2 million.
|
|
Year Ended December 31, 2017
|
|
|
|
|
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
|
$
|
107,510
|
|
$
|
102,311
|
|
$
|
5,199
|
|
$
|
-
|
|
GNMA
certificates
|
|
65,284
|
|
|
63,704
|
|
|
1,580
|
|
|
-
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Treasury securities
|
|
84,202
|
|
|
84,085
|
|
|
117
|
|
|
-
|
|
Total
|
$
|
256,996
|
|
$
|
250,100
|
|
$
|
6,896
|
|
$
|
-
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
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
|
$
|
293,505
|
|
$
|
277,181
|
|
$
|
16,324
|
|
$
|
-
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of PR government and public instrumentalities
|
|
6,978
|
|
|
11,095
|
|
|
-
|
|
|
4,117
|
|
Total mortgage-backed securities
|
$
|
300,483
|
|
$
|
288,276
|
|
$
|
16,324
|
|
$
|
4,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
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
|
$
|
40,307
|
|
$
|
37,736
|
|
$
|
2,571
|
|
$
|
-
|
|
GNMA
certificates
|
|
63,524
|
|
|
63,523
|
|
|
1
|
|
|
-
|
|
Total mortgage-backed securities
|
$
|
103,831
|
|
$
|
101,259
|
|
$
|
2,572
|
|
$
|
-
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables show Oriental’s gross
unrealized losses and fair value of investment securities available-for-sale
and held-to-maturity, aggregated by investment category and the length of time
that individual securities have been in a continuous unrealized loss position
at December 31, 2017 and 2016:
|
|
December 31, 2017
|
|
|
12 months or more
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Loss
|
|
Value
|
|
|
(In thousands)
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
CMOs issued by US Government-sponsored agencies
|
$
|
72,562
|
|
$
|
1,857
|
|
$
|
70,705
|
|
FNMA and FHLMC certificates
|
|
111,635
|
|
|
2,122
|
|
|
109,513
|
|
Obligations of US Government and sponsored agencies
|
|
2,927
|
|
|
48
|
|
|
2,879
|
|
Obligations of Puerto Rico government and public
instrumentalities
|
|
2,455
|
|
|
362
|
|
|
2,093
|
|
GNMA certificates
|
|
20,803
|
|
|
499
|
|
|
20,304
|
|
US Treasury Securities
|
|
9,952
|
|
|
113
|
|
|
9,839
|
|
|
$
|
220,334
|
|
$
|
5,001
|
|
$
|
215,333
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
352,399
|
|
$
|
7,264
|
|
$
|
345,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Loss
|
|
Value
|
|
|
(In thousands)
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
CMOs issued by US government-sponsored agencies
|
$
|
9,464
|
|
$
|
98
|
|
$
|
9,366
|
|
FNMA and FHLMC certificates
|
|
125,107
|
|
|
759
|
|
|
124,348
|
|
GNMA certificates
|
|
14,001
|
|
|
85
|
|
|
13,916
|
|
US Treausury Securities
|
|
324
|
|
|
-
|
|
|
324
|
|
|
$
|
148,896
|
|
$
|
942
|
|
$
|
147,954
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC Certificates
|
$
|
153,665
|
|
$
|
1,119
|
|
$
|
152,546
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Loss
|
|
Value
|
|
|
(In thousands)
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
CMOs issued by US government-sponsored agencies
|
$
|
82,026
|
|
$
|
1,955
|
|
$
|
80,071
|
|
FNMA and FHLMC certificates
|
|
236,742
|
|
|
2,881
|
|
|
233,861
|
|
Obligations of Puerto Rico government and public
instrumentalities
|
|
2,455
|
|
|
362
|
|
|
2,093
|
|
Obligations of US government and sponsored agencies
|
|
2,927
|
|
|
48
|
|
|
2,879
|
|
GNMA certificates
|
|
34,804
|
|
|
584
|
|
|
34,220
|
|
US Treausury Securities
|
|
10,276
|
|
|
113
|
|
|
10,163
|
|
|
$
|
369,230
|
|
$
|
5,943
|
|
$
|
363,287
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
506,064
|
|
$
|
8,383
|
|
$
|
497,681
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
12 months or more
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Loss
|
|
Value
|
|
|
(In thousands)
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
Obligations
of Puerto Rico government and public instrumentalities
|
$
|
4,680
|
|
$
|
607
|
|
$
|
4,073
|
|
CMOs issued
by US government-sponsored agencies
|
|
33,883
|
|
|
793
|
|
|
33,090
|
|
|
$
|
38,563
|
|
$
|
1,400
|
|
$
|
37,163
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Loss
|
|
Value
|
|
|
(In thousands)
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
CMOs issued
by US government-sponsored agencies
|
|
67,777
|
|
|
1,430
|
|
|
66,347
|
|
FNMA and
FHLMC certificates
|
|
184,782
|
|
|
3,036
|
|
|
181,746
|
|
Obligations
of US government and sponsored agencies
|
|
3,903
|
|
|
19
|
|
|
3,884
|
|
GNMA
certificates
|
|
29,445
|
|
|
620
|
|
|
28,825
|
|
US Treasury
Securities
|
|
49,172
|
|
|
618
|
|
|
48,554
|
|
|
$
|
335,079
|
|
$
|
5,723
|
|
$
|
329,356
|
|
Securities
held to maturity
|
|
|
|
|
|
|
|
|
|
FNMA and
FHLMC certificates
|
$
|
525,258
|
|
$
|
7,266
|
|
$
|
517,992
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Loss
|
|
Value
|
|
|
(In thousands)
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
CMOs issued
by US government-sponsored agencies
|
|
101,660
|
|
|
2,223
|
|
|
99,437
|
|
FNMA and
FHLMC certificates
|
|
184,782
|
|
|
3,036
|
|
|
181,746
|
|
Obligations
of Puerto Rico government and public instrumentalities
|
|
4,680
|
|
|
607
|
|
|
4,073
|
|
Obligations
of US government and sponsored agencies
|
|
3,903
|
|
|
19
|
|
|
3,884
|
|
GNMA
certificates
|
|
29,445
|
|
|
620
|
|
|
28,825
|
|
US Treasury
Securities
|
|
49,172
|
|
|
618
|
|
|
48,554
|
|
|
$
|
373,642
|
|
$
|
7,123
|
|
$
|
366,519
|
|
Securities
held to maturity
|
|
|
|
|
|
|
|
|
|
FNMA and
FHLMC certificates
|
$
|
525,258
|
|
$
|
7,266
|
|
$
|
517,992
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental performs
valuations of the investment securities on a monthly basis. Moreover, Oriental
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 the statements of
operations with the remaining noncredit-related component recognized in other
comprehensive income (loss). 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 Oriental 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.
Most of the investments ($872.8 million, amortized cost, or 99.7%) with an unrealized loss
position at December 31, 2017 consist of securities issued or guaranteed by the
U.S. Treasury or U.S. government-sponsored agencies, all of which are highly
liquid securities that have a large and efficient secondary market. Their
aggregate losses and their variability from period to period are the result of
changes in market conditions, and not due to the repayment capacity or
creditworthiness of the issuers or guarantors of such securities.
The sole exposure to a Puerto Rico
government bond ($2.5 million, amortized cost, or 0.3%) with an unrealized loss
position at December 31, 2017 consists of an obligation issued by the Puerto
Rico Highways and Transportation Authority ("PRHTA") secured by a
pledge of toll revenues from the Teodoro Moscoso Bridge operated through a
public-private partnership. The decline in the market value of this security is
mainly attributed to the significant economic and fiscal challenges that Puerto
Rico is facing, which is expected to result in a significant restructuring of
the government under the supervision of the federally-created Fiscal Oversight and
Management Board of Puerto Rico. All other Puerto Rico government securities
were sold during the first quarter of 2016. The PRHTA bond had an aggregate
fair value of $2.1 million at December 31,
2017 (85% of the bond's amortized
cost) and matures on July 1, 2018. The discounted cash flow analysis for the
investment showed a cumulative default probability at maturity of 4.4%, thus reflecting that it
is more likely than not that the bond will not default during its remaining
term. Based on this analysis, Oriental determined that it is more likely than
not that it will recover all interest and principal invested in this Puerto
Rico government bond and is, therefore, not required to recognize a credit loss
as of December 31, 2017. Also, Oriental’s
conclusion is based on the assessment of the specific source of repayment of
the outstanding bond, which continues to perform. PRHTA started principal
repayments on July 1, 2014. All scheduled principal and interest payments to
date have been collected. As a
result of the aforementioned analysis, no other-than-temporary losses were
recorded during the year ended December 31, 2017.
As of December 31, 2017, Oriental performed a cash
flow analysis of its Puerto Rico government bond to calculate the cash flows
expected to be collected and determine if any portion of the decline in market
value of this investment was considered an other-than-temporary impairment. The
analysis derives an estimate of value based on the present value of
risk-adjusted future cash flows of the underlying investment, and included the
following components:
·
The contractual future
cash flows of the bond are projected based on the key terms as set forth in the
PRHTA official statement for the investment. Such key terms include among
others the interest rate, amortization schedule, if any, and the maturity date.
·
The risk-adjusted cash
flows are calculated based on a monthly default probability and recovery rate
assumptions based on the credit rating of the investment. Constant monthly
default rates are assumed throughout the life of the bond which is based on the
respective security’s credit rating as of the date of the analysis.
·
The adjusted future
cash flows are then discounted at the original effective yield of the
investment based on the purchase price and expected risk-adjusted future cash
flows as of the purchase date of the investment.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents a rollforward of credit-related impairment
losses recognized in earnings for the years ended December 31, 2017, 2016 and 2015 on available-for-sale securities:
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
|
|
|
Balance at beginning
of year
|
|
$
|
-
|
|
$
|
1,490
|
|
$
|
-
|
|
Reductions for
securities sold during the period (realized)
|
|
|
-
|
|
|
(1,490)
|
|
|
-
|
|
Additions from
credit losses recognized on available-for-sale securities that had no
previous impairment lossess
|
|
|
-
|
|
|
-
|
|
|
1,490
|
|
Balance at end
of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,490
|
NOTE
5 - PLEDGED ASSETS
The following table shows a summary of pledged and not pledged
assets at December 31, 2017 and 2016. Investment securities available for sale are
presented at fair value, and investment securities held-to-maturity, residential
mortgage loans, commercial loans and leases are presented at amortized cost:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Pledged
investment securities to secure:
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
$
|
205,484
|
|
$
|
700,498
|
|
Derivatives
|
|
1,478
|
|
|
2,397
|
|
Bond for the
Bank's trust operations
|
|
341
|
|
|
348
|
|
Puerto Rico public fund deposits
|
|
22,948
|
|
|
-
|
|
Total
pledged investment securities
|
|
230,251
|
|
|
703,243
|
|
Pledged
residential mortgage loans to secure:
|
|
|
|
|
|
|
Advances
from the Federal Home Loan Bank
|
|
971,772
|
|
|
1,028,234
|
|
Pledged
commercial loans to secure:
|
|
|
|
|
|
|
Advances
from the Federal Home Loan Bank
|
|
305,346
|
|
|
381,990
|
|
Federal
Reserve Bank Credit Facility
|
|
993
|
|
|
1,303
|
|
Puerto Rico public fund deposits
|
|
150,036
|
|
|
209,236
|
|
|
|
456,375
|
|
|
592,529
|
|
Total pledged assets
|
$
|
1,658,398
|
|
$
|
2,324,006
|
|
Financial
assets not pledged:
|
|
|
|
|
|
|
Investment
securities
|
$
|
921,610
|
|
$
|
648,125
|
|
Residential
mortgage loans
|
|
325,698
|
|
|
348,030
|
|
Commercial
loans
|
|
1,152,151
|
|
|
1,064,923
|
|
Consumer
loans
|
|
361,497
|
|
|
329,050
|
|
Auto loans
and leases
|
|
949,650
|
|
|
895,097
|
|
Total assets not pledged
|
$
|
3,710,606
|
|
$
|
3,285,225
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 6 - LOANS
Oriental’s loan portfolio is composed of two segments,
loans initially accounted for under the amortized cost method (referred to as
"originated and other" loans) and loans acquired (referred to as
"acquired" loans). Acquired loans are further segregated between
acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were
purchased subject to loss-sharing agreements with the FDIC, which were terminated on February 6,
2017.
As a result of the devastation caused by hurricanes Irma
and Maria, Oriental offered an automatic three-month moratorium for the payment
due on auto and personal loans for customers whose payments were not over 89
days past due at August 31, 2017. These payments, together with any additional
accrued interest, are payable in three installments after the original maturity
of the loans. Residential mortgage loans have the same moratorium, but the
payments subject to the moratorium on non-conforming loans are payable in
aggregate as a balloon payment at the maturity of the loan and on conforming
mortgage loans the repayment terms are established on a case by case basis at
the end of the moratorium period. For credit cards, that were not over 29 days
past due at August 31, 2017, the minimum payment amount was waived until
December 31, 2017. Oriental also offered an automatic one-month moratorium for
the payment of principal and interest on commercial loans for customers whose
payments were not over 30 days past due at August 31, 2017, and the flexibility
of extending it up to two additional months, based on the customer's needs.
Oriental had approximately 83 thousand loans under the moratorium
program amounting to $2.6 billion at December 31,
2017. The level of delinquencies for mortgage and auto loans as of December 31,
2017 was impacted by the loan moratorium. Although the repayment schedule was
modified as part of the moratorium, certain borrowers continued to make
payments, having an impact on the respective delinquency status.
The composition of Oriental’s
loan portfolio at
December 31, 2017 and 2016 was as follows:
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Originated and other loans and leases held for
investment:
|
|
|
|
|
|
|
Mortgage
|
$
|
683,607
|
|
$
|
721,494
|
|
Commercial
|
|
1,307,261
|
|
|
1,277,866
|
|
Consumer
|
|
330,039
|
|
|
290,515
|
|
Auto and leasing
|
|
883,985
|
|
|
756,395
|
|
|
|
3,204,892
|
|
|
3,046,270
|
|
Allowance for loan and lease losses on originated and
other loans and leases
|
|
(92,718)
|
|
|
(59,300)
|
|
|
|
3,112,174
|
|
|
2,986,970
|
|
Deferred loan costs, net
|
|
6,695
|
|
|
5,766
|
|
Total originated and other loans loans held for
investment, net
|
|
3,118,869
|
|
|
2,992,736
|
|
Acquired loans:
|
|
|
|
|
|
|
Acquired BBVAPR loans:
|
|
|
|
|
|
|
Accounted for under ASC 310-20 (Loans with revolving
feature and/or
|
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
|
Commercial
|
|
4,380
|
|
|
5,562
|
|
Consumer
|
|
28,915
|
|
|
32,862
|
|
Auto
|
|
21,969
|
|
|
53,026
|
|
|
|
55,264
|
|
|
91,450
|
|
Allowance for loan and lease losses on acquired BBVAPR
loans accounted for under ASC 310-20
|
|
(3,862)
|
|
|
(4,300)
|
|
|
|
51,402
|
|
|
87,150
|
|
Accounted for under ASC 310-30 (Loans acquired with
deteriorated
|
|
|
|
|
|
|
credit quality, including those by analogy)
|
|
|
|
|
|
|
Mortgage
|
|
532,053
|
|
|
569,253
|
|
Commercial
|
|
243,092
|
|
|
292,564
|
|
Consumer
|
|
1,431
|
|
|
4,301
|
|
Auto
|
|
43,696
|
|
|
85,676
|
|
|
|
820,272
|
|
|
951,794
|
|
Allowance for loan and lease losses on acquired BBVAPR
loans accounted for under ASC 310-30
|
|
(45,755)
|
|
|
(31,056)
|
|
|
|
774,517
|
|
|
920,738
|
|
Total acquired BBVAPR loans, net
|
|
825,919
|
|
|
1,007,888
|
|
Acquired Eurobank loans:
|
|
|
|
|
|
|
Loans secured by 1-4 family residential properties
|
|
69,538
|
|
|
73,018
|
|
Commercial
|
|
53,793
|
|
|
81,460
|
|
Consumer
|
|
1,112
|
|
|
1,372
|
|
Total acquired Eurobank loans
|
|
124,443
|
|
|
155,850
|
|
Allowance for loan and lease losses on Eurobank loans
|
|
(25,174)
|
|
|
(21,281)
|
|
Total acquired Eurobank loans, net
|
|
99,269
|
|
|
134,569
|
|
Total acquired loans, net
|
|
925,188
|
|
|
1,142,457
|
|
Total held for investment, net
|
|
4,044,057
|
|
|
4,135,193
|
|
Mortgage loans held-for-sale
|
|
12,272
|
|
|
12,499
|
|
Total loans, net
|
$
|
4,056,329
|
|
$
|
4,147,692
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Originated
and Other Loans and Leases Held for Investment
Oriental’s originated and other loans held for investment are
encompassed within four portfolio segments: mortgage, commercial, consumer, and
auto and leasing.
The following tables present the aging of the recorded investment
in gross originated and other loans held for investment at December 31, 2017 and 2016, by class of
loans. Mortgage
loans past due include 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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
86
|
|
$
|
938
|
|
$
|
3,537
|
|
$
|
4,561
|
|
$
|
41,579
|
|
$
|
46,140
|
|
$
|
467
|
|
Years 2003 and 2004
|
|
92
|
|
|
1,077
|
|
|
6,304
|
|
|
7,473
|
|
|
75,758
|
|
|
83,231
|
|
|
-
|
|
Year 2005
|
|
101
|
|
|
383
|
|
|
3,348
|
|
|
3,832
|
|
|
40,669
|
|
|
44,501
|
|
|
68
|
|
Year 2006
|
|
242
|
|
|
604
|
|
|
5,971
|
|
|
6,817
|
|
|
55,966
|
|
|
62,783
|
|
|
66
|
|
Years 2007, 2008
and 2009
|
|
358
|
|
|
1,258
|
|
|
8,561
|
|
|
10,177
|
|
|
58,505
|
|
|
68,682
|
|
|
577
|
|
Years 2010, 2011, 2012, 2013
|
|
233
|
|
|
978
|
|
|
7,393
|
|
|
8,604
|
|
|
116,674
|
|
|
125,278
|
|
|
1,202
|
|
Years 2014, 2015, 2016 and 2017
|
|
-
|
|
|
75
|
|
|
1,649
|
|
|
1,724
|
|
|
121,194
|
|
|
122,918
|
|
|
-
|
|
|
|
1,112
|
|
|
5,313
|
|
|
36,763
|
|
|
43,188
|
|
|
510,345
|
|
|
553,533
|
|
|
2,380
|
|
Non-traditional
|
|
-
|
|
|
326
|
|
|
3,543
|
|
|
3,869
|
|
|
14,401
|
|
|
18,270
|
|
|
-
|
|
Loss mitigation program
|
|
7,233
|
|
|
3,331
|
|
|
18,923
|
|
|
29,487
|
|
|
73,793
|
|
|
103,280
|
|
|
4,981
|
|
|
|
8,345
|
|
|
8,970
|
|
|
59,229
|
|
|
76,544
|
|
|
598,539
|
|
|
675,083
|
|
|
7,361
|
|
Home equity secured personal loans
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
256
|
|
|
256
|
|
|
-
|
|
GNMA's buy-back option program
|
|
-
|
|
|
-
|
|
|
8,268
|
|
|
8,268
|
|
|
-
|
|
|
8,268
|
|
|
-
|
|
|
|
8,345
|
|
|
8,970
|
|
|
67,497
|
|
|
84,812
|
|
|
598,795
|
|
|
683,607
|
|
|
7,361
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
235,426
|
|
|
235,426
|
|
|
-
|
|
Institutional
|
|
-
|
|
|
-
|
|
|
118
|
|
|
118
|
|
|
44,648
|
|
|
44,766
|
|
|
-
|
|
Middle market
|
|
765
|
|
|
-
|
|
|
3,527
|
|
|
4,292
|
|
|
225,649
|
|
|
229,941
|
|
|
-
|
|
Retail
|
|
352
|
|
|
936
|
|
|
9,695
|
|
|
10,983
|
|
|
235,084
|
|
|
246,067
|
|
|
-
|
|
Floor plan
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,998
|
|
|
3,998
|
|
|
-
|
|
Real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,556
|
|
|
17,556
|
|
|
-
|
|
|
|
1,117
|
|
|
936
|
|
|
13,340
|
|
|
15,393
|
|
|
762,361
|
|
|
777,754
|
|
|
-
|
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
170,015
|
|
|
170,015
|
|
|
-
|
|
Institutional
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
125,591
|
|
|
125,591
|
|
|
-
|
|
Middle market
|
|
-
|
|
|
-
|
|
|
881
|
|
|
881
|
|
|
84,482
|
|
|
85,363
|
|
|
-
|
|
Retail
|
|
455
|
|
|
103
|
|
|
1,616
|
|
|
2,174
|
|
|
111,078
|
|
|
113,252
|
|
|
-
|
|
Floor plan
|
|
9
|
|
|
-
|
|
|
51
|
|
|
60
|
|
|
35,226
|
|
|
35,286
|
|
|
-
|
|
|
|
464
|
|
|
103
|
|
|
2,548
|
|
|
3,115
|
|
|
526,392
|
|
|
529,507
|
|
|
-
|
|
|
|
1,581
|
|
|
1,039
|
|
|
15,888
|
|
|
18,508
|
|
|
1,288,753
|
|
|
1,307,261
|
|
|
-
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
246
|
|
$
|
130
|
|
$
|
1,227
|
|
$
|
1,603
|
|
$
|
26,827
|
|
$
|
28,430
|
|
$
|
-
|
|
Overdrafts
|
|
20
|
|
|
6
|
|
|
31
|
|
|
57
|
|
|
157
|
|
|
214
|
|
|
-
|
|
Personal lines of credit
|
|
259
|
|
|
54
|
|
|
87
|
|
|
400
|
|
|
1,820
|
|
|
2,220
|
|
|
-
|
|
Personal loans
|
|
3,778
|
|
|
1,494
|
|
|
223
|
|
|
5,495
|
|
|
278,982
|
|
|
284,477
|
|
|
-
|
|
Cash collateral personal loans
|
|
103
|
|
|
59
|
|
|
312
|
|
|
474
|
|
|
14,224
|
|
|
14,698
|
|
|
-
|
|
|
|
4,406
|
|
|
1,743
|
|
|
1,880
|
|
|
8,029
|
|
|
322,010
|
|
|
330,039
|
|
|
-
|
|
Auto and leasing
|
|
21,760
|
|
|
10,399
|
|
|
4,232
|
|
|
36,391
|
|
|
847,594
|
|
|
883,985
|
|
|
-
|
|
Total
|
$
|
36,092
|
|
$
|
22,151
|
|
$
|
89,497
|
|
$
|
147,740
|
|
$
|
3,057,152
|
|
$
|
3,204,892
|
|
$
|
7,361
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
196
|
|
$
|
2,176
|
|
$
|
3,371
|
|
$
|
5,743
|
|
$
|
44,542
|
|
$
|
50,285
|
|
$
|
158
|
|
Years
2003 and 2004
|
|
156
|
|
|
3,872
|
|
|
7,272
|
|
|
11,300
|
|
|
79,407
|
|
|
90,707
|
|
|
-
|
|
Year
2005
|
|
-
|
|
|
1,952
|
|
|
4,306
|
|
|
6,258
|
|
|
43,751
|
|
|
50,009
|
|
|
-
|
|
Year
2006
|
|
506
|
|
|
2,905
|
|
|
6,261
|
|
|
9,672
|
|
|
59,628
|
|
|
69,300
|
|
|
-
|
|
Years
2007, 2008
and
2009
|
|
409
|
|
|
1,439
|
|
|
11,732
|
|
|
13,580
|
|
|
63,149
|
|
|
76,729
|
|
|
398
|
|
Years
2010, 2011, 2012, 2013
|
|
349
|
|
|
1,772
|
|
|
10,417
|
|
|
12,538
|
|
|
127,322
|
|
|
139,860
|
|
|
583
|
|
Years
2014, 2015 and 2016
|
|
47
|
|
|
123
|
|
|
1,357
|
|
|
1,527
|
|
|
106,672
|
|
|
108,199
|
|
|
-
|
|
|
|
1,663
|
|
|
14,239
|
|
|
44,716
|
|
|
60,618
|
|
|
524,471
|
|
|
585,089
|
|
|
1,139
|
|
Non-traditional
|
|
-
|
|
|
498
|
|
|
4,730
|
|
|
5,228
|
|
|
17,631
|
|
|
22,859
|
|
|
-
|
|
Loss
mitigation program
|
|
8,911
|
|
|
7,205
|
|
|
16,541
|
|
|
32,657
|
|
|
70,871
|
|
|
103,528
|
|
|
1,724
|
|
|
|
10,574
|
|
|
21,942
|
|
|
65,987
|
|
|
98,503
|
|
|
612,973
|
|
|
711,476
|
|
|
2,863
|
|
Home equity
secured personal loans
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
337
|
|
|
337
|
|
|
-
|
|
GNMA's
buy-back option program
|
|
-
|
|
|
-
|
|
|
9,681
|
|
|
9,681
|
|
|
-
|
|
|
9,681
|
|
|
-
|
|
|
|
10,574
|
|
|
21,942
|
|
|
75,668
|
|
|
108,184
|
|
|
613,310
|
|
|
721,494
|
|
|
2,863
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
242,770
|
|
|
242,770
|
|
|
-
|
|
Institutional
|
|
-
|
|
|
-
|
|
|
254
|
|
|
254
|
|
|
26,546
|
|
|
26,800
|
|
|
-
|
|
Middle
market
|
|
-
|
|
|
60
|
|
|
3,319
|
|
|
3,379
|
|
|
231,602
|
|
|
234,981
|
|
|
-
|
|
Retail
|
|
154
|
|
|
350
|
|
|
6,594
|
|
|
7,098
|
|
|
242,630
|
|
|
249,728
|
|
|
-
|
|
Floor
plan
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,989
|
|
|
2,989
|
|
|
-
|
|
Real
estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,395
|
|
|
16,395
|
|
|
-
|
|
|
|
154
|
|
|
410
|
|
|
10,167
|
|
|
10,731
|
|
|
762,932
|
|
|
773,663
|
|
|
-
|
|
Other commercial
and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
136,438
|
|
|
136,438
|
|
|
-
|
|
Institutional
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,285
|
|
|
180,285
|
|
|
-
|
|
Middle
market
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
81,633
|
|
|
81,633
|
|
|
-
|
|
Retail
|
|
930
|
|
|
100
|
|
|
969
|
|
|
1,999
|
|
|
71,706
|
|
|
73,705
|
|
|
-
|
|
Floor
plan
|
|
8
|
|
|
-
|
|
|
61
|
|
|
69
|
|
|
32,073
|
|
|
32,142
|
|
|
-
|
|
|
|
938
|
|
|
100
|
|
|
1,030
|
|
|
2,068
|
|
|
502,135
|
|
|
504,203
|
|
|
-
|
|
|
|
1,092
|
|
|
510
|
|
|
11,197
|
|
|
12,799
|
|
|
1,265,067
|
|
|
1,277,866
|
|
|
-
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
cards
|
$
|
527
|
|
$
|
283
|
|
$
|
525
|
|
$
|
1,335
|
|
$
|
25,023
|
|
$
|
26,358
|
|
$
|
-
|
|
Overdrafts
|
|
16
|
|
|
12
|
|
|
5
|
|
|
33
|
|
|
174
|
|
|
207
|
|
|
-
|
|
Personal
lines of credit
|
|
41
|
|
|
4
|
|
|
32
|
|
|
77
|
|
|
2,327
|
|
|
2,404
|
|
|
-
|
|
Personal
loans
|
|
2,474
|
|
|
1,489
|
|
|
1,081
|
|
|
5,044
|
|
|
241,228
|
|
|
246,272
|
|
|
-
|
|
Cash
collateral personal loans
|
|
240
|
|
|
20
|
|
|
4
|
|
|
264
|
|
|
15,010
|
|
|
15,274
|
|
|
-
|
|
|
|
3,298
|
|
|
1,808
|
|
|
1,647
|
|
|
6,753
|
|
|
283,762
|
|
|
290,515
|
|
|
-
|
|
Auto and leasing
|
|
42,714
|
|
|
19,014
|
|
|
8,173
|
|
|
69,901
|
|
|
686,494
|
|
|
756,395
|
|
|
-
|
|
Total
|
$
|
57,678
|
|
$
|
43,274
|
|
$
|
96,685
|
|
$
|
197,637
|
|
$
|
2,848,633
|
|
$
|
3,046,270
|
|
$
|
2,863
|
At December 31, 2017 and 2016, Oriental had carrying balance of $94.9 million and $136.6 million, respectively, in
originated and other loans held for investment granted to the Puerto Rico
government, including its instrumentalities, public corporations and
municipalities as part of the institutional commercial loan segment. All
originated and other loans granted to the Puerto Rico government are general
obligations of municipalities secured by ad valorem taxation, without
limitation as to rate or amount, on all taxable property within the issuing
municipalities. The good faith, credit and unlimited taxing power of each
issuing municipality are pledged for the payment of its general obligations. In
2017, Oriental sold a performing originated municipal loan, which was due in
July 2018, for $28.8 million. The sale reduced near-term risk
associated with a likely refinancing.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired Loans
Acquired loans were initially measured at fair value and
subsequently accounted for under either ASC 310-30 or ASC 310-20
(Non-refundable fees and Other Costs). We have acquired loans in two
acquisitions, BBVAPR and Eurobank.
