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OFG BANCORP - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

     EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

or

 

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

       EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number 001-12647

 

OFG Bancorp

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

 

Principal Executive Offices:

254 Muñoz Rivera Avenue

San Juan, Puerto Rico 00918

Telephone Number: (787) 771-6800

 

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

 

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

 

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

 

Large Accelerated Filer               Accelerated Filer ý               Non-Accelerated Filer                 Smaller Reporting Company                                                                                                                                                                                          (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 Act 

 

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

 

 

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

 

 43,968,342 common shares ($1.00 par value per share) outstanding as of April 30, 2018

 


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

 

 

Unaudited Consolidated Statements of Financial Condition

1

 

Unaudited Consolidated Statements of Operations

3

 

Unaudited Consolidated Statements of Comprehensive Income

5

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

6

 

Unaudited Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Note 1 – Organization, Consolidation and Basis of Presentation

9

 

 

Note 2 – Significant Events

 10 

 

 

Note 3 – Restricted Cash

11

 

 

Note 4 – Investment Securities

12

 

 

Note 5 – Loans  

17

 

 

Note 6 – Allowance for Loan and Lease Losses

41

 

 

Note 7 – FDIC Indemnification Asset and True-Up Payment Obligation

49

 

 

Note 8 – Foreclosed Real Estate

48

 

 

Note 9 – Derivatives

50

 

 

Note 10 – Accrued Interest Receivable and Other Assets

51

 

 

Note 11 – Deposits and Related Interest

52

 

 

Note 12 – Borrowings and Related Interest

54

 

 

Note 13 – Offsetting of  Financial Assets and Liabilities

56

 

 

Note 14 – Income Taxes

58

 

 

Note 15 – Regulatory Capital Requirements

59

 

 

Note 16 – Stockholders’ Equity

60

 

 

Note 17 – Accumulated Other Comprehensive Income

61

 

 

Note 18 – Earnings per Common Share

63

 

 

Note 19 – Guarantees

64

 

 

Note 20 – Commitments and Contingencies

65

 

 

Note 21 – Banking and Financial Service Revenues

68

 

 

Note 22 – Fair Value of Financial Instruments

69

 

 

Note 23 – Business Segments

75

 

 

 

Item 2.

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

77

 

 

Critical Accounting Policies and  Estimates  

77

 

 

Overview of Financial Performance:

77

 

 

Selected Financial Data

78

 

 

Financial Highlights of the First Quarter of 2018

80

 

 

Analysis of Results of Operations  

81

 

 

Analysis of Financial Condition  

90

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

117

Item 4.

Controls and Procedures

121

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

122

Item 1A.

Risk Factors

122

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

122

Item 3.

Default upon Senior Securities

122

Item 4.

Mine Safety Disclosures

122

Item 5.

Other Information

122

Item 6.

Exhibits

123

Signatures

124

 


 

FORWARD-LOOKING STATEMENTS

 

The information included in this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the financial condition, results of operations, plans, objectives, future performance and business of OFG Bancorp (“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 or its municipalities;

·     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 quarterly report on Form 10-Q 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.

 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2018 AND DECEMBER 31, 2017

 

  

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

(In thousands)

ASSETS

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

    Cash and due from banks

 

$

354,930

 

$

478,182

    Money market investments

 

 

7,428

 

 

7,021

        Total cash and cash equivalents

 

 

362,358

 

 

485,203

Restricted cash

 

 

3,030

 

 

3,030

Investments:

 

 

 

 

 

 

    Trading securities, at fair value, with amortized cost of $647 (December 31, 2017 - $647)

 

 

293

 

 

191

    Investment securities available-for-sale, at fair value, with amortized cost of $815,970 (December 31, 2017 - $648,800)

 

 

801,641

 

 

645,797

    Investment securities held-to-maturity, at amortized cost, with fair value of $467,980 (December 31, 2017 - $497,681)

 

 

485,143

 

 

506,064

    Federal Home Loan Bank (FHLB) stock, at cost

 

 

11,499

 

 

13,995

    Other investments

 

 

3

 

 

3

        Total investments

 

 

1,298,579

 

 

1,166,050

Loans:

 

 

 

 

 

 

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

 

 

10,505

 

 

12,272

    Loans held for investment, net of allowance for loan and lease losses of $168,592 (December 31, 2017 - $167,509)