Acquired BBVAPR Loans
Accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Credit cards, retail and commercial revolving lines of credits,
floor plans and performing auto loans with FICO scores over 660 acquired at a
premium are accounted for
under the guidance of ASC 310-20, which requires that any contractually
required loan payment receivable in excess of Oriental’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 Oriental’s non-accrual policy, and any
accretion of discount or amortization of premium is discontinued. Acquired
BBVAPR loans that were accounted for under the provisions of ASC 310-20 are
removed from the acquired loan category at the end of the reporting period upon
refinancing, renewal or normal re-underwriting.
The following tables present the aging of the recorded investment
in gross acquired BBVAPR loans accounted for under ASC 310-20 as of December 31, 2017 and 2016, by class of
loans:
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
-
|
|
$
|
-
|
|
$
|
119
|
|
$
|
119
|
|
$
|
-
|
|
$
|
119
|
|
$
|
-
|
|
Floor
plan
|
|
-
|
|
|
-
|
|
|
928
|
|
|
928
|
|
|
393
|
|
|
1,321
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
1,047
|
|
|
1,047
|
|
|
393
|
|
|
1,440
|
|
|
-
|
|
Other commercial
and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
36
|
|
|
-
|
|
|
221
|
|
|
257
|
|
|
2,681
|
|
|
2,938
|
|
|
-
|
|
Floor
plan
|
|
-
|
|
|
-
|
|
|
2
|
|
|
2
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
|
36
|
|
|
-
|
|
|
223
|
|
|
259
|
|
|
2,681
|
|
|
2,940
|
|
|
-
|
|
|
|
36
|
|
|
-
|
|
|
1,270
|
|
|
1,306
|
|
|
3,074
|
|
|
4,380
|
|
|
-
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
cards
|
|
208
|
|
|
127
|
|
|
1,310
|
|
|
1,645
|
|
|
24,822
|
|
|
26,467
|
|
|
-
|
|
Personal
loans
|
|
139
|
|
|
61
|
|
|
45
|
|
|
245
|
|
|
2,203
|
|
|
2,448
|
|
|
-
|
|
|
|
347
|
|
|
188
|
|
|
1,355
|
|
|
1,890
|
|
|
27,025
|
|
|
28,915
|
|
|
-
|
|
Auto
|
|
602
|
|
|
248
|
|
|
179
|
|
|
1,029
|
|
|
20,940
|
|
|
21,969
|
|
|
-
|
|
Total
|
$
|
985
|
|
$
|
436
|
|
$
|
2,804
|
|
$
|
4,225
|
|
$
|
51,039
|
|
$
|
55,264
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
33
|
|
$
|
-
|
|
$
|
110
|
|
$
|
143
|
|
$
|
-
|
|
$
|
143
|
|
$
|
-
|
|
Floor
plan
|
|
-
|
|
|
-
|
|
|
219
|
|
|
219
|
|
|
2,171
|
|
|
2,390
|
|
|
-
|
|
|
|
33
|
|
|
-
|
|
|
329
|
|
|
362
|
|
|
2,171
|
|
|
2,533
|
|
|
-
|
|
Other commercial
and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
97
|
|
|
34
|
|
|
121
|
|
|
252
|
|
|
2,775
|
|
|
3,027
|
|
|
-
|
|
Floor
plan
|
|
-
|
|
|
-
|
|
|
2
|
|
|
2
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
|
97
|
|
|
34
|
|
|
123
|
|
|
254
|
|
|
2,775
|
|
|
3,029
|
|
|
-
|
|
|
|
130
|
|
|
34
|
|
|
452
|
|
|
616
|
|
|
4,946
|
|
|
5,562
|
|
|
-
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
cards
|
|
736
|
|
|
369
|
|
|
708
|
|
|
1,813
|
|
|
28,280
|
|
|
30,093
|
|
|
-
|
|
Personal
loans
|
|
48
|
|
|
14
|
|
|
120
|
|
|
182
|
|
|
2,587
|
|
|
2,769
|
|
|
-
|
|
|
|
784
|
|
|
383
|
|
|
828
|
|
|
1,995
|
|
|
30,867
|
|
|
32,862
|
|
|
-
|
|
Auto
|
|
3,652
|
|
|
1,355
|
|
|
517
|
|
|
5,524
|
|
|
47,502
|
|
|
53,026
|
|
|
-
|
|
Total
|
$
|
4,566
|
|
$
|
1,772
|
|
$
|
1,797
|
|
$
|
8,135
|
|
$
|
83,315
|
|
$
|
91,450
|
|
$
|
-
|
Acquired BBVAPR Loans Accounted for under ASC 310-30 (including
those accounted for under ASC 310-30 by analogy)
Acquired BBVAPR loans, except for credit cards, retail and
commercial revolving lines of credits, floor plans and performing auto loans
with FICO scores over 660 acquired at a premium, are accounted for by Oriental
in accordance with ASC 310-30.
The carrying amount corresponding to acquired
BBVAPR loans with deteriorated credit quality, including those accounted under
ASC 310-30 by analogy, in the statements of financial condition at December 31,
2017 and 2016 is as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Contractual required payments receivable:
|
$
|
1,481,616
|
|
$
|
1,669,602
|
|
Less: Non-accretable discount
|
|
352,431
|
|
|
363,107
|
|
Cash expected to be collected
|
|
1,129,185
|
|
|
1,306,495
|
|
Less: Accretable yield
|
|
308,913
|
|
|
354,701
|
|
Carrying amount, gross
|
|
820,272
|
|
|
951,794
|
|
Less: allowance for loan and lease losses
|
|
45,755
|
|
|
31,056
|
|
Carrying amount, net
|
$
|
774,517
|
|
$
|
920,738
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2017 and 2016, Oriental had $50.3 million and $66.2 million, respectively, in
loans granted to the Puerto Rico government, including its instrumentalities,
public corporations and municipalities as part of its acquired BBVAPR loans accounted
for under ASC 310-30. These loans are primarily secured municipal general obligations
and funds recovered under a Puerto Rico escheat law. During of 2017, Oriental
received the scheduled payments of principal from the municipal general obligations
and settled the loan payable from funds recovered under the escheat law that
was in default.
The following
tables describe the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for
under ASC 310-30 for the years ended December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
2017
|
|
|
Mortgage
|
|
Commercial
|
|
Auto
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
292,115
|
|
$
|
50,366
|
|
$
|
8,538
|
|
$
|
3,682
|
|
$
|
354,701
|
|
Accretion
|
|
(30,205)
|
|
|
(20,572)
|
|
|
(6,339)
|
|
|
(1,841)
|
|
|
(58,957)
|
|
Change in expected cash flows
|
|
2
|
|
|
22,250
|
|
|
170
|
|
|
143
|
|
|
22,565
|
|
Transfer (to) from non-accretable discount
|
|
(3,414)
|
|
|
(5,280)
|
|
|
397
|
|
|
(1,099)
|
|
|
(9,396)
|
|
Balance at end of year
|
$
|
258,498
|
|
$
|
46,764
|
|
$
|
2,766
|
|
$
|
885
|
|
$
|
308,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
305,615
|
|
$
|
16,965
|
|
$
|
22,407
|
|
$
|
18,120
|
|
$
|
363,107
|
|
Change in actual and expected losses
|
|
(9,528)
|
|
|
(11,649)
|
|
|
1,040
|
|
|
65
|
|
|
(20,072)
|
|
Transfer from (to) accretable yield
|
|
3,414
|
|
|
5,280
|
|
|
(397)
|
|
|
1,099
|
|
|
9,396
|
|
Balance at end of year
|
$
|
299,501
|
|
$
|
10,596
|
|
$
|
23,050
|
|
$
|
19,284
|
|
$
|
352,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2016
|
|
|
Mortgage
|
|
Commercial
|
|
Auto
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
268,794
|
|
$
|
65,026
|
|
$
|
21,578
|
|
$
|
6,290
|
|
$
|
361,688
|
|
Accretion
|
|
(32,834)
|
|
|
(26,254)
|
|
|
(13,567)
|
|
|
(2,982)
|
|
|
(75,637)
|
|
Change in actual and expected losses
|
|
(1)
|
|
|
14,259
|
|
|
1,251
|
|
|
(242)
|
|
|
15,267
|
|
Transfer from (to) non-accretable discount
|
|
56,156
|
|
|
(2,665)
|
|
|
(724)
|
|
|
616
|
|
|
53,383
|
|
Balance at end of year
|
$
|
292,115
|
|
$
|
50,366
|
|
$
|
8,538
|
|
$
|
3,682
|
|
$
|
354,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
374,772
|
|
$
|
18,545
|
|
$
|
22,039
|
|
$
|
18,834
|
|
$
|
434,190
|
|
Change in actual and expected losses
|
|
(13,001)
|
|
|
(4,245)
|
|
|
(356)
|
|
|
(98)
|
|
|
(17,700)
|
|
Transfer (to) from accretable yield
|
|
(56,156)
|
|
|
2,665
|
|
|
724
|
|
|
(616)
|
|
|
(53,383)
|
|
Balance at end of year
|
$
|
305,615
|
|
$
|
16,965
|
|
$
|
22,407
|
|
$
|
18,120
|
|
$
|
363,107
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
Year Ended December 31,
2015
|
|
|
Mortgage
|
|
Commercial
|
|
Auto
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
298,364
|
|
$
|
87,025
|
|
$
|
53,998
|
|
$
|
6,559
|
|
$
|
445,946
|
|
Accretion
|
|
(34,842)
|
|
|
(49,429)
|
|
|
(23,463)
|
|
|
(4,379)
|
|
|
(112,113)
|
|
Change in actual and expected losses
|
|
-
|
|
|
8,532
|
|
|
-
|
|
|
(1)
|
|
|
8,531
|
|
Transfer (to) from non-accretable discount
|
|
5,272
|
|
|
18,898
|
|
|
(8,957)
|
|
|
4,111
|
|
|
19,324
|
|
Balance at end of year
|
$
|
268,794
|
|
$
|
65,026
|
|
$
|
21,578
|
|
$
|
6,290
|
|
$
|
361,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
389,839
|
|
$
|
26,555
|
|
$
|
16,215
|
|
$
|
24,018
|
|
$
|
456,627
|
|
Change in actual and expected losses
|
|
(9,795)
|
|
|
10,888
|
|
|
(3,133)
|
|
|
(1,073)
|
|
|
(3,113)
|
|
Transfer from (to) accretable yield
|
|
(5,272)
|
|
|
(18,898)
|
|
|
8,957
|
|
|
(4,111)
|
|
|
(19,324)
|
|
Balance at end of year
|
$
|
374,772
|
|
$
|
18,545
|
|
$
|
22,039
|
|
$
|
18,834
|
|
$
|
434,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Eurobank Loans
The carrying amount of acquired Eurobank loans at December 31, 2017 and 2016 is as follows:
|
|
December 31
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Contractual required payments receivable:
|
$
|
179,960
|
|
$
|
232,698
|
|
Less: Non-accretable discount
|
|
5,845
|
|
|
12,340
|
|
Cash expected to be collected
|
|
174,115
|
|
|
220,358
|
|
Less: Accretable yield
|
|
49,672
|
|
|
64,508
|
|
Carrying amount, gross
|
|
124,443
|
|
|
155,850
|
|
Less: Allowance for loan and lease losses
|
|
25,174
|
|
|
21,281
|
|
Carrying amount, net
|
$
|
99,269
|
|
$
|
134,569
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables describe the
accretable yield and non-accretable discount activity of acquired Eurobank
loans for the years ended December
31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
2017
|
|
|
Loans Secured by 1-4 Family
Residential Properties
|
|
Commercial
|
|
Construction &
Development Secured by 1-4 Family Residential Properties
|
|
Leasing
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
45,839
|
|
$
|
16,475
|
|
$
|
2,194
|
|
$
|
-
|
|
$
|
-
|
|
$
|
64,508
|
|
Accretion
|
|
(7,180)
|
|
|
(12,985)
|
|
|
(82)
|
|
|
(30)
|
|
|
(283)
|
|
|
(20,560)
|
|
Change in expected cash flows
|
|
121
|
|
|
1,881
|
|
|
121
|
|
|
(217)
|
|
|
759
|
|
|
2,665
|
|
Transfer from (to) non-accretable discount
|
|
2,694
|
|
|
1,380
|
|
|
(786)
|
|
|
247
|
|
|
(476)
|
|
|
3,059
|
|
Balance at end of year
|
$
|
41,474
|
|
$
|
6,751
|
|
$
|
1,447
|
|
$
|
-
|
|
$
|
-
|
|
$
|
49,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
8,441
|
|
$
|
3,880
|
|
$
|
11
|
|
$
|
-
|
|
$
|
8
|
|
$
|
12,340
|
|
Change in actual and expected losses
|
|
(1,171)
|
|
|
(2,224)
|
|
|
(39)
|
|
|
247
|
|
|
(249)
|
|
|
(3,436)
|
|
Transfer from (to) accretable yield
|
|
(2,694)
|
|
|
(1,380)
|
|
|
786
|
|
|
(247)
|
|
|
476
|
|
|
(3,059)
|
|
Balance at end of year
|
$
|
4,576
|
|
$
|
276
|
|
$
|
758
|
|
$
|
-
|
|
$
|
235
|
|
$
|
5,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
Year Ended December 31,
2016
|
|
|
Loans Secured by 1-4
Family Residential Properties
|
|
Commercial
|
|
Construction &
Development Secured by 1-4 Family Residential Properties
|
|
Leasing
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
51,954
|
|
$
|
26,970
|
|
$
|
2,255
|
|
|
-
|
|
$
|
3,212
|
|
$
|
84,391
|
|
Accretion
|
|
(8,942)
|
|
|
(19,593)
|
|
|
(90)
|
|
|
(60)
|
|
|
(1,813)
|
|
|
(30,498)
|
|
Change in actual and expected losses
|
|
2,134
|
|
|
13,722
|
|
|
1
|
|
|
(15)
|
|
|
(1,386)
|
|
|
14,456
|
|
Transfer from (to) non-accretable discount
|
|
693
|
|
|
(4,624)
|
|
|
28
|
|
|
75
|
|
|
(13)
|
|
|
(3,841)
|
|
Balance at end of year
|
$
|
45,839
|
|
$
|
16,475
|
|
$
|
2,194
|
|
$
|
-
|
|
$
|
-
|
|
$
|
64,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
12,869
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,287
|
|
$
|
21,156
|
|
Change in actual and expected losses
|
|
(3,735)
|
|
|
(744)
|
|
|
39
|
|
|
75
|
|
|
(8,292)
|
|
|
(12,657)
|
|
Transfer (to) from accretable yield
|
|
(693)
|
|
|
4,624
|
|
|
(28)
|
|
|
(75)
|
|
|
13
|
|
|
3,841
|
|
Balance at end of year
|
$
|
8,441
|
|
$
|
3,880
|
|
$
|
11
|
|
$
|
-
|
|
$
|
8
|
|
$
|
12,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
Year Ended December 31,
2015
|
|
|
Loans Secured by 1-4
Family Residential Properties
|
|
Commercial
|
|
Construction &
Development Secured by 1-4 Family Residential Properties
|
|
Leasing
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
47,636
|
|
$
|
37,920
|
|
$
|
20,753
|
|
$
|
2,479
|
|
$
|
1,071
|
|
$
|
109,859
|
|
Accretion
|
|
(13,685)
|
|
|
(32,124)
|
|
|
(2,513)
|
|
|
(3,458)
|
|
|
(631)
|
|
|
(52,411)
|
|
Change in expected cash flows
|
|
4,631
|
|
|
44,660
|
|
|
(15,048)
|
|
|
(51)
|
|
|
305
|
|
|
34,497
|
|
Transfer from (to) non-accretable discount
|
|
13,372
|
|
|
(23,486)
|
|
|
(937)
|
|
|
1,030
|
|
|
2,467
|
|
|
(7,554)
|
|
Balance at end of year
|
$
|
51,954
|
|
$
|
26,970
|
|
$
|
2,255
|
|
$
|
-
|
|
$
|
3,212
|
|
$
|
84,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
27,348
|
|
$
|
24,464
|
|
$
|
-
|
|
$
|
-
|
|
$
|
10,598
|
|
$
|
62,410
|
|
Change in actual and expected cash flows
|
|
(1,107)
|
|
|
(47,950)
|
|
|
(937)
|
|
|
1,030
|
|
|
156
|
|
|
(48,808)
|
|
Transfer (to) from accretable yield
|
|
(13,372)
|
|
|
23,486
|
|
|
937
|
|
|
(1,030)
|
|
|
(2,467)
|
|
|
7,554
|
|
Balance at end of year
|
$
|
12,869
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,287
|
|
$
|
21,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
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 December 31, 2017 and 2016:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Originated and other loans and leases
held for investment
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
Traditional (by origination year):
|
|
|
|
|
|
|
Up to the year 2002
|
$
|
3,070
|
|
$
|
3,336
|
|
Years 2003 and 2004
|
|
6,380
|
|
|
7,668
|
|
Year 2005
|
|
3,280
|
|
|
4,487
|
|
Year 2006
|
|
5,905
|
|
|
6,746
|
|
Years 2007, 2008 and 2009
|
|
7,984
|
|
|
11,526
|
|
Years 2010, 2011, 2012, 2013
|
|
6,259
|
|
|
10,089
|
|
Years 2014, 2015, 2016 and 2017
|
|
1,649
|
|
|
1,404
|
|
|
|
34,527
|
|
|
45,256
|
|
Non-traditional
|
|
3,543
|
|
|
4,730
|
|
Loss mitigation program
|
|
16,783
|
|
|
20,744
|
|
|
|
54,853
|
|
|
70,730
|
|
Commercial
|
|
|
|
|
|
|
Commercial secured by real estate
|
|
|
|
|
|
|
Institutional
|
|
118
|
|
|
-
|
|
Middle market
|
|
11,394
|
|
|
4,682
|
|
Retail
|
|
14,438
|
|
|
11,561
|
|
|
|
25,950
|
|
|
16,243
|
|
Other commercial and industrial
|
|
|
|
|
|
|
Middle market
|
|
6,323
|
|
|
1,278
|
|
Retail
|
|
2,929
|
|
|
1,950
|
|
Floor plan
|
|
51
|
|
|
61
|
|
|
|
9,303
|
|
|
3,289
|
|
|
|
35,253
|
|
|
19,532
|
|
Consumer
|
|
|
|
|
|
|
Credit cards
|
|
1,227
|
|
|
525
|
|
Overdrafts
|
|
31
|
|
|
-
|
|
Personal lines of credit
|
|
102
|
|
|
32
|
|
Personal loans
|
|
900
|
|
|
1,420
|
|
Cash collateral personal loans
|
|
312
|
|
|
4
|
|
|
|
2,572
|
|
|
1,981
|
|
Auto and leasing
|
|
4,232
|
|
|
9,052
|
|
Total non-accrual originated loans
|
$
|
96,910
|
|
$
|
101,295
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Acquired BBVAPR loans accounted for
under ASC 310-20
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
Commercial secured by real estate
|
|
|
|
|
|
|
Retail
|
$
|
119
|
|
$
|
143
|
|
Floor plan
|
|
928
|
|
|
1,149
|
|
|
|
1,047
|
|
|
1,292
|
|
Other commercial and industrial
|
|
|
|
|
|
|
Retail
|
|
221
|
|
|
121
|
|
Floor plan
|
|
2
|
|
|
2
|
|
|
|
223
|
|
|
123
|
|
|
|
1,270
|
|
|
1,415
|
|
Consumer
|
|
|
|
|
|
|
Credit cards
|
|
1,310
|
|
|
708
|
|
Personal loans
|
|
45
|
|
|
120
|
|
|
|
1,355
|
|
|
828
|
|
Auto
|
|
179
|
|
|
552
|
|
Total non-accrual acquired BBVAPR loans accounted for
under ASC 310-20
|
|
2,804
|
|
|
2,795
|
|
Total non-accrual loans
|
$
|
99,714
|
|
$
|
104,090
|
|
|
|
|
|
|
|
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 or are
accounted under the cost recovery method.
Delinquent residential mortgage loans insured or guaranteed under
applicable FHA and VA programs are classified as non-performing loans when they
become 90 days or more past due, but are not placed in non-accrual status until
they become 12 months or more past due, since they are insured loans.
Therefore, these loans are included as non-performing loans but excluded from
non-accrual loans. In addition, these loans are excluded from the impairment
analysis.
At December 31, 2017 and 2016, loans whose terms have been
extended and which are classified as troubled-debt restructurings that are not
included in non-accrual loans amounted to $109.2 million and $98.1 million, respectively, as
they are performing under their new terms.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impaired
Loans
Oriental evaluates all loans, some individually and others as
homogeneous groups, for purposes of determining impairment. The total
investment in impaired commercial loans that were individually evaluated for impairment
was $72.3 million and $54.3 million at December 31,
2017 and 2016, respectively. The impairments on these commercial loans were
measured based on the fair value of collateral or the present value of cash
flows, including those identified as troubled-debt restructurings. The
allowance for loan and lease losses for these impaired commercial loans
amounted to $10.6 million and $1.8 million at December 31,
2017 and 2016, respectively. The total investment in impaired mortgage loans
that were individually evaluated for impairment was $85.4 million and $91.6 million at December 31,
2017 and 2016, respectively. Impairment on mortgage loans assessed as
troubled-debt restructurings was measured using the present value of cash
flows. The allowance for loan losses for these impaired mortgage loans amounted
to $9.1 million and $7.8 million at December 31,
2017 and 2016, respectively.