 

 

4,122,924

 

 

4,044,057

        Total loans

 

 

4,133,429

 

 

4,056,329

Other assets:

 

 

 

 

 

 

    Foreclosed real estate

 

 

40,314

 

 

44,174

    Accrued interest receivable

 

 

35,141

 

 

49,969

    Deferred tax asset, net

 

 

128,270

 

 

127,421

    Premises and equipment, net

 

 

67,163

 

 

67,860

    Customers' liability on acceptances

 

 

25,869

 

 

27,663

    Servicing assets

 

 

10,533

 

 

9,821

    Derivative assets

 

 

898

 

 

771

    Goodwill

 

 

86,069

 

 

86,069

    Other assets

 

 

55,468

 

 

64,693

                Total assets

 

$

6,247,121

 

$

6,189,053

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

1 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2018 AND DECEMBER 31, 2017 (CONTINUED)

 

  

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

(In thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

    Demand deposits

 

$

2,117,857

 

$

2,039,126

    Savings accounts

 

 

1,274,414

 

 

1,251,398

    Time deposits

 

 

1,441,157

 

 

1,508,958

        Total deposits

 

 

4,833,428

 

 

4,799,482

Borrowings:

 

 

 

 

 

 

    Securities sold under agreements to repurchase

 

 

273,926

 

 

192,869

    Advances from FHLB

 

 

43,934

 

 

99,643

    Subordinated capital notes

 

 

36,083

 

 

36,083

    Other borrowings

 

 

394

 

 

153

        Total borrowings

 

 

354,337

 

 

328,748

Other liabilities:

 

 

 

 

 

 

    Derivative liabilities

 

 

752

 

 

1,281

    Acceptances executed and outstanding

 

 

25,869

 

 

27,644

    Accrued expenses and other liabilities

 

 

85,886

 

 

86,791

            Total liabilities

 

 

5,300,272

 

 

5,243,946

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, 2017 - 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, 2017 -

           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: 43,968,342 shares outstanding (December 31, 2017 - 52,625,869;

 

 

 

 

 

 

        43,947,442)

 

 

52,626

 

 

52,626

    Additional paid-in capital

 

 

541,404

 

 

541,600

    Legal surplus

 

 

83,138

 

 

81,454

    Retained earnings

 

 

210,008

 

 

200,878

    Treasury stock, at cost, 8,657,527 shares (December 31, 2017 - 8,678,427

        shares)

 

 

(104,142)

 

 

(104,502)

    Accumulated other comprehensive (loss), net of tax of $1,999 (December 31, 2017  $564)

 

 

(12,185)

 

 

(2,949)

            Total stockholders’ equity

 

 

946,849

 

 

945,107

                Total liabilities and stockholders’ equity

 

 $  

6,247,121

 

 $  

6,189,053

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

2 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

 

 

Quarter Ended March 31,

 

2018

 

2017

 

 

(In thousands, except per share data)

Interest income:

 

 

 

 

 

 

        Loans

$

74,612

 

$

77,650

 

        Mortgage-backed securities

 

7,051

 

 

7,206

 

        Investment securities and other

 

1,507

 

 

1,322

 

                    Total interest income

 

83,170

 

 

86,178

 

Interest expense:

 

 

 

 

 

 

        Deposits

 

7,298

 

 

7,353

 

        Securities sold under agreements to repurchase

 

1,076

 

 

3,245

 

        Advances from FHLB and other borrowings

 

374

 

 

596

 

        Subordinated capital notes

 

428

 

 

366

 

                    Total interest expense

 

9,176

 

 

11,560

 

Net interest income

 

73,994

 

 

74,618

 

Provision for loan and lease losses, net

 

15,460

 

 

17,654

 

Net interest income after provision for loan and lease losses

 

58,534

 

 

56,964

 

Non-interest income:

 

 

 

 

 

 

        Banking service revenue

 

10,463

 

 

10,626

 

        Wealth management revenue

 

6,019

 

 

6,215

 

        Mortgage banking activities

 

1,757

 

 

587

 

                    Total banking and financial service revenues

 

18,239

 

 

17,428

 

 

 

 

 

 

 

 

        FDIC shared-loss benefit, net

 

-

 

 

1,403

 

        Net gain on:

 

 

 

 

 

 

            Derivatives

 