Originated and Other Loans and Leases Held for Investment
Oriental’s recorded investment in commercial and mortgage loans
categorized as originated and other loans and leases held for investment that
were individually evaluated for impairment and the related allowance for loan
and lease losses at December 31, 2017 and 2016 are as follows:
|
|
December 31, 2017
|
|
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
|
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
|
|
|
(In thousands)
|
|
|
|
Impaired loans with specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
57,922
|
|
$
|
52,585
|
|
$
|
10,573
|
|
20%
|
|
|
|
Residential impaired and troubled-debt
restructuring
|
|
94,971
|
|
|
85,403
|
|
|
9,121
|
|
11%
|
|
|
|
Impaired loans with no specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
22,022
|
|
|
18,953
|
|
|
N/A
|
|
0%
|
|
|
|
Total investment in impaired loans
|
$
|
174,915
|
|
$
|
156,941
|
|
$
|
19,694
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
|
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
|
|
|
(In thousands)
|
|
|
|
Impaired loans with specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
13,183
|
|
$
|
11,698
|
|
$
|
1,626
|
|
14%
|
|
|
|
Residential impaired and troubled-debt
restructuring
|
|
100,101
|
|
|
91,650
|
|
|
7,761
|
|
8%
|
|
|
|
Impaired loans with no specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
49,038
|
|
|
41,441
|
|
|
N/A
|
|
0%
|
|
|
|
Total investment in impaired loans
|
$
|
162,322
|
|
$
|
144,789
|
|
$
|
9,387
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired BBVAPR Loans Accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Oriental’s recorded investment in acquired
BBVAPR commercial loans accounted for under ASC 310-20 that were individually
evaluated for impairment and the related allowance for loan and lease losses at
December 31, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
|
(In thousands)
|
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
926
|
|
$
|
747
|
|
$
|
20
|
|
3%
|
|
Impaired loans with no specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
-
|
|
$
|
-
|
|
|
N/A
|
|
0%
|
|
Total investment in impaired loans
|
$
|
926
|
|
$
|
747
|
|
$
|
20
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Unpaid
|
|
Recorded
|
|
Specific
|
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
|
(In thousands)
|
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
944
|
|
$
|
929
|
|
$
|
141
|
|
15%
|
|
Impaired loans with no specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
240
|
|
$
|
221
|
|
|
N/A
|
|
0%
|
|
Total investment in impaired loans
|
$
|
1,184
|
|
$
|
1,150
|
|
$
|
141
|
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR Loans Accounted for under ASC 310-30 (including
those accounted for under ASC 310-30 by analogy)
Oriental’s recorded investment in acquired BBVAPR loan pools
accounted for under ASC 310-30 that have recorded impairments and their related
allowance for loan and lease losses at December 31, 2017 and 2016 are as
follows:
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
|
Unpaid
|
|
Recorded
|
|
|
|
to Recorded
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
|
(In thousands)
|
|
Impaired loan pools with specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
547,064
|
|
$
|
532,052
|
|
$
|
14,085
|
|
3%
|
|
Commercial
|
|
250,451
|
|
|
241,124
|
|
|
23,691
|
|
10%
|
|
Consumer
|
|
2,468
|
|
|
1,431
|
|
|
18
|
|
1%
|
|
Auto
|
|
43,440
|
|
|
43,696
|
|
|
7,961
|
|
18%
|
|
Total investment in impaired loan pools
|
$
|
843,423
|
|
$
|
818,303
|
|
$
|
45,755
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31 , 2016
|
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
|
Unpaid
|
|
Recorded
|
|
|
|
to Recorded
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
|
(In thousands)
|
|
Impaired loan pools with specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
595,757
|
|
$
|
569,250
|
|
$
|
2,682
|
|
0%
|
|
Commercial
|
|
199,092
|
|
|
195,528
|
|
|
23,452
|
|
12%
|
|
Auto
|
|
92,797
|
|
|
85,676
|
|
|
4,922
|
|
6%
|
|
Total investment in impaired loan pools
|
$
|
887,646
|
|
$
|
850,454
|
|
$
|
31,056
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables above only present information with respect to acquired
BBVAPR loan pools accounted for under ASC 310-30 if there is a recorded
impairment to such loan pools and a specific allowance for loan losses.
Acquired Eurobank Loans
Oriental’s recorded investment in acquired Eurobank loan pools
that have recorded impairments and their related allowance for loan and lease
losses as of December 31,
2017 and 2016 are as follows:
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
|
Unpaid
|
|
Recorded
|
|
|
|
to Recorded
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
|
(In thousands)
|
|
Impaired loan pools with specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
Loans secured by 1-4 family residential
properties
|
$
|
81,132
|
|
$
|
69,538
|
|
$
|
15,187
|
|
22%
|
|
Commercial
|
|
58,099
|
|
|
53,793
|
|
|
9,982
|
|
19%
|
|
Consumer
|
|
15
|
|
|
4
|
|
|
5
|
|
125%
|
|
Total investment in impaired loan pools
|
$
|
139,246
|
|
$
|
123,335
|
|
$
|
25,174
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
|
Unpaid
|
|
Recorded
|
|
Specific
|
|
to Recorded
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
|
(In thousands)
|
|
Impaired loan pools with specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
Loans secured by 1-4 family residential
properties
|
$
|
88,017
|
|
$
|
73,018
|
|
$
|
11,947
|
|
16%
|
|
Commercial
|
|
81,992
|
|
|
72,140
|
|
|
9,328
|
|
13%
|
|
Consumer
|
|
29
|
|
|
1,372
|
|
|
6
|
|
0%
|
|
Total investment in impaired loan pools
|
$
|
170,038
|
|
$
|
146,530
|
|
$
|
21,281
|
|
15%
|
The tables above only present information with respect to acquired
Eurobank loan pools accounted for under ASC 310-30 if there is a recorded
impairment to such loan pools and a specific allowance for loan losses.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the interest
recognized in commercial and mortgage loans that were individually evaluated
for impairment, which excludes loans accounted for under ASC 310-30, for the years
ended December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Interest Income
Recognized
|
|
Average Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
Average Recorded
Investment
|
|
|
Interest Income
Recognized
|
Average Recorded
Investment
|
|
|
(In thousands)
|
|
Originated and other loans held for
investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,538
|
|
$
|
25,797
|
|
$
|
452
|
|
$
|
118,980
|
|
$
|
280
|
|
$
|
175,115
|
|
Residential troubled-debt restructuring
|
|
3,301
|
|
|
87,414
|
|
|
3,190
|
|
|
91,139
|
|
|
3,219
|
|
|
90,736
|
|
Impaired loans with no specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
875
|
|
|
36,666
|
|
|
1,941
|
|
|
40,443
|
|
|
1,350
|
|
|
64,356
|
|
Total interest income from impaired loans
|
$
|
5,714
|
|
$
|
149,877
|
|
$
|
5,583
|
|
$
|
250,562
|
|
$
|
4,849
|
|
$
|
330,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired loans accounted for under ASC
310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
-
|
|
$
|
794
|
|
$
|
-
|
|
$
|
319
|
|
$
|
-
|
|
$
|
-
|
|
Impaired loans with no specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
-
|
|
|
-
|
|
|
-
|
|
|
608
|
|
|
-
|
|
|
-
|
|
Total interest income from impaired loans
|
$
|
5,714
|
|
$
|
150,671
|
|
$
|
5,583
|
|
$
|
251,489
|
|
$
|
4,849
|
|
$
|
330,207
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Modifications
The following tables present the troubled-debt restructurings in
all loan portfolios during the years ended December 31, 2017, 2016 and 2015.
|
|
Year Ended December 31,
2017
|
|
|
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
|
85
|
|
$
|
10,441
|
|
6.23%
|
|
390
|
|
$
|
10,343
|
|
4.40%
|
|
384
|
|
Commercial
|
24
|
|
|
13,828
|
|
6.05%
|
|
57
|
|
|
13,829
|
|
5.73%
|
|
62
|
|
Consumer
|
107
|
|
|
1,391
|
|
11.68%
|
|
62
|
|
|
1,430
|
|
10.85%
|
|
69
|
|
Auto
|
9
|
|
|
134
|
|
7.24%
|
|
66
|
|
|
135
|
|
11.75%
|
|
37
|
|
|
Year Ended December 31,
2016
|
|
|
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
|
90
|
|
$
|
11,684
|
|
6.05%
|
|
351
|
|
$
|
11,625
|
|
4.77%
|
|
439
|
|
Commercial
|
20
|
|
|
9,833
|
|
5.73%
|
|
64
|
|
|
10,151
|
|
5.93%
|
|
116
|
|
Consumer
|
75
|
|
|
817
|
|
13.60%
|
|
73
|
|
|
902
|
|
11.23%
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2015
|
|
|
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
|
160
|
|
$
|
21,053
|
|
5.42%
|
|
356
|
|
$
|
21,182
|
|
4.35%
|
|
272
|
|
Commercial
|
9
|
|
|
5,664
|
|
6.79%
|
|
66
|
|
|
13,174
|
|
4.57%
|
|
56
|
|
Consumer
|
64
|
|
|
611
|
|
13.85%
|
|
71
|
|
|
898
|
|
13.43%
|
|
60
|
|
Auto
|
5
|
|
|
130
|
|
10.51%
|
|
65
|
|
|
131
|
|
10.87%
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents troubled-debt
restructurings for which there was a payment default during the years ended
2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
2017
|
|
|
2016
|
|
2015
|
|
|
Number of Contracts
|
|
Recorded Investment
|
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Number of Contracts
|
|
Recorded Investment
|
|
|
(Dollars in thousands)
|
|
Mortgage
|
34
|
|
$
|
3,129
|
|
|
19
|
|
$
|
2,241
|
|
65
|
|
$
|
7,387
|
|
Commercial
|
5
|
|
$
|
452
|
|
|
2
|
|
$
|
157
|
|
-
|
|
$
|
-
|
|
Consumer
|
20
|
|
$
|
249
|
|
|
11
|
|
$
|
126
|
|
8
|
|
$
|
177
|
|
Auto
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
1
|
|
$
|
64
|
Credit Quality Indicators
Oriental categorizes originated and other loans 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.
Oriental uses the following definitions for risk ratings:
Pass: Loans classified as “pass” have a well-defined primary
source of repayment very likely to be sufficient, with no apparent risk, strong
financial position, minimal operating risk, profitability, liquidity and
capitalization better than industry standards.
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
effected 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.
As of December 31, 2017 and 2016, and based on the most recent
analysis performed, the risk category of gross originated and other loans and
BBVAPR acquired loans accounted for under ASC 310-20 subject to risk rating by
class of loans is as follows:
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
Risk Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
|
(In thousands)
|
|
Commercial - originated and other loans held for
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
$
|
235,426
|
|
$
|
200,395
|
|
$
|
33,094
|
|
$
|
1,937
|
|
$
|
-
|
|
$
|
-
|
|
Institutional
|
|
44,766
|
|
|
33,856
|
|
|
-
|
|
|
10,910
|
|
|
-
|
|
|
-
|
|
Middle market
|
|
229,941
|
|
|
196,058
|
|
|
4,749
|
|
|
29,134
|
|
|
-
|
|
|
-
|
|
Retail
|
|
246,067
|
|
|
215,121
|
|
|
8,058
|
|
|
22,888
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
3,998
|
|
|
2,678
|
|
|
1,320
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Real estate
|
|
17,556
|
|
|
17,556
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
777,754
|
|
|
665,664
|
|
|
47,221
|
|
|
64,869
|
|
|
-
|
|
|
-
|
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
170,015
|
|
|
157,683
|
|
|
12,332
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Institutional
|
|
125,591
|
|
|
125,591
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Middle market
|
|
85,363
|
|
|
71,222
|
|
|
6,386
|
|
|
7,755
|
|
|
-
|
|
|
-
|
|
Retail
|
|
113,252
|
|
|
109,477
|
|
|
562
|
|
|
3,213
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
35,286
|
|
|
32,165
|
|
|
3,070
|
|
|
51
|
|
|
-
|
|
|
-
|
|
|
|
529,507
|
|
|
496,138
|
|
|
22,350
|
|
|
11,019
|
|
|
-
|
|
|
-
|
|
Total
|
|
1,307,261
|
|
|
1,161,802
|
|
|
69,571
|
|
|
75,888
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial - acquired loans
(under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
119
|
|
|
-
|
|
|
-
|
|
|
119
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
1,321
|
|
|
393
|
|
|
-
|
|
|
928
|
|
|
-
|
|
|
-
|
|
|
|
1,440
|
|
|
393
|
|
|
-
|
|
|
1,047
|
|
|
-
|
|
|
-
|
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
2,938
|
|
|
2,933
|
|
|
-
|
|
|
5
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
2
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
-
|
|
|
|
2,940
|
|
|
2,933
|
|
|
-
|
|
|
7
|
|
|
-
|
|
|
-
|
|
Total
|
|
4,380
|
|
|
3,326
|
|
|
-
|
|
|
1,054
|
|
|
-
|
|
|
-
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
Risk Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
|
(In thousands)
|
|
Retail - originated and other loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
553,533
|
|
|
516,770
|
|
|
-
|
|
|
36,763
|
|
|
-
|
|
|
-
|
|
Non-traditional
|
|
18,270
|
|
|
14,727
|
|
|
-
|
|
|
3,543
|
|
|
-
|
|
|
-
|
|
Loss mitigation program
|
|
103,280
|
|
|
84,357
|
|
|
-
|
|
|
18,923
|
|
|
-
|
|
|
-
|
|
Home equity secured personal loans
|
|
256
|
|
|
256
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
GNMA's buy-back option program
|
|
8,268
|
|
|
-
|
|
|
-
|
|
|
8,268
|
|
|
-
|
|
|
-
|
|
|
|
683,607
|
|
|
616,110
|
|
|
-
|
|
|
67,497
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
28,430
|
|
|
27,203
|
|
|
-
|
|
|
1,227
|
|
|
-
|
|
|
-
|
|
Overdrafts
|
|
214
|
|
|
158
|
|
|
-
|
|
|
56
|
|
|
-
|
|
|
-
|
|
Unsecured personal lines of credit
|
|
2,220
|
|
|
2,133
|
|
|
-
|
|
|
87
|
|
|
-
|
|
|
-
|
|
Unsecured personal loans
|
|
284,477
|
|
|
284,255
|
|
|
-
|
|
|
222
|
|
|
-
|
|
|
-
|
|
Cash collateral personal loans
|
|
14,698
|
|
|
14,386
|
|
|
-
|
|
|
312
|
|
|
-
|
|
|
-
|
|
|
|
330,039
|
|
|
328,135
|
|
|
-
|
|
|
1,904
|
|
|
-
|
|
|
-
|
|
Auto and Leasing
|
|
883,985
|
|
|
879,753
|
|
|
-
|
|
|
4,232
|
|
|
-
|
|
|
-
|
|
Total
|
|
1,897,631
|
|
|
1,823,998
|
|
|
-
|
|
|
73,633
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail - acquired loans (accounted for under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
26,467
|
|
|
25,156
|
|
|
-
|
|
|
1,311
|
|
|
-
|
|
|
-
|
|
Personal loans
|
|
2,448
|
|
|
2,402
|
|
|
-
|
|
|
46
|
|
|
-
|
|
|
-
|
|
|
|
28,915
|
|
|
27,558
|
|
|
-
|
|
|
1,357
|
|
|
-
|
|
|
-
|
|
Auto
|
|
21,969
|
|
|
21,790
|
|
|
-
|
|
|
179
|
|
|
-
|
|
|
-
|
|
|
|
50,884
|
|
|
49,348
|
|
|
-
|
|
|
1,536
|
|
|
-
|
|
|
-
|
|
|
$
|
3,260,156
|
|
$
|
3,038,474
|
|
$
|
69,571
|
|
$
|
152,111
|
|
$
|
-
|
|
$
|
-
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
Risk Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
|
(In thousands)
|
|
Commercial - originated and other loans held for
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
$
|
242,770
|
|
$
|
226,768
|
|
$
|
16,002
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Institutional
|
|
26,800
|
|
|
16,067
|
|
|
9,090
|
|
|
1,643
|
|
|
-
|
|
|
-
|
|
Middle market
|
|
234,981
|
|
|
194,913
|
|
|
11,689
|
|
|
28,379
|
|
|
-
|
|
|
-
|
|
Retail
|
|
249,728
|
|
|
222,205
|
|
|
8,559
|
|
|
18,964
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
2,989
|
|
|
2,989
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Real estate
|
|
16,395
|
|
|
16,395
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
773,663
|
|
|
679,337
|
|
|
45,340
|
|
|
48,986
|
|
|
-
|
|
|
-
|
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
136,438
|
|
|
136,438
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Institutional
|
|
180,285
|
|
|
180,185
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Middle market
|
|
81,633
|
|
|
63,556
|
|
|
16,150
|
|
|
1,927
|
|
|
-
|
|
|
-
|
|
Retail
|
|
73,705
|
|
|
68,743
|
|
|
731
|
|
|
4,231
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
32,142
|
|
|
29,267
|
|
|
2,814
|
|
|
61
|
|
|
-
|
|
|
-
|
|
|
|
504,203
|
|
|
478,189
|
|
|
19,795
|
|
|
6,219
|
|
|
-
|
|
|
-
|
|
Total
|
|
1,277,866
|
|
|
1,157,526
|
|
|
65,135
|
|
|
55,205
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial - acquired loans
(under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
143
|
|
|
-
|
|
|
-
|
|
|
143
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
2,390
|
|
|
905
|
|
|
337
|
|
|
1,148
|
|
|
-
|
|
|
-
|
|
|
|
2,533
|
|
|
905
|
|
|
337
|
|
|
1,291
|
|
|
-
|
|
|
-
|
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
3,027
|
|
|
3,014
|
|
|
-
|
|
|
13
|
|
|
-
|
|
|
-
|
|
Floor plan
|
|
2
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
-
|
|
|
|
3,029
|
|
|
3,014
|
|
|
-
|
|
|
15
|
|
|
-
|
|
|
-
|
|
Total
|
|
5,562
|
|
|
3,919
|
|
|
337
|
|
|
1,306
|
|
|
-
|
|
|
-
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
Risk Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
|
(In thousands)
|
|
Retail - originated and other loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
585,089
|
|
|
540,373
|
|
|
-
|
|
|
44,716
|
|
|
-
|
|
|
-
|
|
Non-traditional
|
|
22,859
|
|
|
18,129
|
|
|
-
|
|
|
4,730
|
|
|
-
|
|
|
-
|
|
Loss mitigation program
|
|
103,528
|
|
|
86,987
|
|
|
-
|
|
|
16,541
|
|
|
-
|
|
|
-
|
|
Home equity secured personal loans
|
|
337
|
|
|
337
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
GNMA's buy-back option program
|
|
9,681
|
|
|
-
|
|
|
-
|
|
|
9,681
|
|
|
-
|
|
|
-
|
|
|
|
721,494
|
|
|
645,826
|
|
|
-
|
|
|
75,668
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
26,358
|
|
|
25,833
|
|
|
-
|
|
|
525
|
|
|
-
|
|
|
-
|
|
Overdrafts
|
|
207
|
|
|
174
|
|
|
-
|
|
|
33
|
|
|
-
|
|
|
-
|
|
Unsecured personal lines of credit
|
|
2,404
|
|
|
2,372
|
|
|
-
|
|
|
32
|
|
|
-
|
|
|
-
|
|
Unsecured personal loans
|
|
246,272
|
|
|
245,190
|
|
|
-
|
|
|
1,082
|
|
|
-
|
|
|
-
|
|
Cash collateral personal loans
|
|
15,274
|
|
|
15,270
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
|
290,515
|
|
|
288,839
|
|
|
-
|
|
|
1,676
|
|
|
-
|
|
|
-
|
|
Auto and Leasing
|
|
756,395
|
|
|
748,221
|
|
|
-
|
|
|
8,174
|
|
|
-
|
|
|
-
|
|
Total
|
|
1,768,404
|
|
|
1,682,886
|
|
|
-
|
|
|
85,518
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail - acquired loans
(under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
30,093
|
|
|
29,386
|
|
|
-
|
|
|
707
|
|
|
-
|
|
|
-
|
|
Personal loans
|
|
2,769
|
|
|
2,649
|
|
|
-
|
|
|
120
|
|
|
-
|
|
|
-
|
|
|
|
32,862
|
|
|
32,035
|
|
|
-
|
|
|
827
|
|
|
-
|
|
|
-
|
|
Auto
|
|
53,026
|
|
|
52,510
|
|
|
-
|
|
|
516
|
|
|
-
|
|
|
-
|
|
Total
|
|
85,888
|
|
|
84,545
|
|
|
-
|
|
|
1,343
|
|
|
-
|
|
|
-
|
|
|
$
|
3,137,720
|
|
$
|
2,928,876
|
|
$
|
65,472
|
|
$
|
143,372
|
|
$
|
-
|
|
$
|
-
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 7 – ALLOWANCE FOR LOAN AND LEASE
LOSSES
The composition of Oriental’s allowance
for loan and lease losses at December 31, 2017 and 2016 was as follows:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Allowance for loans and lease losses:
|
|
|
|
|
|
|
Originated and other loans and leases held for
investment:
|
|
|
|
|
|
|
Mortgage
|
$
|
20,439
|
|
$
|
17,344
|
|
Commercial
|
|
30,258
|
|
|
8,995
|
|
Consumer
|
|
16,454
|
|
|
13,067
|
|
Auto and leasing
|
|
25,567
|
|
|
19,463
|
|
Unallocated
|
|
-
|
|
|
431
|
|
Total allowance for originated and other loans and
lease losses
|
|
92,718
|
|
|
59,300
|
|
|
|
|
|
|
|
|
Acquired BBVAPR loans:
|
|
|
|
|
|
|
Accounted for under ASC 310-20 (Loans with revolving
feature and/or
|
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
|
Commercial
|
|
42
|
|
|
169
|
|
Consumer
|
|
3,225
|
|
|
3,028
|
|
Auto
|
|
595
|
|
|
1,103
|
|
|
|
3,862
|
|
|
4,300
|
|
Accounted for under ASC 310-30 (Loans acquired with
deteriorated
|
|
|
|
|
|
|
credit quality, including those by analogy)
|
|
|
|
|
|
|
Mortgage
|
|
14,085
|
|
|
2,682
|
|
Commercial
|
|
23,691
|
|
|
23,452
|
|
Consumer
|
|
18
|
|
|
-
|
|
Auto
|
|
7,961
|
|
|
4,922
|
|
|
|
45,755
|
|
|
31,056
|
|
Total allowance for acquired BBVAPR loans and lease
losses
|
|
49,617
|
|
|
35,356
|
|
Acquired Eurobank loans:
|
|
|
|
|
|
|
Loans secured by 1-4 family residential properties
|
|
15,187
|
|
|
11,947
|
|
Commercial
|
|
9,982
|
|
|
9,328
|
|
Consumer
|
|
5
|
|
|
6
|
|
Total allowance for acquired Eurobank loan and
lease losses
|
|
25,174
|
|
|
21,281
|
|
Total allowance for loan and lease losses
|
$
|
167,509
|
|
$
|
115,937
|
Oriental 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.
Oriental’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 Oriental’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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As
discussed in Note 2, during 2017, hurricanes Irma and Maria caused catastrophic
damages throughout Puerto Rico. Although the effect of the hurricanes on
Oriental's loan portfolio is difficult to predict at this time, management
performed an evaluation of the loan portfolios in order to assess the impact on
repayment sources and underlying collateral that could result in additional
losses.
For the commercial portfolio,
the framework for the analysis was based on our current ALLL methodology with
additional considerations according to the estimated impact categorized as low,
medium or high. From this impact assessment, additional reserve levels were
estimated by increasing default probabilities (“PD”) and loss given default
expectations (“LGD”) of each allowance segment.
As part of the process,
Oriental contacted its clients to evaluate the impact of the hurricanes on
their business operations and collateral. The impact was then categorized as
follows: (i) low risk, for clients that had no business impact or relatively
insignificant impact; (ii) medium risk, for clients that had a business impact
on their primary or secondary sources of repayment, but had adequate cash flow
to cover operations and to satisfy their obligations; or (iii) high risk, for
clients that had potentially significant problems that affected primary,
secondary and tertiary (collateral) sources of repayment. This criterion was
used to model adjusted PDs and LGDs considering internal and external sources
of information available to support our estimation process and output.
During the fourth quarter,
Oriental performed an update of the initial estimate, taking into consideration
the most recent available information gathered through additional visits and
interviews with clients and the economic environment in Puerto Rico.
For the retail portfolios,
mortgage, consumer and auto, the assumptions established in the initial
estimate were based on the historical losses of each ALLL segment and then
further adjusted based on parameters used as key risk indicators, such as the
industry of employment for all portfolios and the location of the collateral
for mortgage loans. During the fourth quarter of 2017, Oriental performed
additional procedures to evaluate the reasonability of the initial estimate based
on the payment experience % of borrowers for which the deferral period expired.
The analysis took into consideration historical payment behavior and loss
experience of borrowers (PDs and LGDs) of each portfolio segment to develop a
range of estimated potential losses. Management understands that this approach
is reasonable given the lack of historical information related to the behavior
of local borrowers in such an unprecedented event. The amount used in the
analysis represents the average of potential outcomes of expected losses.
The documentation for the
assessments considers all information available at the moment. Oriental will
continue to assess the impact to our customers and our businesses as a result
of the hurricanes and refine our estimates as more information becomes
available.
Based on the analysis above
and in accordance with ASC 450-20-25-2, we have increased our provision for
loan losses during 2017 for $32.4 million. The increase in
the allowance corresponding to our originated loan portfolio was $17.5 million: $3.8 million in mortgage loans,
$7.3 million in commercial
loans, $1.7 million in consumer loans,
and $4.7 million in auto loans. The
increase in the allowance corresponding to our acquired loan portfolio was $14.9 million: $6.7 million in mortgage loans,
$7.9 million in commercial
loans, and $0.3 million in auto loans.
The documentation for the
assessments considers all information available at the moment; gathered through
visits or interviews with our clients, inspections of collaterals,
identification of most affected areas and industries. Oriental will continue to
assess the impact to our customers and our businesses as a result of the
hurricanes and refine our estimates as more information becomes available.
As part of Oriental’s
continuous enhancement to the allowance for loan and lease losses methodology,
and taking into consideration the effect of the hurricanes, during 2017 the
following assumptions were reviewed:
-
An assessment of the
look-back period and historical loss factor was performed for all portfolio
segments. The analysis was based on the trends observed and their relation with
the economic cycle as of the period of the analysis. As a result of the
assessment, the commercial portfolio look-back period was maintained at 36
months. Also, for the auto, leasing and consumer portfolios, a look-back period
of 24 months was maintained. For the residential mortgages portfolio a
12-month look-back period was maintained as management concluded that, given
the charge off evolution, a shorter period of losses is more representative of
the recent trends and more accurate in predicting future losses.
-
During the fourth
quarter of 2017, an assessment of environmental factors was performed for
commercial, auto, and consumer portfolios. As a result, the environmental
factors continue to reflect our assessment of their impact to our portfolio,
taking into consideration the current evolution of the portfolios and expected
impact, due to recent economic developments, changes in values of collateral
and delinquencies, among others.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
-
During the fourth quarter of 2017, the loss realization period was
revised to 2.09 years from 2.10 in 2016 for commercial real estate portfolio,
other portfolios remained at one year.
These changes in the
allowance for loan and lease losses are considered a change in accounting
estimate as per ASC 250-10 provisions, where adjustments are made
prospectively.
Allowance for
Originated and Other Loan and Lease Losses Held for Investment
The
following tables presents the activity in our allowance for loan and lease
losses and the related recorded investment of the originated and other loans
held for investment portfolio by segment for the periods indicated:
|
|
Year Ended December 31,
2017
|
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto and Leasing
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for originated and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
17,344
|
|
$
|
8,995
|
|
$
|
13,067
|
|
$
|
19,463
|
|
$
|
431
|
|
$
|
59,300
|
|
Charge-offs
|
|
(6,623)
|
|
|
(7,684)
|
|
|
(13,641)
|
|
|
(33,908)
|
|
|
-
|
|
|
(61,856)
|
|
Recoveries
|
|
585
|
|
|
1,281
|
|
|
1,209
|
|
|
12,314
|
|
|
-
|
|
|
15,389
|
|
Provision (recapture) for loan and lease losses
|
|
9,133
|
|
|
27,666
|
|
|
15,819
|
|
|
27,698
|
|
|
(431)
|
|
|
79,885
|
|
Balance at end of year
|
$
|
20,439
|
|
$
|
30,258
|
|
$
|
16,454
|
|
$
|
25,567
|
|
$
|
-
|
|
$
|
92,718
|
|
|
Year Ended December 31,
2016
|
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto and Leasing
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for originated and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
18,352
|
|
$
|
64,791
|
|
$
|
11,197
|
|
$
|
18,261
|
|
$
|
25
|
|
$
|
112,626
|
|
Charge-offs
|
|
(6,767)
|
|
|
(62,445)
|
|
|
(11,554)
|
|
|
(31,731)
|
|
|
-
|
|
|
(112,497)
|
|
Recoveries
|
|
330
|
|
|
460
|
|
|
452
|
|
|
12,871
|
|
|
-
|
|
|
14,113
|
|
Provision (recapture) for loan and lease losses
|
|
5,429
|
|
|
6,189
|
|
|
12,972
|
|
|
20,062
|
|
|
406
|
|
|
45,058
|
|
Balance at end of year
|
$
|
17,344
|
|
$
|
8,995
|
|
$
|
13,067
|
|
$
|
19,463
|
|
$
|
431
|
|
$
|
59,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2015
|
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto and Leasing
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for originated and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
19,679
|
|
$
|
8,432
|
|
$
|
9,072
|
|
$
|
14,255
|
|
$
|
1
|
|
$
|
51,439
|
|
Charge-offs
|
|
(5,397)
|
|
|
(5,546)
|
|
|
(8,683)
|
|
|
(33,375)
|
|
|
-
|
|
|
(53,001)
|
|
Recoveries
|
|
391
|
|
|
432
|
|
|
871
|
|
|
13,158
|
|
|
-
|
|
|
14,852
|
|
Provision (recapture) for loan and lease losses
|
|
3,679
|
|
|
61,473
|
|
|
9,937
|
|
|
24,223
|
|
|
24
|
|
|
99,336
|
|
Balance at end of year
|
$
|
18,352
|
|
$
|
64,791
|
|
$
|
11,197
|
|
$
|
18,261
|
|
$
|
25
|
|
$
|
112,626
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto and Leasing
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses on originated and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable
to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
9,121
|
|
$
|
10,573
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
19,694
|
|
Collectively evaluated for impairment
|
|
11,318
|
|
|
19,685
|
|
|
16,454
|
|
|
25,567
|
|
|
-
|
|
|
73,024
|
|
Total ending allowance balance
|
$
|
20,439
|
|
$
|
30,258
|
|
$
|
16,454
|
|
$
|
25,567
|
|
$
|
-
|
|
$
|
92,718
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
85,403
|
|
$
|
71,538
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
156,941
|
|
Collectively evaluated for impairment
|
|
598,204
|
|
|
1,235,723
|
|
|
330,039
|
|
|
883,985
|
|
|
-
|
|
|
3,047,951
|
|
Total ending loan balance
|
$
|
683,607
|
|
$
|
1,307,261
|
|
$
|
330,039
|
|
$
|
883,985
|
|
$
|
-
|
|
$
|
3,204,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto and Leasing
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses on originated and
other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable
to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
7,761
|
|
$
|
1,626
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
9,387
|
|
Collectively evaluated for impairment
|
|
9,583
|
|
|
7,369
|
|
|
13,067
|
|
|
19,463
|
|
|
431
|
|
|
49,913
|
|
Total ending allowance balance
|
$
|
17,344
|
|
$
|
8,995
|
|
$
|
13,067
|
|
$
|
19,463
|
|
$
|
431
|
|
$
|
59,300
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
91,650
|
|
$
|
53,139
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
144,789
|
|
Collectively evaluated for impairment
|
|
629,844
|
|
|
1,224,727
|
|
|
290,515
|
|
|
756,395
|
|
|
-
|
|
|
2,901,481
|
|
Total ending loan balance
|
$
|
721,494
|
|
$
|
1,277,866
|
|
$
|
290,515
|
|
$
|
756,395
|
|
$
|
-
|
|
$
|
3,046,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for BBVAPR Acquired Loan Losses
Loans accounted for under ASC 310-20
(Loans with revolving feature and/or acquired at a premium)
The following tables present the activity
in our allowance for loan losses and related recorded investment of the
associated loans in our BBVAPR acquired loan portfolio accounted for under ASC
310-20, for the periods indicated:
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
Year Ended December 31,
2017
|
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
169
|
|
$
|
3,028
|
|
$
|
1,103
|
|
|
$
|
4,300
|
|
Charge-offs
|
|
(132)
|
|
|
(3,048)
|
|
|
(976)
|
|
|
|
(4,156)
|
|
Recoveries
|
|
5
|
|
|
446
|
|
|
1,420
|
|
|
|
1,871
|
|
Provision (recapture) for acquired BBVAPR
loan and lease losses accounted for
under ASC 310-20
|
|
-
|
|
|
2,799
|
|
|
(952)
|
|
|
|
1,847
|
|
Balance at end of year
|
$
|
42
|
|
$
|
3,225
|
|
$
|
595
|
|
|
$
|
3,862
|
|
|
Year Ended December 31,
2016
|
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
26
|
|
$
|
3,429
|
|
$
|
2,087
|
|
$
|
5,542
|
|
Charge-offs
|
|
(42)
|
|
|
(3,619)
|
|
|
(2,155)
|
|
|
(5,816)
|
|
Recoveries
|
|
73
|
|
|
301
|
|
|
1,945
|
|
|
2,319
|
|
Provision (recapture) for acquired BBVAPR
loan and lease losses accounted for
under ASC 310-20
|
|
112
|
|
|
2,917
|
|
|
(774)
|
|
|
2,255
|
|
Balance at end of year
|
$
|
169
|
|
$
|
3,028
|
|
$
|
1,103
|
|
$
|
4,300
|
|
|
Year Ended December 31,
2015
|
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
65
|
|
$
|
1,211
|
|
$
|
3,321
|
|
|
$
|
4,597
|
|
Charge-offs
|
|
(42)
|
|
|
(4,755)
|
|
|
(4,548)
|
|
|
|
(9,345)
|
|
Recoveries
|
|
31
|
|
|
680
|
|
|
2,110
|
|
|
|
2,821
|
|
Provision (recapture) for acquired
loan and lease losses accounted for
under ASC 310-20
|
|
(28)
|
|
|
6,293
|
|
|
1,204
|
|
|
|
7,469
|
|
Balance at end of year
|
$
|
26
|
|
$
|
3,429
|
|
$
|
2,087
|
|
|
$
|
5,542
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable
to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
20
|
|
$
|
-
|
|
$
|
-
|
|
$
|
20
|
|
Collectively evaluated for impairment
|
|
22
|
|
|
3,225
|
|
|
595
|
|
|
3,842
|
|
Total ending allowance balance
|
$
|
42
|
|
$
|
3,225
|
|
$
|
595
|
|
$
|
3,862
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
747
|
|
$
|
-
|
|
$
|
-
|
|
$
|
747
|
|
Collectively evaluated for impairment
|
|
3,633
|
|
|
28,915
|
|
|
21,969
|
|
|
54,517
|
|
Total ending loan balance
|
$
|
4,380
|
|
$
|
28,915
|
|
$
|
21,969
|
|
$
|
55,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable
to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
141
|
|
$
|
-
|
|
$
|
-
|
|
$
|
141
|
|
Collectively evaluated for impairment
|
|
28
|
|
|
3,028
|
|
|
1,103
|
|
|
4,159
|
|
Total ending allowance balance
|
$
|
169
|
|
$
|
3,028
|
|
$
|
1,103
|
|
$
|
4,300
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
1,150
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,150
|
|
Collectively evaluated for impairment
|
|
4,412
|
|
|
32,862
|
|
|
53,026
|
|
|
90,300
|
|
Total ending loan balance
|
$
|
5,562
|
|
$
|
32,862
|
|
$
|
53,026
|
|
$
|
91,450
|
Loans Accounted for under ASC 310-30 (including those
accounted for under ASC 310-30 by analogy)
For loans accounted for under ASC 310- 30, as part of the
evaluation of actual versus expected cash flows, Oriental 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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present the activity
in our allowance for loan losses and related recorded investment of the
acquired BBVAPR loan portfolio accounted for under ASC 310-30 for the periods
indicated:
|
|
Year Ended December 31,
2017
|
|
|
Mortgage
|
|
Commercial
|
Consumer
|
|
Auto
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for acquired BBVAPR
loans accounted for under ASC 310-30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2,682
|
|
$
|
23,452
|
$
|
-
|
|
$
|
4,922
|
|
$
|
31,056
|
|
Provision for BBVAPR loans and
lease losses accounted for
under ASC 310-30
|
|
11,497
|
|
|
9,758
|
|
18
|
|
|
3,408
|
|
|
24,681
|
|
Allowance de-recognition
|
|
(94)
|
|
|
(9,519)
|
|
-
|
|
|
(369)
|
|
|
(9,982)
|
|
Balance at end of year
|
$
|
14,085
|
|
$
|
23,691
|
$
|
18
|
|
$
|
7,961
|
|
$
|
45,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2016
|
|
|
Mortgage
|
|
Commercial
|
Consumer
|
|
Auto
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for acquired BBVAPR
loans accounted for under ASC 310-30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
1,762
|
|
$
|
21,161
|
$
|
-
|
|
$
|
2,862
|
|
$
|
25,785
|
|
Provision (recapture) for BBVAPR loans
and lease losses accounted for
under ASC 310-30
|
|
1,105
|
|
|
11,710
|
|
-
|
|
|
2,693
|
|
|
15,508
|
|
Loan pools fully charged-off
|
|
(14)
|
|
|
(66)
|
|
-
|
|
|
(202)
|
|
|
(282)
|
|
Allowance de-recognition
|
|
(171)
|
|
|
(9,353)
|
|
-
|
|
|
(431)
|
|
|
(9,955)
|
|
Balance at end of year
|
$
|
2,682
|
|
$
|
23,452
|
$
|
-
|
|
$
|
4,922
|
|
$
|
31,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2015
|
|
|
Mortgage
|
|
Commercial
|
Consumer
|
|
Auto
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for acquired BBVAPR
loans accounted for under ASC 310-30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
5
|
|
|
13,476
|
|
-
|
|
|
-
|
|
|
13,481
|
|
Provision for BBVAPR loans
and lease losses accounted for
under ASC 310-30
|
|
1,757
|
|
|
12,037
|
|
-
|
|
|
2,862
|
|
|
16,656
|
|
Loan pools fully charged-off
|
|
-
|
|
|
(4,352)
|
|
-
|
|
|
-
|
|
|
(4,352)
|
|
Balance at end of year
|
$
|
1,762
|
|
$
|
21,161
|
$
|
-
|
|
$
|
2,862
|
|
$
|
25,785
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Allowance
for Acquired Eurobank Loan Losses
The changes in the allowance for loan and lease losses on acquired
Eurobank loans for the years ended December 31, 2017, 2016 and 2015 were as
follows:
|
|
Year Ended December 31,
2017
|
|
|
Loans Secured by 1-4
Family Residential Properties
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for acquired Eurobank
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
11,947
|
|
$
|
9,328
|
|
$
|
6
|
|
$
|
21,281
|
|
Provision for covered loan and lease losses,
net
|
|
5,045
|
|
|
1,680
|
|
|
-
|
|
|
6,725
|
|
Allowance de-recognition
|
|
(1,805)
|
|
|
(1,026)
|
|
|
(1)
|
|
|
(2,832)
|
|
Balance at end of year
|
$
|
15,187
|
|
$
|
9,982
|
|
$
|
5
|
|
$
|
25,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2016
|
|
|
Loans Secured by 1-4
Family Residential Properties
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for acquired Eurobank
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
22,570
|
|
$
|
67,365
|
|
$
|
243
|
|
$
|
90,178
|
|
Provision for covered loan and lease losses,
net
|
|
1,080
|
|
|
1,183
|
|
|
(8)
|
|
|
2,255
|
|
Loan pools fully charged-off
|
|
-
|
|
|
(134)
|
|
|
-
|
|
|
(134)
|
|
Allowance de-recognition
|
|
(15,094)
|
|
|
(59,086)
|
|
|
(229)
|
|
|
(74,409)
|
|
FDIC shared-loss portion of provision for
covered loan and lease losses, net
|
|
3,391
|
|
|
-
|
|
|
-
|
|
|
3,391
|
|
Balance at end of year
|
$
|
11,947
|
|
$
|
9,328
|
|
$
|
6
|
|
$
|
21,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2015
|
|
|
Loans Secured by 1-4
Family Residential Properties
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
|
(In thousands)
|
|
Allowance for loan and lease losses for acquired Eurobank
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
5,469
|
|
$
|
58,511
|
|
$
|
265
|
|
$
|
64,245
|
|
Provision for covered loan and lease losses,
net
|
|
17,718
|
|
$
|
20,043
|
|
|
279
|
|
|
38,040
|
|
Loan pools fully charged-off
|
|
(722)
|
|
|
(13,587)
|
|
|
(301)
|
|
|
(14,610)
|
|
FDIC shared-loss portion of provision for
covered loan and lease losses, net
|
|
105
|
|
|
2,398
|
|
|
-
|
|
|
2,503
|
|
Balance at end of year
|
$
|
22,570
|
|
$
|
67,365
|
|
$
|
243
|
|
$
|
90,178
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 8- FDIC INDEMNIFICATION ASSET,
TRUE-UP PAYMENT OBLIGATION, AND FDIC SHARED-LOSS EXPENSE
On February 6, 2017, the Bank and the FDIC agreed to
terminate the single family and commercial shared-loss agreements related to
the FDIC assisted acquisition of Eurobank on April 30, 2010. As part of
the loss share termination transaction, the Bank made a payment of $10.1 million to the FDIC and
recorded a net benefit of $1.4 million. Such termination
payment took into account the anticipated reimbursements over the life of the
shared-loss agreements and the true-up payment liability of the Bank
anticipated at the end of the ten-year term of the single family shared-loss
agreement. All rights and obligations of the parties under the shared-loss
agreements terminated as of the closing date of the agreement.
Pursuant to the terms of the shared-loss agreements, the FDIC
would reimburse the Bank for 80% of all qualifying losses with respect to
assets covered by such agreements, and the Bank would reimburse the FDIC for
80% of qualifying recoveries with respect to losses for which the FDIC
reimbursed the Bank. The single family shared-loss agreement provided for FDIC
loss sharing and the Bank’s reimbursement to the FDIC to last for ten years,
and the commercial shared-loss agreement provided for FDIC loss sharing and the
Bank’s reimbursement to the FDIC to last for five years, with additional
recovery sharing for three years thereafter.
The following table presents the activity in the FDIC
indemnification asset and true-up payment obligation for the years ended
December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
FDIC indemnification asset:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
14,411
|
|
$
|
22,599
|
|
$
|
97,378
|
|
Shared-loss agreements reimbursements from the FDIC
|
|
-
|
|
|
(1,573)
|
|
|
(55,723)
|
|
Increase in expected credit losses to be
covered under shared-loss agreements, net
|
|
-
|
|
|
3,391
|
|
|
2,503
|
|
FDIC indemnification asset benefit (expense)
|
|
1,403
|
|
|
(8,040)
|
|
|
(36,398)
|
|
Final settlement with the FDIC on commercial loans
|
|
-
|
|
|
-
|
|
|
(1,589)
|
|
Net expenses incurred under shared-loss agreements
|
|
-
|
|
|
(1,966)
|
|
|
16,428
|
|
Shared-loss termination settlement
|
|
(15,814)
|
|
|
-
|
|
|
-
|
|
Balance at end of year
|
$
|
-
|
|
$
|
14,411
|
|
$
|
22,599
|
|
|
|
|
|
|
|
|
|
|
|
True-up payment obligation:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
26,786
|
|
$
|
24,658
|
|
$
|
21,981
|
|
Change in true-up payment obligation
|
|
-
|
|
|
2,128
|
|
|
2,677
|
|
Shared-loss termination settlement
|
|
(26,786)
|
|
|
-
|
|
|
-
|
|
Balance at end of year
|
$
|
-
|
|
$
|
26,786
|
|
$
|
24,658
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table provides
the fair value and the undiscounted amount of the true-up payment obligation at
December 31, 2016:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Carrying
amount (fair value)
|
$
|
-
|
|
$
|
26,786
|
|
Undiscounted
amount
|
$
|
-
|
|
$
|
33,635
|
Oriental recognized an FDIC shared-loss (benefit) expense, net in
the consolidated statements of operations, which consists of the following, for
the years ended December 31, 2017, 2016, and 2015:
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
FDIC indemnification asset expense (benefit)
|
|
$
|
(1,403)
|
|
$
|
8,040
|
|
$
|
36,398
|
|
Change in true-up payment obligation
|
|
|
-
|
|
|
2,128
|
|
|
2,677
|
|
Reimbursement to FDIC for recoveries
|
|
|
-
|
|
|
3,413
|
|
|
2,144
|
|
Final settlement with the FDIC on commercial loans
|
|
|
-
|
|
|
-
|
|
|
1,589
|
|
Total FDIC shared-loss expense (benefit), net
|
|
$
|
(1,403)
|
|
$
|
13,581
|
|
$
|
42,808
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 9 — FORECLOSED REAL ESTATE
The following tables present the activity
related to foreclosed real estate for the years ended December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
2017
|
|
|
Originated and other
loans and leases held for investment
|
|
Acquired BBVAPR loans
|
|
Acquired Eurobank loans
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
12,390
|
|
$
|
21,379
|
|
$
|
13,751
|
|
$
|
47,520
|
|
Decline in value
|
|
(1,913)
|
|
|
(2,850)
|
|
|
(1,797)
|
|
|
(6,560)
|
|
Additions
|
|
10,565
|
|
|
9,416
|
|
|
3,120
|
|
|
23,101
|
|
Sales
|
|
(6,615)
|
|
|
(9,453)
|
|
|
(3,530)
|
|
|
(19,598)
|
|
Other adjustments
|
|
(144)
|
|
|
(145)
|
|
|
-
|
|
|
(289)
|
|
Balance at end of year
|
$
|
14,283
|
|
$
|
18,347
|
|
$
|
11,544
|
|
$
|
44,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2016
|
|
|
Originated and other
loans and leases held for investment
|
|
Acquired BBVAPR loans
|
|
Acquired Eurobank loans
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
10,324
|
|
$
|
26,757
|
|
$
|
21,095
|
|
$
|
58,176
|
|
Decline in value
|
|
(1,966)
|
|
|
(6,124)
|
|
|
(4,913)
|
|
|
(13,003)
|
|
Additions
|
|
10,170
|
|
|
7,872
|
|
|
3,591
|
|
|
21,633
|
|
Sales
|
|
(6,138)
|
|
|
(7,126)
|
|
|
(6,022)
|
|
|
(19,286)
|
|
Balance at end of year
|
$
|
12,390
|
|
$
|
21,379
|
|
$
|
13,751
|
|
$
|
47,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2015
|
|
|
Originated and other
loans and leases held for investment
|
|
Acquired BBVAPR loans
|
|
Acquired Eurobank loans
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
12,343
|
|
$
|
35,804
|
|
$
|
47,603
|
|
$
|
95,750
|
|
Decline in value
|
|
(2,831)
|
|
|
(7,668)
|
|
|
(13,791)
|
|
|
(24,290)
|
|
Additions
|
|
9,817
|
|
|
8,213
|
|
|
18,535
|
|
|
36,565
|
|
Sales
|
|
(5,933)
|
|
|
(9,338)
|
|
|
(31,075)
|
|
|
(46,346)
|
|
Other adjustments
|
|
(3,072)
|
|
|
(254)
|
|
|
(177)
|
|
|
(3,503)
|
|
Balance at end of year
|
$
|
10,324
|
|
$
|
26,757
|
|
$
|
21,095
|
|
$
|
58,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
After the hurricanes Irma and Maria, management
has evaluated the potential impact these two events brought to Oriental’s
foreclosed real estate, considering the related underlying insurance coverage.
Oriental has performed property inspections and taking into consideration all
available information, the fair value of these properties was not materially
impacted.
NOTE 10 — PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2017
and 2016 are stated at cost less accumulated depreciation and amortization as
follows:
|
|
Useful Life
|
|
|
December 31,
|
|
|
(Years)
|
|
2017
|
|
2016
|
|
|
|
|
(In thousands)
|
|
Land
|
—
|
|
$
|
5,638
|
|
$
|
5,638
|
|
Buildings and
improvements
|
40
|
|
|
64,277
|
|
|
64,048
|
|
Leasehold
improvements
|
5 — 10
|
|
|
20,647
|
|
|
20,414
|
|
Furniture and
fixtures
|
3 — 7
|
|
|
16,242
|
|
|
14,479
|
|
Information
technology and other
|
3 — 7
|
|
|
28,783
|
|
|
26,003
|
|
|
|
|
|
135,587
|
|
|
130,582
|
|
Less:
accumulated depreciation and amortization
|
|
|
|
(67,727)
|
|
|
(60,175)
|
|
|
|
|
$
|
67,860
|
|
$
|
70,407
|
Depreciation and amortization of premises and equipment totaled $9.0 million in 2017, $9.4 million in 2016 and $11.1 million in 2015. These are
included in the consolidated statements of operations as part of occupancy and
equipment expenses.
NOTE 11
- SERVICING ASSETS
Oriental periodically sells or securitizes mortgage loans while
retaining the obligation to perform the servicing of such loans. In addition, Oriental
may purchase or assume the right to service mortgage loans originated by
others. Whenever Oriental undertakes an obligation to service a loan,
management assesses whether a servicing asset and/or liability should be
recognized. A servicing asset is recognized whenever the compensation for
servicing is expected to more than adequately compensate Oriental for servicing
the loans and leases. Likewise, a servicing liability would be recognized in
the event that servicing fees to be received are not expected to adequately
compensate Oriental for its expected cost.
All separately recognized servicing assets are recognized at fair
value using the fair value measurement method. Under the fair value measurement
method, Oriental measures servicing rights at fair value at each reporting
date, reports changes in fair value of servicing assets in earnings in the
period in which the changes occur, and includes these changes, if any, with
mortgage banking activities in the consolidated statements of operations. The
fair value of servicing rights is subject to fluctuations as a result of
changes in estimated and actual prepayment speeds and default rates and losses.
The fair value of servicing rights 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.
At December 31, 2017, the servicing asset amounted to $9.8 million
($9.9 million — December 31, 2016) related to mortgage servicing rights.