-

 

 

81

 

            Other non-interest income

 

275

 

 

162

 

                    Total non-interest income, net

 

18,514

 

 

19,074

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

3 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017 (CONTINUED)

 

 

Quarter Ended March 31,

 

2018

 

2017

 

(In thousands, except per share data)

Non-interest expense:

 

 

 

 

 

        Compensation and employee benefits

 

20,608

 

 

20,347

        Professional and service fees

 

2,694

 

 

3,237

        Occupancy and equipment

 

7,768

 

 

7,199

        Insurance

 

1,478

 

 

1,600

        Electronic banking charges

 

4,966

 

 

4,902

        Information technology expenses

 

2,009

 

 

1,998

        Advertising, business promotion, and strategic initiatives

 

1,347

 

 

1,395

        Loss on sale of foreclosed real estate and other repossessed assets

 

1,226

 

 

1,326

        Loan servicing and clearing expenses

 

1,161

 

 

1,189

        Taxes, other than payroll and income taxes

 

2,260

 

 

2,372

        Communication

 

885

 

 

914

        Printing, postage, stationary and supplies

 

644

 

 

637

        Director and investor relations

 

240

 

 

280

        Credit related expenses

 

2,419

 

 

2,626

        Other

 

2,416

 

 

1,662

                    Total non-interest expense

 

52,121

 

 

51,684

Income before income taxes

 

24,927

 

 

24,354

        Income tax expense

 

8,010

 

 

9,204

Net income

 

16,917

 

 

15,150

        Less: dividends on preferred stock

 

(3,465)

 

 

(3,465)

Income available to common shareholders

$

13,452

 

$

11,685

Earnings per common share:

 

 

 

 

 

        Basic

$

0.31

 

$

0.27

        Diluted

$

0.30

 

$

0.26

Average common shares outstanding and equivalents

 

51,121

 

 

51,131

Cash dividends per share of common stock

$

0.06

 

$

0.06

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

4 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

 

 

 

 

 

 

 

  

Quarter Ended March 31,

 

2018

 

2017

 

(In thousands)

 

 

 

 

 

 

Net income

$

16,917

 

$

15,150

Other comprehensive income before tax:

 

 

 

 

 

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

 

(11,326)

 

 

1,866

     Unrealized gain on cash flow hedges

 

656

 

 

182

Other comprehensive (loss) income before taxes

 

(10,670)

 

 

2,048

     Income tax effect

 

1,434

 

 

(296)

Other comprehensive (loss) income after taxes

 

(9,236)

 

 

1,752

Comprehensive income

$

7,681

 

$

16,902

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

5 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2018

 

2017

 

 

(In thousands)

Preferred stock:

 

 

 

 

 

 

Balance at beginning of period

$

176,000

 

$

176,000

 

       Balance at end of period

 

176,000

 

 

176,000

 

Common stock:

 

 

 

 

 

 

Balance at beginning of period

 

52,626

 

 

52,626

 

       Balance at end of period

 

52,626

 

 

52,626

 

Additional paid-in capital:

 

 

 

 

 

 

Balance at beginning of period

 

541,600

 

 

540,948

 

Stock-based compensation expense

 

291

 

 

218

 

Stock-based compensation excess tax benefit recognized in income

 

(127)

 

 

-

 

Lapsed restricted stock units

 

(360)

 

 

(358)

 

       Balance at end of period

 

541,404

 

 

540,808

 

Legal surplus:

 

 

 

 

 

 

Balance at beginning of period

 

81,454

 

 

76,293

 

Transfer from retained earnings

 

1,684

 

 

1,479

 

       Balance at end of period

 

83,138

 

 

77,772

 

Retained earnings:

 

 

 

 

 

 

Balance at beginning of period

 

200,878

 

 

177,808

 

Net income

 

16,917

 

 

15,150

 

Cash dividends declared on common stock

 

(2,638)

 

 

(2,637)

 

Cash dividends declared on preferred stock

 

(3,465)

 

 

(3,465)

 

Transfer to legal surplus

 

(1,684)

 

 

(1,479)

 

       Balance at end of period

 

210,008

 

 

185,377

 

Treasury stock:

 

 

 

 

 

 

Balance at beginning of period

 

(104,502)

 

 

(104,860)

 

Lapsed restricted stock units

 

360

 