During 2015, Oriental completed the sale of certain servicing
assets for approximately $7.0 million. Oriental recognized
a loss of $2.7 million related to this
transaction, which is included as other non-interest (loss) income in the
consolidated statements of operations.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the changes
in servicing rights measured using the fair value method for years ended
December 31, 2017, 2016 and 2015:
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
|
2015
|
|
|
|
|
(In thousands)
|
|
Fair value at beginning of year
|
$
|
9,858
|
|
$
|
7,455
|
|
$
|
13,992
|
|
|
Sale of mortgage servicing rights
|
|
-
|
|
|
-
|
|
|
(5,927)
|
|
|
Servicing from mortgage securitizations or asset
transfers
|
|
1,658
|
|
|
2,616
|
|
|
2,620
|
|
|
Changes due to payments on loans
|
|
(590)
|
|
|
(489)
|
|
|
(1,017)
|
|
|
Changes in fair value related to price of MSR's held
for sale
|
|
-
|
|
|
-
|
|
|
(2,939)
|
|
|
Changes in fair value due to changes in valuation
model
inputs or assumptions
|
|
(1,105)
|
|
|
276
|
|
|
726
|
|
|
Fair value at end of year
|
$
|
9,821
|
|
$
|
9,858
|
|
$
|
7,455
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents key economic assumption ranges used
in measuring the mortgage-related servicing asset fair value for the years
ended 2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Constant
prepayment rate
|
3.94% - 8.49%
|
|
4.24% - 9.14%
|
|
5.23% - 15.24%
|
|
Discount
rate
|
10.00% - 12.00%
|
|
10.00% - 12.00%
|
|
10.00% - 12.00%
|
The sensitivity of the current fair value of servicing assets to immediate
10 percent and 20 percent adverse changes in the above key assumptions were as
follows:
|
|
December 31, 2017
|
|
|
(In thousands)
|
|
Mortgage-related
servicing asset
|
|
|
|
Carrying
value of mortgage servicing asset
|
$
|
9,821
|
|
Constant
prepayment rate
|
|
|
|
Decrease in
fair value due to 10% adverse change
|
$
|
(196)
|
|
Decrease in
fair value due to 20% adverse change
|
$
|
(384)
|
|
Discount
rate
|
|
|
|
Decrease in
fair value due to 10% adverse change
|
$
|
(436)
|
|
Decrease in
fair value due to 20% adverse change
|
$
|
(838)
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
These sensitivities are hypothetical and
should be used with caution. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair
value may not be linear. Also, in this table, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption.
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 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.
Servicing fee income is based on a
contractual percentage of the outstanding principal balance and is recorded as
income when earned. Servicing fees on mortgage loans for the years ended 2017,
2016 and 2015 totaled $3.9 million, $3.7 million and $4.8 million, respectively.
NOTE
12 — DERIVATIVES
The following table presents Oriental’s derivative assets and
liabilities at December
31, 2017 and 2016:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Derivative assets:
|
|
|
|
|
|
|
Interest rate swaps not designated as hedges
|
$
|
618
|
|
$
|
1,187
|
|
Interest rate caps
|
|
153
|
|
|
143
|
|
|
$
|
771
|
|
$
|
1,330
|
|
Derivative liabilities:
|
|
|
|
|
|
|
Interest rate swaps designated as cash flow hedges
|
|
510
|
|
|
1,004
|
|
Interest rate swaps not designated as hedges
|
|
618
|
|
|
1,187
|
|
Interest rate caps
|
|
153
|
|
|
139
|
|
Other
|
|
-
|
|
|
107
|
|
|
$
|
1,281
|
|
$
|
2,437
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interest
Rate Swaps
Oriental 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 Oriental’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 borrowing transactions, are
properly documented as such, and therefore, qualify for cash flow hedge
accounting. Any gain or loss associated with the effective portion of the cash
flow hedges is recognized in other comprehensive income (loss) and is subsequently
reclassified into operations in the period during which the hedged forecasted
transactions affect 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, Oriental does not expect to reclassify any amount included in other
comprehensive income (loss) related to these interest rate swaps to operations
in the next twelve months.
The following table shows a summary of these swaps and their terms
at December 31, 2017:
|
|
|
Notional
|
|
Fixed
|
|
Variable
|
|
Trade
|
|
Settlement
|
|
Maturity
|
|
Type
|
|
Amount
|
|
Rate
|
|
Rate Index
|
|
Date
|
|
Date
|
|
Date
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
35,113
|
|
2.4210%
|
|
1-Month LIBOR
|
|
07/03/13
|
|
07/03/13
|
|
08/01/23
|
|
|
|
$
|
35,113
|
|
|
|
|
|
|
|
|
|
|
An accumulated unrealized loss of $510 thousand and $1.0
million was
recognized in accumulated other comprehensive income (loss) related to the
valuation of these swaps at December 31, 2017 and 2016, respectively, and the
related liability is being reflected in the consolidated statements of
financial condition.
At December 31, 2017 and 2016, interest rate swaps not
designated as hedging instruments that were offered to clients represented an
asset of $618 thousand and $1.2 million, respectively, and were included as
part of derivative assets in the consolidated statements of financial position.
The credit risk to these clients stemming from these derivatives, if any, is
not material. At December 31, 2017 and 2016, interest rate swaps not designated
as hedging instruments that are the mirror-images of the derivatives offered to
clients represented a liability of $618 thousand and $1.2 million,
respectively, and were included as part of derivative liabilities in the
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 December 31, 2017:
|
|
|
Notional
|
|
Fixed
|
|
Variable
|
|
Settlement
|
|
Maturity
|
|
Type
|
|
Amount
|
|
Rate
|
|
Rate Index
|
|
Date
|
|
Date
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps - Derivatives Offered to Clients
|
|
$
|
12,500
|
|
5.5050%
|
|
1-Month LIBOR
|
|
04/11/09
|
|
04/11/19
|
|
|
|
$
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps - Mirror Image Derivatives
|
|
$
|
12,500
|
|
5.5050%
|
|
1-Month LIBOR
|
|
04/11/09
|
|
04/11/19
|
|
|
|
$
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interest
Rate Caps
Oriental 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. In these
cases, Oriental simultaneously enters into mirror-image interest rate cap
transactions with financial counterparties. None of these cap transactions
qualify for hedge accounting, and therefore, they are marked to market through
earnings. As of December 31, 2017 and 2016, the outstanding total notional amount of
interest rate caps was $152.6 million and $136.1 million, respectively. At December 31, 2017 and 2016, the interest
rate caps sold to clients represented a liability of $153 thousand and $139
thousand, respectively, and were included as part of derivative liabilities in
the consolidated statements of financial condition. At December 31, 2017 and
2016, the interest rate caps purchased as mirror-images represented an asset of
$153 thousand and $143 thousand, respectively, and were included as part of
derivative assets in the consolidated statements of financial condition.
NOTE 13
— ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS
Accrued interest receivable at December 31, 2017 and 2016 consists of the following:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Loans, excluding acquired loans
|
$
|
46,936
|
|
$
|
16,706
|
|
Investments
|
|
3,033
|
|
|
3,521
|
|
|
$
|
49,969
|
|
$
|
20,227
|
|
|
|
|
|
|
|
Other assets at December 31, 2017 and 2016 consist of the
following:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Prepaid expenses
|
$
|
9,200
|
|
$
|
16,501
|
|
Other repossessed assets
|
|
3,548
|
|
|
3,224
|
|
Core deposit and customer relationship intangibles
|
|
4,687
|
|
|
6,160
|
|
Mortgage tax credits
|
|
4,277
|
|
|
6,277
|
|
Investment in Statutory Trust
|
|
1,083
|
|
|
1,083
|
|
Accounts receivable and other assets
|
|
41,898
|
|
|
47,120
|
|
|
$
|
64,693
|
|
$
|
80,365
|
Accrued interest receivable at December 31, 2017 included $39.7 million resulting from the loan payment
moratorium.
Prepaid expenses amounting to $9.2 million
and $16.5 million at December 31, 2017 and 2016, respectively, include prepaid
municipal, property and income taxes aggregating to $5.7 million and $12.5 million, respectively.
In connection with the FDIC-assisted acquisition and the BBVAPR Acquisition, Oriental
recorded a core deposit intangible representing the value of checking and
savings deposits acquired. At December
31, 2017 and 2016
this core deposit intangible amounted to $3.3 million and $4.3 million, respectively. In
addition, Oriental recorded a customer relationship intangible representing the
value of customer relationships acquired with the acquisition of the securities
broker-dealer and insurance agency in the BBVAPR Acquisition. At December 31, 2017 and 2016, this customer relationship
intangible amounted to $1.4 million and $1.9 million, respectively.
Other repossessed assets totaled $3.5
million and $3.2 million at December 31, 2017 and 2016, respectively, include
repossessed automobiles amounting to $3.4 million and $3.0 million, respectively,
which are recorded at their net realizable value.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2017 and 2016, tax credits
for Oriental totaled $4.3 million and $6.3 million, respectively. These tax
credits do not have an expiration date.
NOTE
14— DEPOSITS AND
RELATED INTEREST
Total deposits, including related accrued
interest payable, as of December 31, 2017 and 2016 consist of the following:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Non-interest bearing demand deposits
|
$
|
969,525
|
|
$
|
848,502
|
|
Interest-bearing savings and demand deposits
|
|
2,274,116
|
|
|
2,219,452
|
|
Individual retirement accounts
|
|
231,376
|
|
|
265,754
|
|
Retail certificates of deposit
|
|
595,983
|
|
|
563,965
|
|
Institutional certificates of deposit
|
|
209,951
|
|
|
190,419
|
|
Total core deposits
|
|
4,280,951
|
|
|
4,088,092
|
|
Brokered deposits
|
|
518,531
|
|
|
576,395
|
|
Total deposits
|
$
|
4,799,482
|
|
$
|
4,664,487
|
|
|
|
|
|
|
|
Brokered deposits include $471.6 million in certificates of deposits and $46.9 million in money market
accounts at December 31, 2017, and $508.4
million in
certificates of deposits and $68.0 million in money market
accounts at December 31, 2016.
The weighted average interest rate of Oriental’s
deposits was 0.65% and 0.62% at December 31, 2017 and
2016, respectively. Interest expense for the years ended December 31, 2017, 2016
and 2015 was as follows:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
|
|
Demand and savings deposits
|
$
|
11,426
|
|
$
|
12,004
|
|
$
|
12,414
|
|
Certificates of deposit
|
|
18,872
|
|
|
17,249
|
|
|
14,620
|
|
|
$
|
30,298
|
|
$
|
29,253
|
|
$
|
27,034
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, demand and
interest-bearing deposits and certificates of deposit included uncollateralized
deposits of Puerto Rico Cash & Money Market Fund, Inc. (the "Fund”),
which amounted to $15.3 million, with a weighted average rate of 0.77%. On April 3, 2017, the
Fund was liquidated in anticipation of its dissolution.
At December 31, 2017 and 2016, time deposits in denominations of
$250 thousand or higher, excluding accrued interest and unamortized discounts,
amounted to $359.6 million and $344.0 million, respectively.
Such amounts include public funds time deposits from various Puerto Rico
government municipalities, agencies, and corporations of $3.5 million and $2.1 million at a weighted
average rate of 0.28% and 0.50% at December 31, 2017 and
2016, respectively.
At December 31, 2017 and 2016, total
public fund deposits from various Puerto Rico government municipalities,
agencies, and corporations amounted to $153.1 million and $170.7 million, respectively.
These public funds were collateralized with commercial loans amounting to $173.0 million and $209.2 million at December 31,
2017 and 2016, respectively.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Excluding accrued
interest of approximately $1.9 million, the scheduled
maturities of certificates of deposit at December 31, 2017 and 2016 are as
follows:
|
|
December 31, 2017
|
|
|
|
2017
|
|
|
2016
|
|
|
(In thousands)
|
|
Within one year:
|
|
|
|
|
|
|
Three (3) months or less
|
$
|
316,382
|
|
$
|
277,621
|
|
Over 3 months through 1 year
|
|
508,285
|
|
|
534,548
|
|
|
|
824,667
|
|
|
812,169
|
|
Over 1 through 2 years
|
|
470,670
|
|
|
488,440
|
|
Over 2 through 3 years
|
|
137,016
|
|
|
154,545
|
|
Over 3 through 4 years
|
|
36,125
|
|
|
29,701
|
|
Over 4 through 5 years
|
|
38,623
|
|
|
41,949
|
|
|
$
|
1,507,101
|
|
$
|
1,526,804
|
|
|
|
|
|
|
|
The table of scheduled maturities of certificates of deposits
above includes brokered-deposits and individual retirement accounts.
The aggregate amount of overdrafts in
demand deposit accounts that were reclassified to loans amounted to $2.2 million and $575 thousand as of December 31,
2017 and 2016, respectively.
NOTE 15 —
BORROWINGS AND RELATED INTEREST
Securities Sold under Agreements to
Repurchase
At December 31, 2017, 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 Oriental the same or similar securities
at the maturity of these agreements. The purpose of these transactions is to
provide financing for Oriental’s securities portfolio.
At December 31, 2017 and 2016, securities
sold under agreements to repurchase (classified by counterparty), excluding
accrued interest in the amount of $369
thousand and $1.5 million, respectively, were
as follows:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
Fair Value of
|
|
|
Borrowing
|
|
Underlying
|
|
Borrowing
|
|
Underlying
|
|
|
Balance
|
|
Collateral
|
|
Balance
|
|
Collateral
|
|
|
(In thousands)
|
|
PR Cash and Money Market Fund
|
$
|
-
|
|
$
|
-
|
|
$
|
70,010
|
|
$
|
74,538
|
|
JP Morgan Chase Bank NA
|
|
82,500
|
|
|
88,974
|
|
|
350,219
|
|
|
376,674
|
|
Credit Suisse Securities (USA) LLC
|
|
-
|
|
|
-
|
|
|
232,000
|
|
|
249,286
|
|
Federal Home Loan Bank
|
|
110,000
|
|
|
116,509
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
192,500
|
|
$
|
205,483
|
|
$
|
652,229
|
|
$
|
700,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table shows a
summary of Oriental’s repurchase agreements and their terms, excluding accrued
interest in the amount of $369 thousand, at December 31, 2017:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Borrowing
|
|
Average
|
|
|
|
Maturity
|
|
Year of Maturity
|
|
Balance
|
|
Coupon
|
|
Settlement Date
|
|
Date
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
2018
|
|
|
82,500
|
|
1.42%
|
|
12/30/2015
|
|
4/29/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
50,000
|
|
1.72%
|
|
3/2/2017
|
|
9/3/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
60,000
|
|
1.85%
|
|
3/2/2017
|
|
3/2/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
192,500
|
|
1.63%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
repurchase agreement in the original amount of $500 million with an
original term of ten years was modified in February 2016 to partially
terminate, before maturity, $268.0 million at a cost of $12.0
million included as a loss on early extinguishment of debt in the consolidated
statements of operations. The remaining balance of this repurchase agreement of
$232.0 million matured on March 2,
2017. In addition, in June 2017, repurchase agreements in the original amounts
of $25.0 million and $75.0 million, respectively, with
original terms of June 2019 and December 2019, respectively, were terminated
before maturity at a cost of $80 thousand included as a loss on early
extinguishment of debt in consolidated statement of operations. Also, in
December 2017, a repurchase agreement in the original amount of $172.5 million, with an original
term of April 2018, was partially terminated, before maturity, by the amount of
$80.0 million at no cost.
The following table presents the repurchase
liability associated with the repurchase agreement transactions (excluding
accrued interest) by maturity. Also, it includes the carrying value and
approximate market value of collateral (excluding accrued interest) at December
31, 2017 and 2016. There was no cash collateral at December 31, 2017 and 2016.
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Market Value of
Underlying Collateral
|
|
|
|
|
|
Weighted
|
|
FNMA and
|
|
|
|
|
|
Repurchase
|
|
Average
|
FHLMC
|
|
|
|
|
Liability
|
|
Rate
|
|
Certificates
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Over 90 days
|
|
192,500
|
|
|
1.63%
|
|
|
205,483
|
|
|
205,483
|
|
Total
|
$
|
192,500
|
|
|
1.63%
|
|
$
|
205,483
|
|
$
|
205,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Market Value of
Underlying Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
FNMA and
|
|
|
|
|
|
US Treasury
|
|
|
|
|
|
Repurchase
|
|
Average
|
FHLMC
|
|
GNMA
|
|
|
Treasury
|
|
|
|
|
Liability
|
|
Rate
|
|
Certificates
|
|
Certificates
|
|
|
Notes
|
Total
|
|
|
(Dollars in thousands)
|
|
Less than 90 days
|
$
|
349,729
|
|
$
|
3.35%
|
|
|
248,288
|
|
$
|
75,536
|
|
$
|
48,954
|
|
$
|
372,778
|
|
Over 90 days
|
|
302,500
|
|
|
1.44%
|
|
|
327,627
|
|
|
93
|
|
|
-
|
|
|
327,720
|
|
Total
|
$
|
652,229
|
|
|
2.47%
|
|
$
|
575,915
|
|
$
|
75,629
|
|
|
48,954
|
|
|
700,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes significant data
on securities sold under agreements to repurchase as of December 31, 2017 and
2016, excluding accrued interest:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Average daily aggregate
balance outstanding
|
$
|
393,133
|
|
$
|
663,845
|
|
Maximum
outstanding balance at any month-end
|
$
|
606,210
|
|
$
|
902,500
|
|
Weighted average
interest rate during the year
|
|
1.80%
|
|
|
2.83%
|
|
Weighted average
interest rate at year end
|
|
1.63%
|
|
|
2.47%
|
Advances from the Federal Home Loan Bank of New York
Advances are received from the FHLB-NY
under an agreement whereby Oriental is required to maintain a minimum amount of
qualifying collateral with a fair value of at least 110% of the outstanding
advances. At December
31, 2017 and 2016, these
advances were secured by mortgage and commercial loans amounting to $1.3 billion and $1.4 billion, respectively.
Also, at December
31, 2017 and 2016, Oriental
had an additional borrowing capacity with the FHLB-NY of $920 million and $1.2 billion, respectively. At December 31, 2017 and 2016, the weighted average remaining maturity
of FHLB’s advances was 3.2 months and 10.6 months, respectively. The original terms of these
advances range between one month and seven years, and the FHLB-NY does not have
the right to exercise put options at par on any advances outstanding as of
December 31, 2017.
The following table shows a summary of
these advances and their terms, excluding accrued interest in the amount of $322 thousand, at December 31,
2017:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Borrowing
|
|
Average
|
|
|
|
Maturity
|
|
Year of Maturity
|
|
|
Balance
|
|
Coupon
|
|
Settlement Date
|
|
Date
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
2018
|
|
|
30,000
|
|
2.19%
|
|
1/16/2013
|
|
1/16/2018
|
|
|
|
|
25,000
|
|
2.18%
|
|
1/16/2013
|
|
1/16/2018
|
|
|
|
|
35,113
|
|
1.49%
|
|
12/1/2017
|
|
1/22/2018
|
|
|
|
|
90,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
9,208
|
|
2.59%
|
|
7/19/2013
|
|
7/20/2020
|
|
|
|
$
|
99,321
|
|
1.98%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Subordinated Capital Notes
Subordinated capital notes amounted to
$36.1 million at December 31, 2017 and 2016, respectively. On September 29, 2016, Oriental repaid $67.0 million of subordinated
capital notes at maturity.
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.
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 Oriental. The subordinated
deferrable interest debenture has a par value of $36.1 million, bears interest
based on 3-month LIBOR plus 295
basis points (4.55% at December, 2017; 3.94.% at December 31, 2016),
is payable quarterly, and matures on September 17, 2033. It may be called at
par after five years and quarterly thereafter (next call date March 2018). 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 Oriental is accounted for as a
liability denominated as a subordinated capital note on the consolidated
statements of financial condition.
The subordinated capital note is treated as Tier 1 capital for
regulatory purposes. Under the Dodd-Frank Act and the new capital rules issued
by the federal banking regulatory agencies in July 2013, 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 Oriental, with total consolidated assets of less than $15
billion as of December 31, 2009, may continue to be included as Tier 1 capital.
Therefore, Oriental is permitted to continue to include its existing trust preferred securities as Tier 1 capital.
NOTE 16 – OFFSETTING OF
FINANCIAL ASSETS AND LIABILITIES
Oriental’s derivatives are subject to
agreements which allow a right of set-off with each respective counterparty. In
addition, Oriental’s securities purchased under agreements to resell and securities
sold under agreements to repurchase have a right of set-off with the respective
counterparty under the supplemental terms of the master repurchase agreements.
In an event of default, each party has a right of set-off against the other
party for amounts owed in the related agreements and any other amount or
obligation owed in respect of any other agreement or transaction between them.
Security collateral posted to open and maintain a master netting agreement with
a counterparty, in the form of cash and securities, may from time to time be
segregated in an account at a third-party custodian pursuant to a an account
control agreement.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the potential
effect of rights of set-off associated with Oriental’s recognized financial
assets and liabilities at December 31, 2017 and 2016:
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
in the Statement of Financial Condition
|
|
|
|
|
|
|
|
Gross Amounts
|
|
Net Amount of
|
|
|
|
|
|
|
|
|
|
|
|
Offset in the
|
|
Assets Presented
|
|
|
|
|
|
|
|
|
|
Gross Amount
|
|
Statement of
|
|
in Statement
|
|
|
|
Cash
|
|
|
|
|
|
of Recognized
|
|
Financial
|
|
of Financial
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
|
Assets
|
|
Condition
|
|
Condition
|
|
Instruments
|
|
Received
|
|
Amount
|
|
|
|
(In thousands)
|
|
Derivatives
|
|
$
|
771
|
|
$
|
-
|
|
$
|
771
|
|
$
|
2,010
|
|
$
|
-
|
|
$
|
(1,239)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
in the Statement of Financial Condition
|
|
|
|
|
|
|
|
Gross Amounts
|
|
Net amount of
|
|
|
|
|
|
|
|
|
|
|
|
Offset in the
|
|
Assets Presented
|
|
|
|
|
|
|
|
|
|
Gross Amount
|
|
Statement of
|
|
in Statement
|
|
|
|
Cash
|
|
|
|
|
|
of Recognized
|
|
Financial
|
|
of Financial
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
|
Assets
|
|
Condition
|
|
Condition
|
|
Instruments
|
|
Received
|
|
Amount
|
|
|
|
(In thousands)
|
|
Derivatives
|
|
$
|
1,330
|
|
$
|
-
|
|
$
|
1,330
|
|
$
|
2,003
|
|
$
|
-
|
|
$
|
(673)
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
in the Statement of Financial Condition
|
|
|
|
|
|
|
|
|
|
Net Amount of
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Offset in the
|
|
Presented
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount
|
|
Statement of
|
|
in Statement
|
|
|
|
Cash
|
|
|
|
|
|
of Recognized
|
|
Financial
|
|
of Financial
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
|
Liabilities
|
|
Condition
|
|
Condition
|
|
Instruments
|
|
Provided
|
|
Amount
|
|
|
|
(In thousands)
|
|
Derivatives
|
|
$
|
1,281
|
|
$
|
-
|
|
$
|
1,281
|
|
$
|
-
|
|
$
|
1,980
|
|
$
|
(699)
|
|
Securities sold under agreements to repurchase
|
|
|
192,500
|
|
|
-
|
|
|
192,500
|
|
|
205,483
|
|
|
-
|
|
|
(12,983)
|
|
Total
|
|
$
|
193,781
|
|
$
|
-
|
|
$
|
193,781
|
|
$
|
205,483
|
|
$
|
1,980
|
|
$
|
(13,682)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
in the Statement of Financial Condition
|
|
|
|
|
|
|
|
|
|
Net Amount of
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Offset in the
|
|
Presented
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount
|
|
Statement of
|
|
in Statement
|
|
|
|
Cash
|
|
|
|
|
|
of Recognized
|
|
Financial
|
|
of Financial
|
|
Financial
|
|
Collateral
|
|
Net
|
|
|
|
Liabilities
|
|
Condition
|
|
Condition
|
|
Instruments
|
|
Provided
|
|
Amount
|
|
|
|
(In thousands)
|
|
Derivatives
|
|
$
|
2,437
|
|
$
|
-
|
|
$
|
2,437
|
|
$
|
-
|
|
$
|
1,980
|
|
$
|
457
|
|
Securities sold under agreements to repurchase
|
|
|
652,229
|
|
|
-
|
|
|
652,229
|
|
|
700,498
|
|
|
-
|
|
|
(48,269)
|
|
Total
|
|
$
|
654,666
|
|
$
|
-
|
|
$
|
654,666
|
|
$
|
700,498
|
|
$
|
1,980
|
|
$
|
(47,812)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 17 — EMPLOYEE BENEFIT PLAN
Oriental has a profit sharing plan containing a cash or
deferred arrangement qualified under Sections 1081.01(a) and 1081.01(d) of
the Puerto Rico Internal Revenue Code of 2011, as amended, (the "PR
Code"), and Sections 401(a) and 401(k) of the United States
Internal Revenue Code of 1986, as amended. This plan is subject to the
provisions of Title I of the Employee Retirement Income Security Act of
1976, as amended (“ERISA”). This plan covers all full-time employees of Oriental
who are age 21 or older. Under this plan, participants may contribute each year
up to $18,000. Oriental's matching
contribution is 50 cents for each dollar contributed by an employee, up to 4%
of such employee’s base salary. It is invested in accordance with the
employee’s decision among the available investment alternatives provided by the
plan. This plan is entitled to acquire and hold qualified employer securities
as part of its investment of the trust assets pursuant to ERISA
Section 407. Oriental contributed $835 thousand, $792 thousand and $808 thousand in cash during
2017, 2016 and 2015, respectively. Oriental’s contribution becomes 100% vested
once the employee completes three years of service.
Also, Oriental offers to its senior management a
non-qualified deferred compensation plan, where executives can defer taxable
income. Both the employer and the employee have flexibility because
non-qualified plans are not subject to ERISA contribution limits nor are they
subject to discrimination tests in terms of who must be included in the plan.
Under this plan, the employee’s current taxable income is reduced by the amount
being deferred. Funds deposited in a deferred compensation plan can accumulate
without current income tax to the individual. Income taxes are due when the
funds are withdrawn.