 

358

 

       Balance at end of period

 

(104,142)

 

 

(104,502)

 

Accumulated other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

Balance at beginning of period

 

(2,949)

 

 

1,596

 

Other comprehensive (loss) income, net of tax

 

(9,236)

 

 

1,752

 

       Balance at end of period

 

(12,185)

 

 

3,348

 

Total stockholders’ equity

$

946,849

 

$

931,429

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

6 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2018

 

2017

 

 

(In thousands)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

$

16,917

 

$

15,150

 

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

 

 

 

 

 

 

Amortization of deferred loan origination fees and fair value premiums on acquired loans

 

1,118

 

 

618

 

Amortization of investment securities premiums, net of accretion of discounts

 

1,614

 

 

2,336

 

Amortization of core deposit and customer relationship intangibles

 

330

 

 

369

 

FDIC shared-loss benefit

 

-

 

 

(1,403)

 

Depreciation and amortization of premises and equipment

 

2,277

 

 

2,110

 

Deferred income tax expense, net

 

586

 

 

2,443

 

Provision for loan and lease losses, net

 

15,460

 

 

17,654

 

Stock-based compensation

 

291

 

 

218

 

  Stock-based compensation excess tax benefit recognized in income

 

(127)

 

 

-

 

(Gain) loss on:

 

 

 

 

 

 

   Sale of mortgage loans held-for-sale

 

(87)

 

 

(207)

 

   Derivatives

 

-

 

 

(81)

 

   Foreclosed real estate

 

1,284

 

 

1,570

 

   Sale of other repossessed assets

 

217

 

 

(160)

 

Originations of loans held-for-sale

 

(23,292)

 

 

(38,945)

 

Proceeds from sale of mortgage loans held-for-sale

 

5,945

 

 

10,893

 

Net (increase) decrease in:

 

 

 

 

 

 

   Trading securities

 

(102)

 

 

33

 

   Accrued interest receivable

 

14,828

 

 

1,672

 

   Servicing assets

 

(712)

 

 

170

 

   Other assets

 

10,448

 

 

11,615

 

Net (decrease) in:

 

 

 

 

 

 

   Accrued interest on deposits and borrowings

 

(359)

 

 

(1,031)

 

   Accrued expenses and other liabilities

 

(11,235)

 

 

(25)

 

Net cash provided by operating activities

 

35,401

 

 

24,999

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

7 


OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017 (CONTINUED)

 

  

Quarter Ended March 31,

  

2018

 

2017

 

 

(In thousands)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of:

 

 

 

 

 

 

   Investment securities available-for-sale

 

(173,162)

 

 

(51,430)

 

   FHLB stock

 

(35,775)

 

 

(7,065)

 

Maturities and redemptions of:

 

 

 

 

 

 

   Investment securities available-for-sale

 

23,408

 

 

28,659

 

   Investment securities held-to-maturity

 

19,844

 

 

20,551

 

   FHLB stock

 

38,271

 

 

697

 

Proceeds from sales of:

 

 

 

 

 

 

   Foreclosed real estate and other repossessed assets, including write-offs

 

(619)

 

 

(127)

 

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

 

(286,129)

 

 

(171,153)

 

Principal repayment of loans, including covered loans

 

197,622

 

 

213,135

 

(Repayments to) reimbursements from the FDIC on shared-loss agreements, net

 

-

 

 

(10,125)

 

Additions to premises and equipment

 

(1,580)

 

 

(1,489)

 

Net cash (used in) provided by investing activities

 

(218,120)

 

 

21,653

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

 

   Deposits

 

40,198

 

 

51,853

 

   Securities sold under agreements to repurchase

 

81,000

 

 

(121,792)

 

   FHLB advances, federal funds purchased, and other borrowings

 

(55,221)

 

 

(378)

 

Exercise of stock options and restricted units lapsed, net

 

-

 

 

(1)

 

Dividends paid on preferred stock

 

(3,465)

 

 

(3,465)

 

Dividends paid on common stock

 

(2,638)

 

 

(3,037)

 

Net cash used in financing activities

$

59,874

 

 $  

(76,820)

 

Net change in cash, cash equivalents and restricted cash

 

(122,845)

 

 

(30,168)

 

Cash, cash equivalents and restricted cash at beginning of period

 

488,233

 

 