NOTE 18 — RELATED PARTY TRANSACTIONS
Oriental 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. The activity and balance of these loans for the years December 31,
2017, 2016, and 2015 was as follows:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
|
|
Balance at
the beginning of year
|
$
|
29,020
|
|
$
|
31,475
|
|
$
|
27,011
|
|
New loans
and disbursements
|
|
2,875
|
|
|
2,329
|
|
|
13,581
|
|
Repayments
|
|
(3,757)
|
|
|
(4,784)
|
|
|
(9,117)
|
|
Balance at
the end of year
|
$
|
28,138
|
|
$
|
29,020
|
|
$
|
31,475
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 19 — INCOME TAXES
Oriental is subject to the provisions of the PR Code, which imposes a maximum corporate
tax rate of 39%. The Oriental, however, maintained a lower effective tax rate
for the years ended December 31, 2017, 2016 and 2015.
Under Puerto Rico law, all companies are treated as separate
taxable entities and are not entitled to file consolidated tax returns. OFG
Bancorp and its subsidiaries are subject to Puerto Rico regular income tax or
the alternative minimum tax (“AMT”) on income earned from all sources. The AMT
is payable if it exceeds regular income tax. The excess of AMT over regular
income tax paid in any one year may be used to offset regular income tax in
future years, subject to certain limitations.
Oriental has operations in U.S. through its wholly owned
subsidiary OPC, a retirement plan administration based in Florida. Also, in
October 2017, Oriental expanded its operations in U.S. through the Bank's wholly
owned subsidiary OFG USA. Both subsidiaries are subject to state and federal
taxes. OPC is subject to Florida state taxes and OFG USA is subject to North
Carolina state taxes. OFG USA elected to be classified as a corporation.
The components of income tax expense (benefit) for the years
ended December 31, 2017, 2016 and 2015 are as follows:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
2015
|
|
|
(In thousands)
|
|
Current income
tax expense
|
$
|
19,101
|
|
$
|
2,768
|
|
$
|
19,775
|
|
Deferred income
tax expense (benefit)
|
|
(3,658)
|
|
|
23,226
|
|
|
(37,329)
|
|
Total income
tax expense (benefit)
|
$
|
15,443
|
|
$
|
25,994
|
|
$
|
(17,554)
|
In relation to the exempt income level, the
Bank’s investment securities portfolio and loans portfolio generated net
tax-exempt interest income of $10.0 million for 2017 and 2016, respectively, and $17.6 million for 2015. OIB
generated exempt income of $9.6 million, $10.3 million and $6.3 million for 2017, 2016 and
2015, respectively.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oriental’s income tax expense
differs from amounts computed by applying the applicable statutory rate to
income (loss) before income taxes as follow:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
Rate
|
|
|
(Dollars in thousands)
|
|
Income tax expense (benefit) at statutory rates
|
$
|
26,555
|
|
39.00%
|
|
$
|
33,220
|
|
39.00%
|
|
$
|
(7,823)
|
|
-39.00%
|
|
Tax effect of exempt and excluded income, net
|
|
(9,506)
|
|
-13.96%
|
|
|
(11,178)
|
|
-13.12%
|
|
|
(8,625)
|
|
-43.00%
|
|
Disallowed net operating loss carryover
|
|
281
|
|
0.41%
|
|
|
1,406
|
|
1.65%
|
|
|
556
|
|
2.77%
|
|
Change in valuation allowance
|
|
(305)
|
|
-0.45%
|
|
|
(9)
|
|
-0.01%
|
|
|
(2,219)
|
|
-11.06%
|
|
Release of unrecognized tax benefits, net
|
|
(775)
|
|
-1.14%
|
|
|
(135)
|
|
-0.16%
|
|
|
(385)
|
|
-1.92%
|
|
Capital (gain) loss at preferential rate
|
|
(279)
|
|
-0.41%
|
|
|
2,394
|
|
2.81%
|
|
|
283
|
|
1.41%
|
|
Other items, net
|
|
(528)
|
|
-0.79%
|
|
|
296
|
|
0.34%
|
|
|
659
|
|
3.28%
|
|
Income tax expense (benefit)
|
$
|
15,443
|
|
22.66%
|
|
$
|
25,994
|
|
30.51%
|
|
$
|
(17,554)
|
|
-87.52%
|
Oriental classifies unrecognized tax benefits in other
liabilities. These gross unrecognized tax benefits would affect the effective
tax rate if realized. At December 31, 2017 the amount of unrecognized tax
benefits was $1.3 million (December 31, 2016 - $2.0 million). Oriental had
accrued $97 thousand at December 31,
2017 (December 31, 2016 - $229 thousand) for the payment
of interest and penalties relating to unrecognized tax benefits and released $877 thousand due to statute of
limitation.
The following table presents a reconciliation of unrecognized tax
benefits:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
In thousands)
|
|
Balance at beginning of year
|
$
|
2,040
|
|
|
$
|
2,175
|
|
|
$
|
2,560
|
|
|
Additions for tax positions of prior years
|
|
97
|
|
|
|
229
|
|
|
|
175
|
|
|
Additions (reductions) due to new tax positions
|
|
-
|
|
|
|
999
|
|
|
|
(560)
|
|
|
Reduction for tax positions as a result of lapse of
statute of limitations
|
|
(877)
|
|
|
|
(1,363)
|
|
|
|
-
|
|
|
Balance at end of year
|
$
|
1,260
|
|
|
$
|
2,040
|
|
|
$
|
2,175
|
|
The amount of unrecognized tax benefits may increase or decrease
in the future for various reasons including adding amounts for current tax year
positions, expiration of open income tax returns due to the statute of
limitations, changes in management’s judgment about the level of uncertainty,
status of examinations, litigation and legislative activity, and the addition
elimination of uncertain tax positions.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The determination of deferred tax expense
or benefit is based on changes in the carrying amounts of assets and
liabilities that generate temporary differences. The carrying value of Oriental’s
net deferred tax assets assumes that Oriental will be able to generate
sufficient future taxable income based on estimates and assumptions. If these
estimates and related assumptions change in the future, Oriental may be
required to record valuation allowances against its deferred tax assets
resulting in additional income tax expense in the consolidated statements of
operations.
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Deferred tax
asset:
|
|
|
|
|
|
|
Allowance for
loan and lease losses and other reserves
|
$
|
97,682
|
|
$
|
84,959
|
|
Loans and other
real estate valuation adjustment
|
|
10,457
|
|
|
11,120
|
|
Net operating
loss carry forwards
|
|
5,169
|
|
|
9,686
|
|
Alternative
minimum tax
|
|
15,672
|
|
|
15,799
|
|
Acquired
portfolio
|
|
35,293
|
|
|
36,237
|
|
FDIC
shared-loss indemnification asset
|
|
-
|
|
|
5,344
|
|
Other assets
allowances
|
|
858
|
|
|
1,547
|
|
Other deferred
tax assets
|
|
5,304
|
|
|
5,116
|
|
Total gross
deferred tax asset
|
|
170,435
|
|
|
169,808
|
|
Less:
valuation allowance
|
|
(3,135)
|
|
|
(3,133)
|
|
Net gross
deferred tax assets
|
|
167,300
|
|
|
166,675
|
|
Deferred tax
liability:
|
|
|
|
|
|
|
FDIC-assisted
acquisition, net
|
|
(24,564)
|
|
|
(25,862)
|
|
Customer
deposit and customer relationship intangibles
|
|
(1,828)
|
|
|
(2,402)
|
|
Building
valuation ajustment
|
|
(9,069)
|
|
|
(9,522)
|
|
Servicing asset
|
|
(3,830)
|
|
|
(3,844)
|
|
Other deferred
tax liabilities
|
|
(588)
|
|
|
(845)
|
|
Total gross
deferred tax liabilities
|
|
(39,879)
|
|
$
|
(42,475)
|
|
Net deferred
tax asset
|
$
|
127,421
|
|
$
|
124,200
|
In assessing the realizability of the
deferred tax asset, management considers whether it is more likely than not
that some portion or the entire deferred tax asset will not be realized. The
ultimate realization of the deferred tax asset is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred tax asset are deductible, management believes it is more
likely than not that Oriental will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31,
2017. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carry-forward period are reduced.
Oriental
follows a two-step approach for recognizing and measuring uncertain tax
positions. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more
likely than not that the position will be sustained on audit, including
resolution of related appeals of litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement.
Oriental
is potentially subject to income tax audits in the Commonwealth of Puerto Rico
for taxable years 2014 to 2017, until the applicable statute of limitations
expire. Tax audits by their nature are often complex and can require several
years to complete.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 20 — REGULATORY CAPITAL REQUIREMENTS
Regulatory Capital Requirements
OFG Bancorp (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 Oriental’s
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Oriental 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 adopted capital rules that became
effective January 1, 2015 for Oriental and the Bank (subject to certain
phase-in periods through January 1, 2019) and that replaced their general
risk-based capital rules, advanced approaches rule, market risk rule, and
leverage rules. Among other matters, the new capital rules: (i) introduce a new
capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory
capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital
consists of CET1 and “Additional Tier 1 capital” instruments meeting certain
revised requirements; (iii) mandate that most deductions/adjustments to
regulatory capital measures be made to CET1 and not to the other components of
capital; and (iv) expand the scope of the deductions from and adjustments to
capital as compared to prior regulations. The current capital rules prescribe a new
standardized approach for risk weightings that expand the risk-weighting
categories from the current four Basel I-derived categories (0%, 20%, 50% and
100%) to a larger and more risk-sensitive number of categories, depending on
the nature of the assets, and resulting in higher risk weights for a variety of
asset classes.
Pursuant to the current capital rules, the
minimum capital ratios requirements are as follows:
4.5% CET1 to risk-weighted
assets;
6.0% Tier 1 capital (that is,
CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is,
Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to
average consolidated assets as reported on consolidated financial statements
(known
as the “leverage ratio”).
As of December
31, 2017 and 2016, OFG
Bancorp and the Bank met all capital adequacy requirements to which they are
subject. As of December
31, 2017 and 2016, the Bank
is “well capitalized” under the regulatory framework for prompt corrective
action. To be categorized as “well capitalized,” an institution must maintain
minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage
ratios as set forth in the tables presented below.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG Bancorp’s and the Bank’s actual capital amounts and ratios as
of December 31,
2017 and 2016 are as follows:
|
|
|
|
|
|
|
Minimum Capital
|
|
Minimum to be Well
|
|
|
Actual
|
|
Requirement
|
|
Capitalized
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
OFG Bancorp Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
899,258
|
|
20.34%
|
|
$
|
353,653
|
|
8.00%
|
|
$
|
442,067
|
|
10.00%
|
|
Tier 1 capital to risk-weighted assets
|
$
|
842,133
|
|
19.05%
|
|
$
|
265,240
|
|
6.00%
|
|
$
|
353,653
|
|
8.00%
|
|
Common equity tier 1 capital to risk-weighted assets
|
$
|
644,804
|
|
14.59%
|
|
$
|
198,930
|
|
4.50%
|
|
$
|
287,343
|
|
6.50%
|
|
Tier 1 capital to average total assets
|
$
|
842,133
|
|
13.92%
|
|
$
|
242,057
|
|
4.00%
|
|
$
|
302,571
|
|
5.00%
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
876,657
|
|
19.62%
|
|
$
|
357,404
|
|
8.00%
|
|
$
|
446,756
|
|
10.00%
|
|
Tier 1 capital to risk-weighted assets
|
$
|
819,662
|
|
18.35%
|
|
$
|
268,053
|
|
6.00%
|
|
$
|
357,404
|
|
8.00%
|
|
Common equity tier 1 capital to risk-weighted assets
|
$
|
627,733
|
|
14.05%
|
|
$
|
201,040
|
|
4.50%
|
|
$
|
290,391
|
|
6.50%
|
|
Tier 1 capital to average total assets
|
$
|
819,662
|
|
12.99%
|
|
$
|
252,344
|
|
4.00%
|
|
$
|
315,430
|
|
5.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital
|
|
Minimum to be Well
|
|
|
Actual
|
|
Requirement
|
|
Capitalized
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
Bank Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
879,648
|
|
19.92%
|
|
$
|
353,265
|
|
8.00%
|
|
$
|
441,581
|
|
10.00%
|
|
Tier 1 capital to risk-weighted assets
|
$
|
822,776
|
|
18.63%
|
|
$
|
264,949
|
|
6.00%
|
|
$
|
353,265
|
|
8.00%
|
|
Common equity tier 1 capital to risk-weighted assets
|
$
|
822,776
|
|
18.63%
|
|
$
|
198,712
|
|
4.50%
|
|
$
|
287,028
|
|
6.50%
|
|
Tier 1 capital to average total assets
|
$
|
822,776
|
|
13.63%
|
|
$
|
241,417
|
|
4.00%
|
|
$
|
301,771
|
|
5.00%
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
857,259
|
|
19.23%
|
|
$
|
356,596
|
|
8.00%
|
|
$
|
445,745
|
|
10.00%
|
|
Tier 1 capital to risk-weighted assets
|
$
|
800,544
|
|
17.96%
|
|
$
|
267,447
|
|
6.00%
|
|
$
|
356,596
|
|
8.00%
|
|
Common equity tier 1 capital to risk-weighted assets
|
$
|
800,544
|
|
17.96%
|
|
$
|
200,585
|
|
4.50%
|
|
$
|
289,734
|
|
6.50%
|
|
Tier 1 capital to average total assets
|
$
|
800,544
|
|
12.75%
|
|
$
|
251,200
|
|
4.00%
|
|
$
|
314,000
|
|
5.00%
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 21 – EQUITY-BASED COMPENSATION PLAN
The Omnibus Plan provides for equity-based compensation incentives
through the grant of stock options, stock appreciation rights, restricted
stock, restricted stock units, and dividend equivalents, as well as
equity-based performance awards. The Omnibus Plan replaced and superseded the
Stock Option Plans. All outstanding stock options under the Stock Option Plans
continue in full force and effect, subject to their original terms.
The activity in outstanding options for the years ended December
31, 2017, 2016 and 2015 is set forth below:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Number
|
|
Average
|
|
Number
|
|
Average
|
|
Number
|
|
Average
|
|
|
Of
|
|
Exercise
|
|
Of
|
|
Exercise
|
|
Of
|
|
Exercise
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Beginning of year
|
917,269
|
|
$
|
14.08
|
|
951,523
|
|
$
|
12.45
|
|
888,571
|
|
$
|
14.12
|
|
Options granted
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
179,225
|
|
|
17.44
|
|
Options exercised
|
(71,150)
|
|
|
12.96
|
|
(24,752)
|
|
|
12.43
|
|
(112,704)
|
|
|
19.78
|
|
Options forfeited
|
(500)
|
|
|
15.23
|
|
(9,502)
|
|
|
16.68
|
|
(3,569)
|
|
|
16.06
|
|
End of year
|
845,619
|
|
$
|
14.14
|
|
917,269
|
|
$
|
14.08
|
|
951,523
|
|
$
|
12.45
|
The following table summarizes the range of exercise prices
and the weighted average remaining contractual life of the options outstanding at December 31, 2017:
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Contract Life
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
Remaining
|
|
Number of
|
|
Average
|
|
Range of
Exercise Prices
|
|
Options
|
|
Exercise Price
|
|
(Years)
|
|
Options
|
|
Exercise Price
|
|
$5.63 to $8.45
|
|
|
4,078
|
|
|
8.28
|
|
1.3
|
|
|
4,078
|
|
|
8.28
|
|
11.27 to 14.08
|
|
|
388,241
|
|
|
11.85
|
|
3.0
|
|
|
388,241
|
|
|
11.85
|
|
14.09 to 16.90
|
|
|
286,575
|
|
|
15.38
|
|
5.7
|
|
|
176,025
|
|
|
15.22
|
|
16.91 to 19.71
|
|
|
165,225
|
|
|
17.44
|
|
7.2
|
|
|
41,305
|
|
|
17.44
|
|
19.72 to 22.53
|
|
|
1,500
|
|
|
21.86
|
|
0.2
|
|
|
1,500
|
|
|
21.86
|
|
|
|
|
845,619
|
|
$
|
14.14
|
|
4.7
|
|
|
611,149
|
|
$
|
13.20
|
|
Aggregate
Intrinsic Value
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
|
The average fair value of each option granted $5.77 during 2015. There were no options
granted during 2017 and 2016. The average fair value of each option granted was
estimated at the date of the grant using the Black-Scholes option pricing
model. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no restrictions and are
fully transferable and negotiable in a free trading market. Black-Scholes does
not consider the employment, transfer or vesting restrictions that are inherent
in Oriental’s stock options. Use of an option valuation model, as required by
GAAP, includes highly subjective assumptions based on long-term predictions,
including the expected stock price volatility and average life of each option
grant.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following assumptions were
used in estimating the fair value of the options granted during the year ended
December 31, 2015, since there were no options granted during the years ended
December 31, 2017 and 2016.
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
Dividend yield
|
N/A
|
|
N/A
|
|
1.89%
|
|
Expected volatility
|
N/A
|
|
N/A
|
|
40.93%
|
|
Risk-free interest rate
|
N/A
|
|
N/A
|
|
2.41%
|
|
Expected life (in years)
|
N/A
|
|
N/A
|
|
8.0
|
The following table summarizes the activity in restricted units
under the Omnibus Plan for the years ended December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Restricted
|
|
Grant Date
|
|
Restricted
|
|
Grant Date
|
|
Restricted
|
|
Grant Date
|
|
|
Units
|
|
Fair Value
|
|
Units
|
|
Fair Value
|
|
Units
|
|
Fair Value
|
|
Beginning of year
|
59,800
|
|
$
|
16.64
|
|
138,400
|
|
$
|
16.17
|
|
153,050
|
|
$
|
14.95
|
|
Restricted units granted
|
83,000
|
|
|
13.31
|
|
-
|
|
|
-
|
|
26,700
|
|
|
16.66
|
|
Restricted units lapsed
|
(33,100)
|
|
|
16.10
|
|
(76,903)
|
|
|
16.04
|
|
(39,750)
|
|
|
11.83
|
|
Restricted units forfeited
|
(3,900)
|
|
|
16.79
|
|
(1,697)
|
|
|
17.02
|
|
(1,600)
|
|
|
15.45
|
|
End of year
|
105,800
|
|
$
|
14.19
|
|
59,800
|
|
$
|
16.64
|
|
138,400
|
|
$
|
16.17
|
The total unrecognized compensation cost
related to non-vested restricted units to members of management at December 31,
2017 was $1.7 million and is expected to be
recognized over a weighted-average period of 1.9 years.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 22 – STOCKHOLDERS’ EQUITY
Additional
Paid-in Capital
Additional paid-in capital represents contributed capital in
excess of par value of common and preferred stock net of the costs of issuance.
As of both periods, December 31, 2017 and 2016 accumulated issuance costs charged
against additional paid-in capital amounted to $13.6 million and $10.1 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 or loss 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 December 31, 2017 and, 2016, the Bank’s legal surplus amounted to $81.5 million and $76.3 million, respectively. The
amount transferred to the legal surplus account is not available for the
payment of dividends to shareholders.
Treasury Stock
Under Oriental’s current stock repurchase
program it is authorized to purchase in the open market up $7.7 million
of its outstanding shares of common stock. The shares of common stock
repurchased are to be held by Oriental as treasury shares. During the years
ended December 31,
2017 and 2016, Oriental did
not purchase any shares under the program. During the year ended December 31,
2015, Oriental purchased 803,985 shares under this program
for a total of $8.9 million, at an average
price of $11.10 per share.
|
|
Total number of
|
|
|
|
|
Dollar amount of
|
|
|
shares purchased as
|
|
Average
|
|
shares repurchased
|
|
|
|
part of stock
|
|
price paid
|
|
(excluding
|
|
|
repurchase programs
|
|
per share
|
|
commissions paid)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Period
|
|
|
|
|
|
|
|
|
|
April 2015
|
|
204,338
|
|
$
|
14.38
|
|
$
|
2,939
|
|
May 2015
|
|
48,200
|
|
|
13.09
|
|
|
631
|
|
June 2015
|
|
51,447
|
|
|
12.81
|
|
|
659
|
|
July 2015
|
|
500,000
|
|
|
9.39
|
|
|
4,696
|
|
Year Ended December 31, 2015
|
|
803,985
|
|
$
|
11.10
|
|
$
|
8,925
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2017 the number of shares that may yet be purchased under the $70
million program is estimated at 822,431 and was calculated by dividing the remaining balance of $7.7 million by $9.40 (closing price
of Oriental's common stock at December 31, 2017).
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The activity in connection with
common shares held in treasury by Oriental for the years ended December 31,
2017, 2016 and 2015 is set forth below:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
Dollar
|
|
|
|
Dollar
|
|
|
|
Dollar
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
(In thousands, except
shares data)
|
|
Beginning of period
|
8,711,025
|
|
$
|
104,860
|
|
8,757,960
|
|
$
|
105,379
|
|
8,012,254
|
|
$
|
97,070
|
|
Common shares used upon lapse of restricted stock units
|
(32,598)
|
|
|
(358)
|
|
(46,935)
|
|
|
(519)
|
|
(58,279)
|
|
|
(641)
|
|
Common shares repurchased as part of the stock repurchase
program
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
803,985
|
|
|
8,950
|
|
End of period
|
8,678,427
|
|
$
|
104,502
|
|
8,711,025
|
|
$
|
104,860
|
|
8,757,960
|
|
$
|
105,379
|
NOTE 23 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, net of income taxes, as of
December 31, 2017 and 2016 consisted of:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Unrealized (loss) gain on securities available-for-sale
which are not
other-than-temporarily impaired
|
$
|
(3,003)
|
|
$
|
1,617
|
|
Income tax effect of unrealized (loss) gain on securities
available-for-sale
|
|
365
|
|
|
592
|
|
Net unrealized gain on securities available-for-sale
which are not
other-than-temporarily impaired
|
|
(2,638)
|
|
|
2,209
|
|
Unrealized loss on cash flow hedges
|
|
(510)
|
|
|
(1,004)
|
|
Income tax effect of unrealized loss on cash flow hedges
|
|
199
|
|
|
391
|
|
Net unrealized loss on cash flow hedges
|
|
(311)
|
|
|
(613)
|
|
Accumulated other comprehensive (loss) income, net of
income taxes
|
$
|
(2,949)
|
|
$
|
1,596
|
The following table presents changes in accumulated other
comprehensive income by component, net of taxes, for the years ended December
31, 2017, 2016, and 2015:
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
Year Ended December 31,
2017
|
|
|
Net unrealized
|
|
Net unrealized
|
|
Accumulated
|
|
|
gains on
|
|
loss on
|
|
other
|
|
|
securities
|
|
cash flow
|
|
comprehensive
|
|
|
available-for-sale
|
|
hedges
|
|
(loss) income
|
|
|
(In thousands)
|
|
Beginning balance
|
$
|
2,209
|
|
$
|
(613)
|
|
$
|
1,596
|
|
Other comprehensive loss before reclassifications
|
|
(11,563)
|
|
|
(186)
|
|
|
(11,749)
|
|
Amounts reclassified out of accumulated other
comprehensive income (loss)
|
|
6,716
|
|
|
488
|
|
|
7,204
|
|
Other comprehensive income (loss)
|
|
(4,847)
|
|
|
302
|
|
|
(4,545)
|
|
Ending balance
|
$
|
(2,638)
|
|
$
|
(311)
|
|
$
|
(2,949)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2016
|
|
|
Net unrealized
|
|
Net unrealized
|
|
Accumulated
|
|
|
gains on
|
|
loss on
|
|
other
|
|
|
securities
|
|
cash flow
|
|
comprehensive
|
|
|
available-for-sale
|
|
hedges
|
|
(loss) income
|
|
|
(In thousands)
|
|
Beginning balance
|
$
|
16,924
|
|
|
(2,927)
|
|
|
13,997
|
|
Other comprehensive loss before reclassifications
|
|
(26,661)
|
|
|
(1,628)
|
|
|
(28,289)
|
|
Amounts reclassified out of accumulated other
comprehensive income (loss)
|
|
11,946
|
|
|
3,942
|
|
|
15,888
|
|
Other comprehensive income (loss)
|
|
(14,715)
|
|
|
2,314
|
|
|
(12,401)
|
|
Ending balance
|
$
|
2,209
|
|
$
|
(613)
|
|
$
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2015
|
|
|
Net unrealized
|
|
Net unrealized
|
|
Accumulated
|
|
|
gains on
|
|
loss on
|
|
other
|
|
|
securities
|
|
cash flow
|
|
comprehensive
|
|
|
available-for-sale
|
|
hedges
|
|
(loss) income
|
|
|
(In thousands)
|
|
Beginning balance
|
$
|
25,765
|
|
|
(6,054)
|
|
|
19,711
|
|
Other comprehensive loss before reclassifications
|
|
(5,822)
|
|
|
(3,019)
|
|
|
(8,841)
|
|
Other-than-temporary impairment amount reclassified from
accumulated other comprehensive income
|
|
(4,662)
|
|
|
-
|
|
|
(4,662)
|
|
Amounts reclassified out of accumulated
other comprehensive income (loss)
|
|
1,643
|
|
|
6,146
|
|
|
7,789
|
|
Other comprehensive income (loss)
|
|
(8,841)
|
|
|
3,127
|
|
|
(5,714)
|
|
Ending balance
|
$
|
16,924
|
|
$
|
(2,927)
|
|
$
|
13,997
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following
table presents reclassifications out of accumulated other comprehensive income
for the years ended December 31, 2017, 2016, and 2015:
|
|
Amount reclassified out
of accumulated
|
|
|
|
other comprehensive
(loss) income
|
Affected Line Item in
|
|
|
Year Ended December 31,
|
Consolidated Statement
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
of Operations
|
|
|
(In thousands)
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest-rate contracts
|
$
|
488
|
|
$
|
3,642
|
|
$
|
6,443
|
Net interest expense
|
|
Tax effect from changes in tax rates
|
|
-
|
|
|
300
|
|
|
(297)
|
Income tax expense
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investments
|
|
6,896
|
|
|
12,207
|
|
|
2,572
|
Net gain on sale of securities
|
|
Other-than-temporary impairment losses on investment
securities
|
|
-
|
|
|
-
|
|
|
(1,490)
|
Net impairment losses recognized in earnings
|
|
Residual tax effect from OIB's change in applicable tax
rate
|
|
104
|
|
|
32
|
|
|
45
|
Income tax expense
|
|
Tax effect from changes in tax rates
|
|
(284)
|
|
|
(293)
|
|
|
516
|
Income tax expense
|
|
|
$
|
7,204
|
|
$
|
15,888
|
|
$
|
7,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 24 – EARNINGS (LOSS) PER COMMON SHARE
The calculation of earnings per common share for the years
ended December 31, 2017, 2016 and 2015 is as follows:
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands, except
per share data)
|
|
Net income (loss)
|
$
|
52,646
|
|
$
|
59,186
|
|
$
|
(2,504)
|
|
|
Less: Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
Non-convertible preferred stock (Series A, B, and
D)
|
|
(6,512)
|
|
|
(6,512)
|
|
|
(6,512)
|
|
|
Convertible preferred stock (Series C)
|
|
(7,350)
|
|
|
(7,350)
|
|
|
(7,350)
|
|
|
Income (loss) Income available to common shareholders
|
$
|
38,784
|
|
$
|
45,324
|
|
$
|
(16,366)
|
|
|
Effect of assumed conversion of the convertible
preferred stock
|
|
7,350
|
|
|
7,350
|
|
|
7,350
|
|
|
Income (loss) available to common shareholders assuming
conversion
|
$
|
46,134
|
|
$
|
52,674
|
|
$
|
(9,016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and share equivalents:
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
43,939
|
|
|
43,913
|
|
|
44,231
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Average potential common shares-options
|
|
19
|
|
|
37
|
|
|
68
|
|
|
Average potential common shares-assuming conversion
of convertible preferred stock
|
|
7,138
|
|
|
7,138
|
|
|
7,156
|
|
|
Total weighted average common shares outstanding and
equivalents
|
|
51,096
|
|
|
51,088
|
|
|
51,455
|
|
|
Earnings (loss) per common share - basic
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
|
|
Earnings (loss) per common share - diluted
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
|
In computing diluted earnings per common share, the 84,000 shares of convertible preferred stock,
which remain outstanding at December 31, 2017, with a conversion rate, subject
to certain conditions, of 86.4225 shares of common stock per
share, were included as average potential common shares from the date they were
issued and outstanding. Moreover, in computing diluted earnings per common
share, the dividends declared during the years ended 2017, 2016 and 2015 on the
convertible preferred stock were added back as income available to common
shareholders.