513,469

 

Cash, cash equivalents and restricted at end of period

$

365,388

 

$

483,301

 

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

 

 

 

 

 

 

Interest paid

$

9,103

 

$

12,131

 

Mortgage loans securitized into mortgage-backed securities

$

17,954

 

 $  

24,921

 

Transfer from loans to foreclosed real estate and other repossessed assets

$

11,179

 

$

1,601

 

Reclassification of loans held-for-sale portfolio to held-for-investment portfolio

$

1,247

 

 $  

-

 

Financed sales of foreclosed real estate

$

369

 

$

242

 

Loans booked under the GNMA buy-back option

$

12,515

 

 $  

9,973

 

See notes to unaudited consolidated financial statements

 

8 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION  

 

Nature of Operations

 

OFG Bancorp (“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”), a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and two operating subsidiaries of the Bank, OFG USA, LLC ("OFG USA") and Oriental International Bank, Inc. Through these subsidiaries and their respective divisions, Oriental provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, auto loans, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services.

 

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities of Eurobank, a Puerto Rico commercial bank, in an FDIC-assisted acquisition. On February 6, 2017, the Bank and the FDIC agreed to terminate the shared-loss agreements related to the Eurobank Acquisition. On December 18, 2012, Oriental acquired a group of Puerto Rico-based entities that included Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR”), a Puerto Rico commercial bank, as well as a securities broker-dealer and an insurance agency, which is referred to herein as the “BBVAPR Acquisition.” These acquired businesses have been integrated with Oriental’s existing business.  

 

 

New Accounting Updates Not Yet Adopted

 

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 March 31, 2018, 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 during this year.

 

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 recently have selected the software and are in the process of assessing the methodology 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.

 

9 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 all of our operating lease commitments for which we are the lessee as a lease liability and corresponding right-of-use asset on our consolidated financial statements. Oriental has 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 March 31, 2018, Oriental had $33.7 million of minimum lease commitments from these operating leases (refer to Note 20). 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 right-of-use assets and lease liabilities will be less than 1% of its total assets and is not expected to have a material impact on its regulatory capital.

 

New Accounting Updates Adopted During the Current Quarter

 

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 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. The standard requires application using a retrospective transition method. The adoption of ASU No. 2016-18 on January 1, 2018, changed the presentation and classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows.

 

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. Oriental has adopted this ASU on January 1, 2018 using the modified retrospective method. Oriental’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 (refer to note 21). We concluded that substantially all of Oriental’s revenues are generated from activities that are outside the scope of this ASU, and the adoption did not have a material impact on our consolidated financial statements. Therefore, there was no cumulative effect adjustment recorded.

 

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.      

 

10 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 third and fourth quarter results included an additional loan loss provision of $27.0 million and $5.4 million, respectively. During the quarter ended March 31, 2018, Oriental recorded a $8.6 million provision for loan losses to replenish the allowance for loan charge-offs of $8.2 million related to the hurricanes.

 

Oriental implemented its disaster response plan as these storms 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 matters, property damages, and emergency communication with customers regarding the status of Bank operations. The estimated total losses as of December 31, 2017 amounted to $6.6 million. No additional losses have been incurred at March 31, 2018.

  

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 the quarter ended December 2017 and a $0.7 million payment during the quarter ended March 31, 2018. Accordingly, a receivable of $0.5 million and $1.2 million was included in other assets at March 31, 2018 and December 31, 2017, respectively, for the expected recovery.   

 

NOTE 3 – RESTRICTED CASH

 

The following table includes the composition of Oriental’s restricted cash:

 

   

March 31,

 

December 31,

 

2018

 

2017

 

(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 both March 31, 2018 and  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.  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 March 31, 2018 and December 31, 2017, Oriental had delivered approximately $2.0 million of cash as collateral for such derivatives activities.

 

Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At both March 31, 2018 and December 31, 2017, 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 March 31, 2018 was $208.5 million (December 31, 2017 - $189.2 million). At March 31, 2018 and December 31, 2017, 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.

11 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 March 31, 2018 and December 31, 2017, money market instruments included as part of cash and cash equivalents amounted to $7.4 million and $7.0 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 March 31, 2018 and December 31, 2017 were as follows:

 

  

March 31, 2018

 

 

 

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

$

538,900

 

$

328

 

$

9,133

 

$

530,095

 

2.51%

        GNMA certificates

 

182,055

 

 

317

 

 

2,870

 

 

179,502

 

2.97%

        CMOs issued by US government-sponsored agencies

 

78,104

 

 

-

 

 

2,729

 

 

75,375

 

1.90%

            Total mortgage-backed securities

 

799,059

 

 

645

 

 

14,732

 

 

784,972

 

2.56%

    Investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        US Treasury securities

 

10,280

 

 

-

 

 

156

 

 

10,124

 

1.28%

        Obligations of US government-sponsored agencies

 

2,773

 

 

-

 

 

72

 

 

2,701

 

1.38%

        Obligations of Puerto Rico government and

            public instrumentalities

 

2,455

 

 

-

 

 

43

 

 

2,412

 

5.55%

        Other debt securities

 

1,403

 

 

29

 

 

-

 

 

1,432

 

2.98%

            Total investment securities

 

16,911

 

 

29

 

 

271

 

 

16,669

 

2.06%

               Total securities available for sale

$

815,970

 

$

674

 

$

15,003

 

$

801,641

 

2.55%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

    Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

        FNMA and FHLMC certificates

$

485,143

 

$

-

 

$

17,163

 

$

467,980

 

2.07%

12 


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%

 

The amortized cost and fair value of Oriental’s investment securities at March 31, 2018, 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.

13 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

March 31, 2018

  

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

$

5,651

 

$

5,598

 

$

-

 

$

-

            Total due from 1 to 5 years

 

5,651

 

 

5,598

 

 

-

 

 

-

    Due after 5 to 10 years

 

 

 

 

 

 

 

 

 

 

 

        CMOs issued by US government-sponsored agencies

$

69,086

 

$

66,513

 

$

-

 

$

-

        FNMA and FHLMC certificates

 

216,028

 

 

212,418

 

 

-

 

 

-

            Total due after 5 to 10 years

 

285,114

 

 

278,931

 

 

-

 

 

-

    Due after 10 years

 

 

 

 

 

 

 

 

 

 

 

        FNMA and FHLMC certificates

$

317,221

 

$

312,079

 

$

485,143

 

$

467,980

        GNMA certificates

 

182,055

 

 

179,502

 

 

-

 

 

-

        CMOs issued by US government-sponsored agencies

 

9,018

 

 

8,862

 

 

-

 

 

-

            Total due after 10 years

 

508,294

 

 

500,443

 

 

485,143

 

 

467,980

                Total  mortgage-backed securities

 

799,059

 

 

784,972

 

 

485,143

 

 

467,980

Investment securities

 

 

 

 

 

 

 

 

 

 

 

    Due less than one year

 

 

 

 

 

 

 

 

 

 

 

        US Treasury securities

$

322

 

$

322

 

$

-

 

$

-

        Obligations of Puerto Rico government and

            public instrumentalities

 

2,455

 

 

2,412

 

 

-

 

 

-

            Total due in less than one year

 

2,777

 

 

2,734

 

 

-

 

 

-

    Due from 1 to 5 years

 

 

 

 

 

 

 

 

 

 

 

        US Treasury securities

$

9,958

 

$

9,802

 

$

-

 

$

-

        Obligations of US government and sponsored agencies

 

2,773

 

 

2,701

 

 

-

 

 

-

            Total due from 1 to 5 years

 

12,731

 

 

12,503

 

 

-

 

 

-

    Due from 5 to 10 years

 

 

 

 

 

 

 

 

 

 

 

        Other debt securities

 

1,403

 

 

1,432

 

 

-

 

 

-

            Total due after 5 to 10 years

 

1,403

 

 

1,432

 

 

-

 

 

-

                Total  investment securities

 

16,911

 

 

16,669

 

 

-

 

 

-

Total

$

815,970

 

$

801,641

 

$

485,143

 

$

467,980

 

 

 

 

 

 

 

 

 

 

 

 

 

During the quarter ended March 31, 2018, Oriental retained securitized GNMA pools totaling $18.0 million amortized cost, at a yield of 3.26% from its own originations while, during the quarter ended March 31, 2017, that amount totaled $25.0 million, amortized cost, at a yield of 3.14%. 

 

During the quarters ended March 31, 2018 and 2017, Oriental did not sell any mortgage-backed securities or investment securities.