For the years ended 2017, 2016 and 2015, weighted-average stock
options with an anti-dilutive effect on earnings per share not included in the calculation
amounted to 932,306, 949,134 and 887,307, respectively.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 25 – GUARANTEES
At December 31, 2017 and
2016 , the unamortized balance of the obligations undertaken in issuing the
guarantees under standby letters of credit represented a liability of $21.1 million and $4.0 million, respectively.
As a result of the BBVAPR
Acquisition, Oriental assumed a liability for residential mortgage loans sold
subject to credit recourse, pursuant to FNMA’s residential mortgage loan sales
and securitization programs. At December 31, 2017 and 2016, the unpaid principal
balance of residential mortgage loans sold subject to credit recourse was $6.4 million
and $20.1 million, respectively.
The following table shows
the changes in Oriental’s liability for estimated losses from these credit
recourse agreements, included in the consolidated statements of financial
condition during the years ended December 31, 2017, 2016 and 2015.
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
$
|
710
|
|
$
|
439
|
|
$
|
927
|
|
Net (charge-offs/terminations) recoveries
|
|
(352)
|
|
|
271
|
|
|
(488)
|
|
Balance at end of period
|
$
|
358
|
|
$
|
710
|
|
$
|
439
|
The estimated losses to be
absorbed under the credit recourse arrangements were recorded as a liability
when the credit recourse was assumed, and are updated on a quarterly basis. The
expected loss, which represents the amount expected to be lost on a given loan,
considers the probability of default and loss severity. The probability of
default represents the probability that a loan in good standing would become
120 days delinquent, in which case Oriental is obligated to repurchase the loan.
If a borrower defaults, pursuant to the credit recourse
provided, Oriental is required to repurchase the loan or reimburse the third
party investor for the incurred loss. The maximum potential amount of future
payments that Oriental would be required to make under the recourse
arrangements is equivalent to the total outstanding balance of the residential
mortgage loans serviced with recourse and interest, if applicable. During 2017,
Oriental repurchased approximately $107 thousand of unpaid
principal balance in mortgage loans subject to credit recourse provisions.
During 2016, Oriental repurchased approximately $515 thousand of unpaid
principal balance in mortgage loans subject to the credit recourse provisions.
If a borrower defaults, Oriental has rights to the underlying collateral
securing the mortgage loan. Oriental suffers losses on these mortgage loans
when the proceeds from a foreclosure sale of the collateral property are less
than the outstanding principal balance of the loan, any uncollected interest
advanced, and the costs of holding and disposing the related property. At
December 31, 2017, Oriental’s liability for estimated credit losses related to
loans sold with credit recourse amounted to $358 thousand (December 31,
2016– $710 thousand).
When Oriental sells or securitizes mortgage loans, it
generally makes customary representations and warranties regarding the
characteristics of the loans sold. Oriental's mortgage operations division
groups conforming mortgage loans into pools which are exchanged for FNMA and
GNMA mortgage-backed securities, which are generally sold to private investors,
or are sold directly to FNMA or other private investors for cash. As required
under such mortgage backed securities programs, quality review procedures are
performed by Oriental to ensure that asset guideline qualifications are met. To
the extent the loans do not meet specified characteristics, Oriental may be
required to repurchase such loans or indemnify for losses and bear any
subsequent loss related to the loans. During the year ended December 31, 2017, Oriental
repurchased $3.1 million (December 31,
2016 – $3.7 million) of unpaid principal balance in mortgage loans,
excluding mortgage loans subject to credit recourse provision referred above.
During 2017, 2016 and 2015, Oriental recognized $260 thousand, $380 thousand and $1.4 million, respectively, in
losses from the repurchase of residential mortgage loans sold subject to credit
recourse. During 2017, 2016 and 2015, Oriental
recognized $477 thousand, $1.3 million and $2.5 million, respectively, in
losses from the repurchase of residential mortgage loans as a result of
breaches of the customary representations and warranties.
Servicing agreements relating to the mortgage-backed
securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to
certain other investors, including the FHLMC, require Oriental to advance funds
to make scheduled payments of principal, interest, taxes and insurance, if such
payments have not been received from the borrowers. At December 31, 2017,
Oriental serviced
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
$864.9 million in mortgage loans
for third-parties. Oriental generally recovers funds advanced pursuant to these
arrangements from the mortgage owner, from liquidation proceeds when the
mortgage loan is foreclosed or, in the case of FHA/VA loans, under the
applicable FHA and VA insurance and guarantees programs. However, in the
meantime, Oriental must absorb the cost of the funds it advances during the
time the advance is outstanding. Oriental must also bear the costs of
attempting to collect on delinquent and defaulted mortgage loans. In addition,
if a defaulted loan is not cured, the mortgage loan would be canceled as part
of the foreclosure proceedings and Oriental would not receive any future
servicing income with respect to that loan. At December 31, 2017, the outstanding balance of funds advanced by Oriental
under such mortgage loan servicing agreements was approximately $440 thousand (December
31, 2016 - $334 thousand). To the extent
the mortgage loans underlying Oriental's servicing portfolio experience
increased delinquencies, Oriental would be required to dedicate additional cash
resources to comply with its obligation to advance funds as well as incur
additional administrative costs related to increases in collection efforts.
NOTE 26—
COMMITMENTS AND CONTINGENCIES
Loan Commitments
In the normal course of
business, Oriental 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 consolidated statements of financial
condition. The contract or notional amount of those instruments reflects the extent
of Oriental’s involvement in particular types of financial instruments.
Oriental’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 amounts 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. Oriental uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Credit-related
financial instruments at
December 31, 2017 and 2016 were as follows:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Commitments to extend credit
|
$
|
485,019
|
|
$
|
492,885
|
|
Commercial letters of credit
|
|
494
|
|
|
2,721
|
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. Oriental
evaluates each customer’s creditworthiness on a case-by-case basis. The amount
of collateral obtained, if it is deemed necessary by Oriental upon the
extension of credit, is based on management’s credit evaluation of the
counterparty.
At December 31, 2017 and 2016, 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 $567 thousand and $667 thousand at December 31, 2017 and 2016, respectively.
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.
OFG BANCORP
NOTES TO
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
December 31, 2017 and 2016, is as follows:
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Standby letters of credit and financial guarantees
|
$
|
21,107
|
|
$
|
4,041
|
|
Loans sold with recourse
|
|
6,420
|
|
|
20,126
|
Standby letters of credit and financial guarantees are
written conditional commitments issued by Oriental 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 Oriental
upon extension of credit, is based on management’s credit evaluation of the
customer.
Lease Commitments
Oriental has entered into various operating lease agreements for
branch facilities and administrative offices. Rent expense for the years ended
December 31, 2017, 2016 and 2015, amounted to $9.9 million, $8.5 million, and $9.2 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 December 31, 2017, exclusive of taxes, insurance, and
maintenance expenses payable by Oriental, are summarized as follows:
|
|
Minimum Rent
|
|
Year Ending December 31,
|
(In thousands)
|
|
2018
|
$
|
7,251
|
|
2019
|
|
6,345
|
|
2020
|
|
5,679
|
|
2021
|
|
4,796
|
|
2022
|
|
3,379
|
|
Thereafter
|
|
6,869
|
|
|
$
|
34,319
|
|
|
|
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contingencies
Oriental and its subsidiaries are
defendants in a number of legal proceedings incidental to their business. In
the ordinary course of business, Oriental and its subsidiaries are also subject
to governmental and regulatory examinations. Certain subsidiaries of Oriental,
including the Bank (and its subsidiary OIB), Oriental Financial Services, and
Oriental Insurance, are subject to regulation by various U.S., Puerto Rico and
other regulators.
Oriental seeks to resolve all litigation
and regulatory matters in the manner management believes is in the best
interests of Oriental 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 Oriental’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 consolidated statements of
financial condition of Oriental. 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 Oriental’s
consolidated results of operations or cash flows in particular quarterly or
annual periods. Oriental has evaluated all litigation and regulatory matters
where the likelihood of a potential loss is deemed reasonably possible. Oriental
has determined that the estimate of the reasonably possible loss is not
significant.
NOTE
27 - FAIR VALUE OF
FINANCIAL INSTRUMENTS
Oriental follows the fair value measurement framework under U.S. Generally
Accepted Accounting Principles (“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 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.
Money market investments
The fair value of money market investments is based on the
carrying amounts reflected in the 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 Interactive Data
Corporation ("IDC"), and independent, well-recognized pricing
company. Such securities are classified as Level 1 or Level 2 depending on the
basis for determining fair value. 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, and
such securities are classified as Level 3. At December 31, 2017 and 2016, Oriental
did not have investment securities classified as Level 3.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Securities purchased under agreements to
resell
The fair value of securities purchased under agreements to resell
is based on the carrying amounts reflected in the consolidated statements of
financial condition as these are reasonable estimates of fair value given the
short-term nature of instruments.
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 Oriental. 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.
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.
Impaired Loans
Impaired loans are carried at the present value of expected future
cash flows using the loan’s existing rate in a discounted cash flow
calculation, or the fair value of the collateral if the loan is
collateral-dependent. Expected cash flows are based on internal inputs
reflecting expected default rates on contractual cash flows. This method of
estimating fair value does not incorporate the exit-price concept of fair value
described in ASC 820-10 and would generally result in a higher value than the
exit-price approach. For loans measured using the estimated fair value of
collateral less costs to sell, fair value is generally determined 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 less
disposition costs. 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.
Other repossessed assets
Other repossessed assets include repossessed automobiles. The fair
value of the repossessed automobiles may be determined using internal valuation
and an external appraisal. These repossessed assets are classified as Level 3
given certain internal adjustments that may be made to external appraisals.
Assets and liabilities measured at fair value on a recurring and
non-recurring basis are summarized below:
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
December 31, 2017
|
|
|
Fair Value Measurements
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In thousands)
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
$
|
-
|
|
$
|
645,797
|
|
$
|
-
|
|
$
|
645,797
|
|
Trading securities
|
|
-
|
|
|
191
|
|
|
-
|
|
|
191
|
|
Money market investments
|
|
7,021
|
|
|
-
|
|
|
-
|
|
|
7,021
|
|
Derivative assets
|
|
-
|
|
|
771
|
|
|
-
|
|
|
771
|
|
Servicing assets
|
|
-
|
|
|
-
|
|
|
9,821
|
|
|
9,821
|
|
Derivative liabilities
|
|
-
|
|
|
(1,281)
|
|
|
-
|
|
|
(1,281)
|
|
|
$
|
7,021
|
|
$
|
645,478
|
|
$
|
9,821
|
|
$
|
662,320
|
|
Non-recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired commercial loans
|
$
|
-
|
|
$
|
-
|
|
$
|
72,285
|
|
$
|
72,285
|
|
Foreclosed real estate
|
|
-
|
|
|
-
|
|
|
44,174
|
|
|
44,174
|
|
Other repossessed assets
|
|
-
|
|
|
-
|
|
|
3,548
|
|
|
3,548
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
120,007
|
|
$
|
120,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Fair Value Measurements
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In thousands)
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
$
|
-
|
|
$
|
751,484
|
|
$
|
-
|
|
$
|
751,484
|
|
Trading securities
|
|
-
|
|
|
347
|
|
|
-
|
|
|
347
|
|
Money market investments
|
|
5,606
|
|
|
-
|
|
|
-
|
|
|
5,606
|
|
Derivative assets
|
|
-
|
|
|
1,330
|
|
|
-
|
|
|
1,330
|
|
Servicing assets
|
|
-
|
|
|
-
|
|
|
9,858
|
|
|
9,858
|
|
Derivative liabilities
|
|
-
|
|
|
(2,437)
|
|
|
-
|
|
|
(2,437)
|
|
|
$
|
5,606
|
|
$
|
750,724
|
|
$
|
9,858
|
|
$
|
766,188
|
|
Non-recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired commercial loans
|
$
|
-
|
|
$
|
-
|
|
$
|
54,289
|
|
$
|
54,289
|
|
Foreclosed real estate
|
|
-
|
|
|
-
|
|
|
47,520
|
|
|
47,520
|
|
Other repossessed assets
|
|
-
|
|
|
-
|
|
|
3,224
|
|
|
3,224
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
105,033
|
|
$
|
105,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFG BANCORP
NOTES TO
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 years ended December 31, 2017,
2016, and 2015:
|
|
Year Ended December 31,
2017
|
|
|
Servicing
|
|
Level 3 Instruments Only
|
assets
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
$
|
9,858
|
|
New instruments acquired
|
|
1,658
|
|
Principal repayments
|
|
(590)
|
|
Changes in fair value of servicing assets
|
|
(1,105)
|
|
Balance at end of period
|
$
|
9,821
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
Year Ended December 31,
2016
|
|
|
Derivative
|
|
|
|
|
Derivative
|
|
|
|
|
|
asset
|
|
|
|
|
liability
|
|
|
|
|
|
(S&P
|
|
|
|
|
(S&P
|
|
|
|
|
|
Purchased
|
|
|
Servicing
|
|
Embedded
|
|
|
|
|
Level 3 Instruments Only
|
Options)
|
|
|
assets
|
|
Options)
|
|
Total
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
$
|
1,171
|
|
$
|
7,455
|
|
$
|
(1,095)
|
|
$
|
7,531
|
|
Gains (losses) included in earnings
|
|
(1,171)
|
|
|
-
|
|
|
1,067
|
|
|
(104)
|
|
New instruments acquired
|
|
-
|
|
|
2,616
|
|
|
-
|
|
|
2,616
|
|
Principal repayments
|
|
-
|
|
|
(489)
|
|
|
-
|
|
|
(489)
|
|
Amortization
|
|
-
|
|
|
-
|
|
|
28
|
|
|
28
|
|
Changes in fair value of servicing assets
|
|
-
|
|
|
276
|
|
|
-
|
|
|
276
|
|
Balance at end of period
|
$
|
-
|
|
$
|
9,858
|
|
$
|
-
|
|
$
|
9,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YearEnded December 31,
2015
|
|
|
Derivative
|
|
|
|
|
Derivative
|
|
|
|
asset
|
|
|
|
|
liability
|
|
|
|
(S&P
|
|
|
|
|
(S&P
|
|
|
|
Purchased
|
|
|
Servicing
|
|
|
Embedded
|
|
|
Level 3 Instruments Only
|
Options)
|
|
|
assets
|
|
|
Options)
|
|
Total
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
$
|
5,555
|
|
$
|
13,992
|
|
$
|
(5,477)
|
|
$
|
14,070
|
|
Gains (losses) included in earnings
|
|
(4,384)
|
|
|
-
|
|
|
4,197
|
|
|
(187)
|
|
Sale of mortgage servicing rights
|
|
-
|
|
|
(5,927)
|
|
|
-
|
|
|
(5,927)
|
|
New instruments acquired
|
|
-
|
|
|
2,620
|
|
|
-
|
|
|
2,620
|
|
Principal repayments
|
|
-
|
|
|
(1,017)
|
|
|
-
|
|
|
(1,017)
|
|
Amortization
|
|
-
|
|
|
-
|
|
|
185
|
|
|
185
|
|
Changes in fair value related to price of MSR
held-for-sale
|
|
-
|
|
|
(2,939)
|
|
|
-
|
|
|
(2,939)
|
|
Changes in fair value of servicing assets
|
|
-
|
|
|
726
|
|
|
-
|
|
|
726
|
|
Balance at end of period
|
$
|
1,171
|
|
$
|
7,455
|
|
$
|
(1,095)
|
|
$
|
7,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During December 31, 2017, 2016, and 2015, 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 periods.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below presents quantitative
information for all assets and liabilities measured at fair value on a
recurring and non-recurring basis using significant unobservable inputs (Level
3) at December 31, 2017:
|
|
|
December 31, 2017
|
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing assets
|
|
$
|
9,821
|
|
Cash flow valuation
|
|
Constant prepayment rate
|
|
3.94% -8.49%
|
|
|
|
|
|
|
|
|
Discount rate
|
|
10.00% - 12.00%
|
|
Collateral dependant
impaired loans
|
|
$
|
36,734
|
|
Fair value of property
or collateral
|
|
Appraised value less disposition costs
|
|
20.20% - 36.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-collateral dependant impaired loans
|
|
$
|
35,551
|
|
Cash flow valuation
|
|
Discount rate
|
|
4.15% - 10.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
$
|
44,174
|
|
Fair value of property
or collateral
|
|
Appraised value less disposition costs
|
|
20.20% - 36.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other repossessed assets
|
|
$
|
3,548
|
|
Fair value of property
or collateral
|
|
Estimated net realizable value less disposition costs
|
|
29.00% - 71.00%
|
Information about Sensitivity to Changes in Significant
Unobservable Inputs
Servicing assets –
The significant unobservable inputs used in the fair value measurement of Oriental’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 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.
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 Oriental.
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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair value and carrying
value of Oriental’s financial instruments at December 31, 2017 and December 31,
2016 is as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
|
(In thousands)
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
485,203
|
|
$
|
485,203
|
|
$
|
510,439
|
|
$
|
510,439
|
|
Restricted cash
|
$
|
3,030
|
|
$
|
3,030
|
|
$
|
3,030
|
|
$
|
3,030
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
191
|
|
$
|
191
|
|
$
|
347
|
|
$
|
347
|
|
Investment securities available-for-sale
|
$
|
645,797
|
|
$
|
645,797
|
|
$
|
751,484
|
|
$
|
751,484
|
|
Investment securities held-to-maturity
|
$
|
497,681
|
|
$
|
506,064
|
|
$
|
592,763
|
|
$
|
599,884
|
|
Federal Home Loan Bank (FHLB) stock
|
$
|
13,995
|
|
$
|
13,995
|
|
$
|
10,793
|
|
$
|
10,793
|
|
Other investments
|
$
|
3
|
|
$
|
3
|
|
$
|
3
|
|
$
|
3
|
|
Derivative assets
|
$
|
771
|
|
$
|
771
|
|
$
|
1,330
|
|
$
|
1,330
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
1,281
|
|
$
|
1,281
|
|
$
|
2,437
|
|
$
|
2,437
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (including loans held-for-sale)
|
$
|
3,842,907
|
|
$
|
4,056,329
|
|
$
|
3,917,340
|
|
$
|
4,147,692
|
|
FDIC indemnification asset
|
$
|
-
|
|
$
|
-
|
|
$
|
8,669
|
|
$
|
14,411
|
|
Accrued interest receivable
|
$
|
49,969
|
|
$
|
49,969
|
|
$
|
20,227
|
|
$
|
20,227
|
|
Servicing assets
|
$
|
9,821
|
|
$
|
9,821
|
|
$
|
9,858
|
|
$
|
9,858
|
|
Accounts receivable and other assets
|
$
|
41,898
|
|
$
|
41,898
|
|
$
|
47,120
|
|
$
|
47,120
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
4,782,197
|
|
$
|
4,799,482
|
|
$
|
4,644,629
|
|
$
|
4,664,487
|
|
Securities sold under agreements to repurchase
|
$
|
191,104
|
|
$
|
192,869
|
|
$
|
651,898
|
|
$
|
653,756
|
|
Advances from FHLB
|
$
|
99,509
|
|
$
|
99,643
|
|
$
|
106,422
|
|
$
|
105,454
|
|
Other borrowings
|
$
|
153
|
|
$
|
153
|
|
$
|
61
|
|
$
|
61
|
|
Subordinated capital notes
|
$
|
33,080
|
|
$
|
36,083
|
|
$
|
30,230
|
|
$
|
36,083
|
|
Accrued expenses and other liabilities
|
$
|
86,791
|
|
$
|
86,791
|
|
$
|
95,370
|
|
$
|
95,370
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following methods and
assumptions were used to estimate the fair values of significant financial
instruments at December 31, 2017 and 2016:
• Cash and cash equivalents
(including money market investments and time deposits with other banks),
restricted cash, accrued interest receivable, accounts receivable and other
assets and accrued expenses and other liabilities have been valued at the carrying
amounts reflected in the consolidated statements of financial condition as
these are reasonable estimates of fair value given the short-term nature of the
instruments.
• Investments in FHLB-NY
stock are valued at their redemption value.
• The fair value of
investment securities, including trading securities and other investments, is
based on quoted market prices, when available or prices provided from
contracted pricing providers, 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 fair value of the FDIC
indemnification asset represented the present value of the net estimated cash
payments 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 and the loss sharing percentages. The FDIC shared-loss agreements were
terminated on February 6, 2017. Such termination takes into account the
anticipated reimbursements over the life of the shared-loss agreements and the
true-up payment liability of the Bank anticipated at the end of the ten year
term of the single family shared-loss agreement. Therefore, at December 31,
2017, Oriental had no FDIC indemnification asset.
• The fair value of servicing asset 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.
• 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 loan portfolio (including loans
held-for-sale) is estimated by segregating by type, such as mortgage,
commercial, consumer, auto 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. Non-performing loans have been
valued at the carrying amounts.
• 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.
• The fair value of long-term borrowings, which include
securities sold under agreements to repurchase, advances from FHLB, 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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 28 – BUSINESS SEGMENTS
Oriental segregates its businesses into the following major
reportable segments of business: Banking, Wealth Management, 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 Oriental’s organization, nature of its products, distribution
channels and economic characteristics of the products were also considered in
the determination of the reportable segments. Oriental 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. Oriental’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.
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 Oriental’s own portfolio.
As part of its mortgage banking activities, Oriental may sell loans directly
into the secondary market or securitize conforming loans into mortgage-backed
securities.
Wealth Management is comprised of the Bank’s trust division,
Oriental Financial Services, Oriental Insurance, and OPC. 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 retirement plan administration
services.
The Treasury segment encompasses all of Oriental’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.