14 


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 March 31, 2018 and December 31, 2017:

 

March 31, 2018

  

12 months or more

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities available-for-sale

 

 

 

 

 

 

 

 

    CMOs issued by US Government-sponsored agencies

$

69,921

 

$

2,594

 

$

67,327

    FNMA and FHLMC certificates

 

106,196

 

 

3,804

 

 

102,392

    Obligations of US Government and sponsored agencies

 

2,773

 

 

72

 

 

2,701

    Obligations of Puerto Rico government and public instrumentalities

 

2,455

 

 

43

 

 

2,412

    GNMA certificates

 

20,678

 

 

906

 

 

19,772

    US Treasury Securities

 

9,958

 

 

156

 

 

9,802

 

$

211,981

 

$

7,575

 

$

204,406

Securities held to maturity

 

 

 

 

 

 

 

 

    FNMA and FHLMC certificates

$

338,260

 

$

13,311

 

$

324,949

 

 

 

 

 

 

 

 

 

  

Less than 12 months

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities available-for-sale

 

 

 

 

 

 

 

 

    CMOs issued by US government-sponsored agencies

$

8,183

 

$

135

 

$

8,048

    FNMA and FHLMC certificates

 

367,587

 

 

5,329

 

 

362,258

    GNMA certificates

 

131,685

 

 

1,964

 

 

129,721

    US Treausury Securities

 

322

 

 

-

 

 

322

 

$

507,777

 

$

7,428

 

$

500,349

Securities held-to-maturity

 

 

 

 

 

 

 

 

    FNMA and FHLMC Certificates

$

146,883

 

$

3,852

 

$

143,031

 

 

 

 

 

 

 

 

 

  

Total

  

Amortized

 

Unrealized

 

Fair

  

Cost

 

Loss

 

Value

 

(In thousands)

Securities available-for-sale

 

 

 

 

 

 

 

 

    CMOs issued by US government-sponsored agencies

$

78,104

 

$

2,729

 

$

75,375

    FNMA and FHLMC certificates

 

473,783

 

 

9,133

 

 

464,650

    Obligations of Puerto Rico government and public instrumentalities

 

2,455

 

 

43

 

 

2,412

    Obligations of US government and sponsored agencies

 

2,773

 

 

72

 

 

2,701

    GNMA certificates

 

152,363

 

 

2,870

 

 

149,493

    US Treausury Securities

 

10,280

 

 

156

 

 

10,124

 

$

719,758

 

$

15,003

 

$

704,755

Securities held-to-maturity

 

 

 

 

 

 

 

 

    FNMA and FHLMC certificates

$

485,143

 

$

17,163

 

$

467,980

15 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

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 available-for-sale

 

 

 

 

 

 

 

 

    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

16 


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 improvement, 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 ($1.2 billion, amortized cost, or 99.8%) with an unrealized loss position at March 31, 2018 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 0.2%) with an unrealized loss position at March 31, 2018 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. The PRHTA bond had an aggregate fair value of $2.4 million at March 31, 2018 (98% 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 2.3%, 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 March 31, 2018. 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 quarter ended March 31, 2018.

 

As of March 31, 2018, 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.

 

NOTE 5 - 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.

  

  The composition of Oriental’s loan portfolio at March 31, 2018 and December 31, 2017 was as follows:

17 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

March 31,

 

December 31,

 

2018

 

2017

 

(In thousands)

Originated and other loans and leases held for investment:

 

 

 

 

 

        Mortgage 

$

682,564

 

$

683,607

        Commercial

 

1,346,404

 

 

1,307,261

        Consumer

 

334,865

 

 

330,039

        Auto and leasing

 

957,197

 

 

883,985

 

 

3,321,030

 

 

3,204,892

        Allowance for loan and lease losses on originated and other loans and leases

 

(96,832)

 

 

(92,718)

 

 

3,224,198

 

 

3,112,174

        Deferred loan costs, net

 

7,125

 

 

6,695

    Total originated and other loans loans held for investment, net

 

3,231,323

 

 

3,118,869

Acquired loans:

 

 

 

 

 

    Acquired BBVAPR loans:

 

 

 

 

 

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

 

 

 

 

 

        acquired at a premium)

 

 

 

 

 

        Commercial

 

4,222

 

 

4,380

        Consumer

 