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Following are the results of operations
and the selected financial information by operating segment for the years ended
December 31, 2017, 2016, and
2015:
|
|
Year Ended December 31,
2017
|
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
|
(In thousands)
|
|
Interest income
|
$
|
311,503
|
|
$
|
53
|
|
$
|
34,091
|
|
$
|
345,647
|
|
$
|
-
|
|
$
|
345,647
|
|
Interest expense
|
|
(26,308)
|
|
|
-
|
|
|
(15,167)
|
|
|
(41,475)
|
|
|
-
|
|
|
(41,475)
|
|
Net interest income
|
|
285,195
|
|
|
53
|
|
|
18,924
|
|
|
304,172
|
|
|
-
|
|
|
304,172
|
|
Provision for loan and lease losses, net
|
|
(113,108)
|
|
|
-
|
|
|
(31)
|
|
|
(113,139)
|
|
|
-
|
|
|
(113,139)
|
|
Non-interest income, net
|
|
45,102
|
|
|
26,069
|
|
|
7,516
|
|
|
78,687
|
|
|
-
|
|
|
78,687
|
|
Non-interest expenses
|
|
(178,540)
|
|
|
(17,830)
|
|
|
(5,261)
|
|
|
(201,631)
|
|
|
-
|
|
|
(201,631)
|
|
Intersegment revenue
|
|
1,604
|
|
|
-
|
|
|
748
|
|
|
2,352
|
|
|
(2,352)
|
|
|
-
|
|
Intersegment expenses
|
|
(748)
|
|
|
(1,137)
|
|
|
(467)
|
|
|
(2,352)
|
|
|
2,352
|
|
|
-
|
|
Income before income taxes
|
$
|
39,505
|
|
$
|
7,155
|
|
$
|
21,429
|
|
$
|
68,089
|
|
$
|
-
|
|
$
|
68,089
|
|
Income tax expense (benefit)
|
|
15,407
|
|
|
2,790
|
|
|
(2,754)
|
|
|
15,443
|
|
|
-
|
|
|
15,443
|
|
Net income
|
$
|
24,098
|
|
$
|
4,365
|
|
$
|
24,183
|
|
$
|
52,646
|
|
$
|
-
|
|
$
|
52,646
|
|
Total assets
|
$
|
5,597,077
|
|
$
|
25,980
|
|
$
|
1,536,417
|
|
$
|
7,159,474
|
|
$
|
(970,421)
|
|
$
|
6,189,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2016
|
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
|
(In thousands)
|
|
Interest income
|
$
|
321,868
|
|
$
|
65
|
|
$
|
34,659
|
|
$
|
356,592
|
|
$
|
-
|
|
$
|
356,592
|
|
Interest expense
|
|
(27,838)
|
|
|
-
|
|
|
(29,327)
|
|
|
(57,165)
|
|
|
-
|
|
|
(57,165)
|
|
Net interest income
|
|
294,030
|
|
|
65
|
|
|
5,332
|
|
|
299,427
|
|
|
-
|
|
|
299,427
|
|
Provision for loan and lease losses, net
|
|
(65,076)
|
|
|
-
|
|
|
-
|
|
|
(65,076)
|
|
|
-
|
|
|
(65,076)
|
|
Non-interest income, net
|
|
35,587
|
|
|
26,788
|
|
|
4,444
|
|
|
66,819
|
|
|
-
|
|
|
66,819
|
|
Non-interest expenses
|
|
(193,156)
|
|
|
(17,443)
|
|
|
(5,391)
|
|
|
(215,990)
|
|
|
-
|
|
|
(215,990)
|
|
Intersegment revenue
|
|
1,521
|
|
|
-
|
|
|
883
|
|
|
2,404
|
|
|
(2,404)
|
|
|
-
|
|
Intersegment expenses
|
|
(883)
|
|
|
(1,108)
|
|
|
(413)
|
|
|
(2,404)
|
|
|
2,404
|
|
|
-
|
|
Income before income taxes
|
$
|
72,023
|
|
$
|
8,302
|
|
$
|
4,855
|
|
$
|
85,180
|
|
$
|
-
|
|
$
|
85,180
|
|
Income tax expenses (benefit)
|
|
28,089
|
|
|
3,238
|
|
|
(5,333)
|
|
|
25,994
|
|
|
-
|
|
|
25,994
|
|
Net income
|
$
|
43,934
|
|
$
|
5,064
|
|
$
|
10,188
|
|
$
|
59,186
|
|
$
|
-
|
|
$
|
59,186
|
|
Total assets
|
$
|
5,584,866
|
|
$
|
23,315
|
|
$
|
1,837,514
|
|
$
|
7,445,695
|
|
$
|
(943,871)
|
|
$
|
6,501,824
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
|
(In thousands)
|
|
Interest income
|
$
|
367,620
|
|
$
|
95
|
|
$
|
38,853
|
|
$
|
406,568
|
|
$
|
-
|
|
$
|
406,568
|
|
Interest
expense
|
|
(28,425)
|
|
|
-
|
|
|
(40,771)
|
|
|
(69,196)
|
|
|
-
|
|
|
(69,196)
|
|
Net interest income (loss)
|
|
339,195
|
|
|
95
|
|
|
(1,918)
|
|
|
337,372
|
|
|
-
|
|
|
337,372
|
|
Provision for
non-covered loan and lease losses
|
|
(161,501)
|
|
|
-
|
|
|
-
|
|
|
(161,501)
|
|
|
-
|
|
|
(161,501)
|
|
Non-interest
income
|
|
24,004
|
|
|
28,288
|
|
|
284
|
|
|
52,576
|
|
|
-
|
|
|
52,576
|
|
Non-interest
expenses
|
|
(219,519)
|
|
|
(22,564)
|
|
|
(6,422)
|
|
|
(248,505)
|
|
|
-
|
|
|
(248,505)
|
|
Intersegment
revenue
|
|
1,427
|
|
|
-
|
|
|
948
|
|
|
2,375
|
|
|
(2,375)
|
|
|
-
|
|
Intersegment
expenses
|
|
(948)
|
|
|
(1,027)
|
|
|
(400)
|
|
|
(2,375)
|
|
|
2,375
|
|
|
-
|
|
Loss) income
before income taxes
|
$
|
(17,342)
|
|
$
|
4,792
|
|
$
|
(7,508)
|
|
$
|
(20,058)
|
|
$
|
-
|
|
$
|
(20,058)
|
|
Income tax
(benefit) expense
|
|
(6,763)
|
|
|
1,869
|
|
|
(12,660)
|
|
|
(17,554)
|
|
|
-
|
|
|
(17,554)
|
|
Net (loss)
income
|
$
|
(10,579)
|
|
$
|
2,923
|
|
$
|
5,152
|
|
$
|
(2,504)
|
|
$
|
-
|
|
$
|
(2,504)
|
|
Total assets
|
$
|
5,867,874
|
|
$
|
22,349
|
|
$
|
2,126,921
|
|
$
|
8,017,144
|
|
$
|
(917,995)
|
|
$
|
7,099,149
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 29
– OFG BANCORP (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
As a bank holding company subject to the
regulations and supervisory guidance of the Federal Reserve Board, Oriental
generally should inform the Federal Reserve Board and eliminate, defer or
significantly reduce its dividends if: (i) its net income available to
shareholders for the past four quarters, net of dividends previously paid
during that period, is not sufficient to fully fund the dividends; (ii) its
prospective rate of earnings retention is not consistent with its capital needs
and overall current and prospective financial condition; or (iii) it will not
meet, or is in danger of not meeting, its minimum regulatory capital adequacy
ratios. The
payment of dividends by the Bank to Oriental may also be affected by other
regulatory requirements and policies, such as the maintenance of certain
regulatory capital levels. During 2017 and 2016, Oriental Insurance paid $4.0 million and $5.0 million, respectively, in
dividends to OFG Bancorp. During 2015, Oriental Insurance did not pay any
dividends to OFG Bancorp. Oriental Financial Services paid $1.0 million in dividends to OFG
Bancorp during 2016 but did not pay any dividends during 2017 and 2015.
The following condensed financial
information presents the financial position of the holding company only as of
December 31, 2017 and 2016, and the results of its operations and its cash
flows for the years ended December 31, 2017, 2016 and 2015:
OFG BANCORP
CONDENSED STATEMENTS OF FINANCIAL POSITION
INFORMATION
(Holding Company Only)
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
24,430
|
|
$
|
22,573
|
|
Investment in
bank subsidiary, equity method
|
|
|
941,198
|
|
|
920,085
|
|
Investment in
nonbank subsidiaries, equity method
|
|
|
20,231
|
|
|
18,427
|
|
Due from bank
subsidiary,net
|
|
|
22
|
|
|
92
|
|
Deferred tax
asset, net
|
|
|
2,230
|
|
|
2,643
|
|
Other assets
|
|
|
1,616
|
|
|
2,085
|
|
Total
assets
|
|
$
|
989,727
|
|
$
|
965,905
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Dividend
payable
|
|
|
6,504
|
|
|
6,501
|
|
Due to
affiliates
|
|
|
-
|
|
|
237
|
|
Accrued
expenses and other liabilities
|
|
|
2,033
|
|
|
2,673
|
|
Subordinated
capital notes
|
|
|
36,083
|
|
|
36,083
|
|
Total liabilities
|
|
|
44,620
|
|
|
45,494
|
|
Stockholders’ equity
|
|
|
945,107
|
|
|
920,411
|
|
Total liabilities and stockholders’ equity
|
|
$
|
989,727
|
|
$
|
965,905
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG
BANCORP
CONDENSED STATEMENTS OF OPERATIONS
INFORMATION
(Holding Company Only)
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
2015
|
|
|
(In thousands)
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
188
|
|
$
|
174
|
|
$
|
321
|
|
Gain on sale
of securities
|
|
-
|
|
|
211
|
|
|
-
|
|
Investment
trading activities, net and other
|
|
4,511
|
|
|
4,066
|
|
|
4,007
|
|
Total income
|
|
4,699
|
|
|
4,451
|
|
|
4,328
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
1,556
|
|
|
1,370
|
|
|
1,222
|
|
Operating
expenses
|
|
6,700
|
|
|
7,179
|
|
|
6,866
|
|
Total expenses
|
|
8,256
|
|
|
8,549
|
|
|
8,088
|
|
(Loss)
before income taxes
|
|
(3,557)
|
|
|
(4,098)
|
|
|
(3,760)
|
|
Income tax
expense (benefit)
|
|
403
|
|
|
518
|
|
|
(3,088)
|
|
(Loss)
before changes in undistributed earnings of subsidiaries
|
|
(3,960)
|
|
|
(4,616)
|
|
|
(672)
|
|
Equity in
undistributed earnings from:
|
|
|
|
|
|
|
|
|
|
Bank
subsidiary
|
|
51,612
|
|
|
58,580
|
|
|
(3,804)
|
|
Nonbank
subsidiaries
|
|
4,994
|
|
|
5,222
|
|
|
1,972
|
|
Net income
(loss)
|
$
|
52,646
|
|
$
|
59,186
|
|
$
|
(2,504)
|
OFG BANCORP
CONDENSED STATEMENTS OF COMPREHENSIVE
INCOME INFORMATION
(Holding Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Net income
(loss)
|
$
|
52,646
|
|
$
|
59,186
|
|
$
|
(2,504)
|
|
Other
comprehensive (loss) before tax:
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities available-for-sale
|
|
-
|
|
|
(204)
|
|
|
(170)
|
|
Other
comprehensive income from bank subsidiary
|
|
(4,545)
|
|
|
(12,238)
|
|
|
(5,578)
|
|
Other
comprehensive (loss) before taxes
|
|
(4,545)
|
|
|
(12,442)
|
|
|
(5,748)
|
|
Income tax
effect
|
|
-
|
|
|
41
|
|
|
34
|
|
Other
comprehensive (loss) income after taxes
|
|
(4,545)
|
|
|
(12,401)
|
|
|
(5,714)
|
|
Comprehensive
income (loss)
|
$
|
48,101
|
|
$
|
46,785
|
|
$
|
(8,218)
|
OFG BANCORP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG
BANCORP
CONDENSED STATEMENTS OF CASH FLOWS
INFORMATION
(Holding Company Only)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
|
52,646
|
|
$
|
59,186
|
|
$
|
(2,504)
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed earnings from banking subsidiary
|
|
(51,612)
|
|
|
(58,580)
|
|
|
3,804
|
|
Equity
in undistributed earnings from nonbanking subsidiaries
|
|
(4,994)
|
|
|
(5,222)
|
|
|
(1,972)
|
|
Amortization of investment securities premiums, net of accretion of discounts
|
|
-
|
|
|
12
|
|
|
44
|
|
Realized gain on sale of securities
|
|
-
|
|
|
211
|
|
|
-
|
|
Stock-based compensation
|
|
1,109
|
|
|
1,270
|
|
|
1,637
|
|
Employee benefit adjustment
|
|
(99)
|
|
|
-
|
|
|
-
|
|
Deferred income tax, net
|
|
414
|
|
|
444
|
|
|
(3,088)
|
|
Net
decrease in other assets
|
|
(205)
|
|
|
42
|
|
|
148
|
|
Net
(decrease) in accrued expenses, other liabilities, and dividend payable
|
|
(1,185)
|
|
|
800
|
|
|
(221)
|
|
Dividends from banking subsidiary
|
|
26,743
|
|
|
17,600
|
|
|
45,000
|
|
Dividends from non-banking subsidiary
|
|
4,002
|
|
|
6,000
|
|
|
-
|
|
Net cash provided by operating activities
|
|
26,819
|
|
|
21,763
|
|
|
42,848
|
|
Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
Maturities and redemptions of investment securities available-for-sale
|
|
-
|
|
|
702
|
|
|
2,013
|
|
Proceeds from sales of investment securities available-for-sale
|
|
-
|
|
|
4,888
|
|
|
-
|
|
Net
decrease (increase) in due from bank subsidiary, net
|
|
307
|
|
|
317
|
|
|
317
|
|
Proceeds from sales of premises and equipment
|
|
-
|
|
|
324
|
|
|
-
|
|
Capital
contribution to banking subsidiary
|
|
(788)
|
|
|
(894)
|
|
|
(1,167)
|
|
Capital
contribution to non-banking subsidiary
|
|
(50)
|
|
|
(68)
|
|
|
(94)
|
|
Additions to premises and equipment
|
|
(19)
|
|
|
(381)
|
|
|
(132)
|
|
Net cash (used in) provided by investing activities
|
|
(550)
|
|
|
4,888
|
|
|
937
|
|
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments to) exercise of stock options and lapsed restricted
units, net
|
|
-
|
|
|
(315)
|
|
|
204
|
|
Purchase of treasury stock
|
|
-
|
|
|
-
|
|
|
(8,950)
|
|
Dividends paid
|
|
(24,412)
|
|
|
(24,003)
|
|
|
(31,623)
|
|
Net cash used in financing activities
|
|
(24,412)
|
|
|
(24,318)
|
|
|
(40,369)
|
|
Net change
in cash and cash equivalents
|
|
1,857
|
|
|
2,333
|
|
|
3,416
|
|
Cash and cash
equivalents at beginning of year
|
|
22,573
|
|
|
20,240
|
|
|
16,824
|
|
Cash and
cash equivalents at end of year
|
$
|
24,430
|
|
$
|
22,573
|
|
$
|
20,240
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Oriental’s management is responsible for establishing and
maintaining effective disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As
of December 31, 2017, an evaluation was carried out under the supervision and
with the participation of Oriental’s management, including the Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness
of the design and operation of Oriental’s disclosure controls and procedures.
Based upon such evaluation, the CEO and CFO have concluded that, as of the end
of the period covered by this annual report on Form 10-K, Oriental’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 Oriental in the reports that it files
or submits under the Securities Exchange Act of 1934. 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 Oriental to disclose material information otherwise required to
be set forth in Oriental’s periodic reports.
Management’s Annual
Report on Internal Control over Financial Reporting
The Management’s Annual Report on Internal Control over
Financial Reporting is included in Item 8 of this report.
Report of the
Registered Public Accounting Firm
The registered public accounting firm’s report on Oriental’s
internal control over financial reporting is included in Item 8 of this
report.
Changes in Internal
Control over Financial Reporting
There have not been any
changes in Oriental’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 last quarter of the year ended December 31, 2017, that has
materially affected, or is reasonably likely to materially affect, Oriental’s
internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART III
Items 10 through 14 are incorporated herein by reference to Oriental’s
definitive proxy statement to be filed with the SEC no later than 120 days
after the end of the fiscal year covered by this report, except with respect to
the information set forth below under Item 12.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Oriental’s 2007 Omnibus
Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides
for equity-based compensation incentives through the grant of stock options,
stock appreciation rights, restricted stock, restricted units and dividend
equivalents, as well as equity-based performance awards. The Omnibus Plan was
adopted in 2007, amended and restated in 2008, and further amended in 2010. It
replaced and superseded Oriental’s 1996, 1998 and 2000 Incentive Stock Option
Plans (the “Stock Option Plans”). All outstanding stock options under the Stock
Option Plans continue in full force and effect, subject to their original terms
and conditions.
The following table shows
certain information pertaining to the awards under the Omnibus Plan and the
Stock Option Plans as of December 31, 2017:
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
Number of Securities
|
|
|
Number of Securities to be
|
|
Weighted-Average
|
|
Remaining Available for
|
|
|
Issued Upon Exercise of
|
|
Exercise Price of
|
|
Future Issuance Under Equity
|
|
|
Outstanding Options,
|
|
Outstanding Options,
|
|
Compensation Plans (excluding
|
|
|
Warrants and Rights
|
|
Warrants and Rights
|
|
those reflected in column (a))
|
|
|
|
|
|
|
|
|
|
|
|
Plan
Category
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by shareholders:
|
|
|
|
|
|
|
|
|
|
Omnibus
Plan
|
|
951,419
|
(1)
|
$
|
12.57
|
(2)
|
$
|
940,519
|
|
|
|
951,419
|
|
$
|
12.57
|
|
|
940,519
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
845,619 stock options and 105,800 restricted stock units.
|
|
(2) Exercise
price related to stock options.
|
Oriental recorded $1.109 million, $1.270 million and $1.637
million related to stock-based compensation expense during the years ended
December 31, 2017, 2016 and 2015, respectively.
Other information required by this Item is incorporated
herein by reference to Oriental’s definitive proxy statement to be filed with
the SEC no later than 120 days after the end of the fiscal year covered by this
report.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements are filed as part
of this report under Item 8 — Financial Statements and Supplementary
Data.
|
Management’s
Report on Internal Control Over Financial Reporting
|
|
|
Financial Statements:
|
|
|
Reports of Independent Registered Public Accounting
Firm
|
|
|
Report of Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting
|
|
|
Consolidated Statements of Financial Condition as of
December 31, 2017 and 2016
|
|
|
Consolidated Statements of Operations for the years
ended December 31, 2017, 2016 and 2015
|
|
|
Consolidated Statements of Comprehensive Income
(Loss) for the years ended December 31, 2017, 2016 and 2015
|
|
|
Consolidated Statements of Changes in Stockholders’
Equity for the years ended December 31, 2017, 2016 and 2015
|
|
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2017, 2016 and 2015
|
|
|
Notes to the Consolidated Financial Statements
|
|
Financial Statement Schedules
No schedules are presented because the
information is not applicable or is included in the accompanying consolidated
financial statements or in the notes thereto described above.
Exhibits
|
|
|
|
Exhibit No.:
|
Description
Of Document:
|
|
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2.1
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Purchase and Assumption Agreement — Whole Bank,
All Deposits, dated as of April 30, 2010, among the Federal Deposit
Insurance Corporation, Receiver of Eurobank, San Juan, Puerto Rico, the
Federal Deposit Insurance Corporation, and Oriental Bank and Trust.(1)
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2.2
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Acquisition Agreement dated as of June 28, 2012
between Oriental and BBVA relating to the purchase and sale of 100% of the
Common Stock of BBVAPR Holding and BBVA Securities.(2)
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3.1
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Composite Certificate of Incorporation. (3)
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3.2
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By-Laws.(4)
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4.1
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Certificate of Designation of the 7.125%
Noncumulative Monthly Income Preferred Stock, Series A.(5)
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4.2
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Certificate of Designation of the 7.0% Noncumulative
Monthly Income Preferred Stock, Series B.(6)
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4.3
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Certificate of Designations of 8.750% Non-Cumulative
Convertible Perpetual Preferred Stock, Series C.(7)
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4.4
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Certificate of Designations of 7.125% Non-Cumulative
Perpetual Preferred Stock, Series D.(8)
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4.5
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Form of Certificate for the 7.125% Noncumulative
Monthly Income Preferred Stock, Series A.(9)
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4.6
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Form of Certificate for the 7.0% Noncumulative
Monthly Income Preferred Stock, Series B.(10)
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4.7
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Form of Certificate for the 8.750% Non-Cumulative
Convertible Perpetual Preferred Stock, Series C. (7)
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4.8
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Form of Certificate for the 7.125% Non-Cumulative
Perpetual Preferred Stock, Series D.(8)
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10.1
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Change in Control Compensation Agreement between Oriental
and José R. Fernández.(11)
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10.2
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Change in Control Compensation Agreement between Oriental
and Ganesh Kumar (12)
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10.3
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Technology Outsourcing Agreement between Oriental
and Metavante Corporation.(13)
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10.4
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OFG Bancorp
2007 Omnibus Performance Incentive Polan, as amended and restated.(14)
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10.5
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Form of qualified stock option award and agreement (15)
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10.6
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Form of restricted stock award and agreement (16)
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10.7
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Form of
restricted unit award and agreement (17)
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10.8
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Employment Agreement between Oriental and José R.
Fernández (18)
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10.9
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Amendment to Technology Outsourcing Agreement
between Oriental and Metavante Corporation
(19)
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10.10
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Termination Agreement, dated as of February 6, 2017,
among the Federal Deposit Insurance Corporation, Receiver of Eurobank, San
Juan, Puerto Rico, the Federal Deposit Insurance Corporation, and Oriental
Bank (20)
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12.1
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Computation of
Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends
(included in Item 6 hereof )
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21.1
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List
of subsidiaries
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23.1
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Consent
of KPMG LLP
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31.1
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Certification of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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(1)
Incorporated herein by reference to
Exhibit 2.1 of Oriental’s current report on Form 8-K filed with the
SEC on May 6, 2010.
(2)
Incorporated herein by reference to
Exhibit 2.1 of Oriental’s current report on Form 8-K filed with the
SEC on July 3, 2012.
(3) Incorporated herein by
reference to Exhibit 3.1 of Oriental’s annual report on Form 10-K
filed with the SEC on March 14, 2017.
(4) Incorporated herein by
reference to Exhibit 3.1 of Oriental’s quarterly report on Form 10-Q
filed with the SEC on August 8, 2015.
(5) Incorporated herein by
reference to Exhibit 4.1 of Oriental’s registration statement on
Form 8-A filed with the SEC on April 30, 1999.
(6) Incorporated herein by reference
to Exhibit 4.1 of Oriental’s registration statement on Form 8-A filed
with the SEC on September 26, 2003.
(7) Incorporated herein by reference
to Exhibit 3.1 of Oriental’s current report on Form 8-K filed with
the SEC on July 3, 2012.
(8) Incorporated herein by reference
to Exhibit 3.1 of Oriental’s current report on Form 8-K filed with
the SEC on November 8, 2012.
(9) Incorporated herein by reference
to Exhibit 4.2 of Oriental’s registration statement on Form S-3 filed with the
SEC on April 2, 1999.
(10) Incorporated herein by reference
to Exhibit 4.2 of Oriental’s registration statement on Form S-3, as amended,
filed with the SEC on September 23, 2003.
(11) Incorporated herein by reference
to Exhibit 10.12 of Oriental’s annual report on Form 10-K filed with
the SEC on September 13, 2005.
(12) Incorporated herein by reference
to Exhibit 10.14 of Oriental’s annual report on Form 10-K filed with
the SEC on September 13, 2005.
(13) Incorporated herein by reference
to Exhibit 10.23 of Oriental’s annual report on Form 10-K filed with
the SEC on March 28, 2007. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.
(14) Incorporated herein by reference
to Exhibit 4.1 of Oriental’s registration statement on Form S-8 filed
with the SEC on October 7, 2013.
(15) Incorporated herein by reference
to Exhibit 10.1 of Oriental’s registration statement on Form S-8 filed
with the SEC on November 30, 2007.
(16) Incorporated herein by reference
to Exhibit 10.2 of Oriental’s registration statement on Form S-8
filed with the SEC on November 30, 2007.
(17) Incorporated herein by reference
to Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed
with the SEC on May 8, 2016.
(18) Incorporated herein by reference
to Exhibit 10 of Oriental’s quarterly report on Form 10-Q filed with
the SEC on November 4, 2017.
(19) Incorporated herein by reference
to Exhibit 10.16 of Oriental’s annual report on Form 10-K filed with
the SEC on March 3, 2015. Portions of this exhibit have been
omitted pursuant to a request
for confidential treatment.
(20) Incorporated herein by reference
to Exhibit 10.1 of Oriental's current report on Form 8-K filed with the SEC on
February 7, 2017.
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
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By:
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/s/ José Rafael
Fernández
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Dated: March 12, 2018
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José Rafael Fernández
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President and Chief Executive Officer
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By:
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/s/ Maritza
Arizmendi Díaz
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Dated: March 12, 2018
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Maritza Arizmendi Díaz
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Executive Vice President and Chief
Financial Officer
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By:
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/s/ Vanessa De
Armas
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Dated: March 12, 2018
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Vanessa De Armas
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Controller
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Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the date
indicated.
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By:
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/s/ Julian Inclán
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Dated: March 12, 2018
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Julian Inclán
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Chairman of the Board
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By:
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/s/ José Rafael
Fernández
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Dated: March 12, 2018
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José Rafael Fernández
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Vice Chairman of the Board
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By:
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/s/ Juan Carlos
Aguayo
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Dated: March 12, 2018
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Juan Carlos Aguayo
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Director
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By:
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/s/ Jorge Colón
Gerena
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Dated: March 12, 2018
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Jorge Colón Gerena
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Director
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By:
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/s/ Pedro
Morazzani
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Dated: March 12, 2018
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Pedro Morazzani
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Director
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By:
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/s/ Rafael
Martínez-Margarida
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Dated: March 12, 2018
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Rafael Martínez-Margarida
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Director
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By:
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/s/ Néstor de
Jesús
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Dated: March 12, 2018
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Néstor de Jesús
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Director
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By:
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/s/ Radamés
Peña Pla
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Dated: March 12, 2018
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Radamés Peña Pla
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Director
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