27,235

 

 

28,915

        Auto

 

16,171

 

 

21,969

 

 

47,628

 

 

55,264

        Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20

 

(3,184)

 

 

(3,862)

 

 

44,444

 

 

51,402

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

 

 

 

 

 

         credit quality, including those by analogy)

 

 

 

 

 

        Mortgage 

 

526,089

 

 

532,053

        Commercial

 

230,988

 

 

243,092

        Consumer

 

932

 

 

1,431

        Auto

 

35,006

 

 

43,696

 

 

793,015

 

 

820,272

         Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30

 

(43,166)

 

 

(45,755)

 

 

749,849

 

 

774,517

    Total acquired BBVAPR loans, net

 

794,293

 

 

825,919

  Acquired Eurobank loans:

 

 

 

 

 

        Loans secured by 1-4 family residential properties

 

69,328

 

 

69,538

        Commercial

 

52,418

 

 

53,793

        Consumer

 

972

 

 

1,112

    Total acquired Eurobank loans

 

122,718

 

 

124,443

        Allowance for loan and lease losses on Eurobank loans

 

(25,410)

 

 

(25,174)

    Total acquired Eurobank loans, net

 

97,308

 

 

99,269

    Total acquired loans, net

 

891,601

 

 

925,188

Total held for investment, net

 

4,122,924

 

 

4,044,057

Mortgage loans held-for-sale

 

10,505

 

 

12,272

Total loans, net

$

4,133,429

 

$

4,056,329

 

 

 

 

 

 

18 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As a result of the devastation caused by hurricanes Irma and Maria, Oriental offered an automatic three-month moratorium for the payment due on certain loans. At December 31, 2017, Oriental had $2.6 billion loans under the moratorium program. The level of delinquencies for mortgage and auto loans as of December 31, 2017 was impacted by the loan moratorium. Aging of current and early delinquent loans in moratorium were frozen at September 30, 2017, throughout the moratorium period. In addition, although the repayment schedule was modified as part of the moratorium, certain borrowers continued to make payments shortly after the moratorium, having an impact on the respective delinquency status at December 31, 2017. At March 31, 2018, most of the loan moratoriums have expired, and delinquency levels are returning to pre-hurricane levels.

 

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 March 31, 2018 and December 31, 2017, 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.

 

19 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

168

 

$

1,697

 

$

3,696

 

$

5,561

 

$

39,752

 

$

45,313

 

$

197

        Years 2003 and 2004

 

235

 

 

1,612

 

 

6,989

 

 

8,836

 

 

73,203

 

 

82,039

 

 

-

        Year 2005

 

-

 

 

1,235

 

 

3,303

 

 

4,538

 

 

38,610

 

 

43,148

 

 

68

        Year 2006

 

78

 

 

2,486

 

 

5,069

 

 

7,633

 

 

53,279

 

 

60,912

 

 

-

        Years 2007, 2008

            and 2009

 

-

 

 

2,075

 

 

7,683

 

 

9,758

 

 

57,173

 

 

66,931

 

 

336

        Years 2010, 2011, 2012, 2013

 

205

 

 

1,422

 

 

8,346

 

 

9,973

 

 

112,977

 

 

122,950

 

 

459

        Years 2014, 2015, 2016, 2017 and 2018

 

-

 

 

318

 

 

1,499

 

 

1,817

 

 

125,289

 

 

127,106

 

 

-

 

 

686

 

 

10,845

 

 

36,585

 

 

48,116

 

 

500,283

 

 

548,399

 

 

1,060

        Non-traditional

 

-

 

 

43

 

 

3,415

 

 

3,458

 

 

13,498

 

 

16,956

 

 

-

        Loss mitigation program

 

12,921

 

 

4,695

 

 

20,062

 

 

37,678

 

 

66,767

 

 

104,445

 

 

4,439

 

 

13,607

 

 

15,583

 

 

60,062

 

 

89,252

 

 

580,548

 

 

669,800

 

 

5,499

    Home equity secured personal loans

 

-

 

 

-

 

 

-

 

 

-

 

 

249

 

 

249

 

 

-

    GNMA's buy-back option program

 

-

 

 

-

 

 

12,515

 

 

12,515

 

 

-

 

 

12,515

 

 

-

 

 

13,607

 

 

15,583

 

 

72,577

 

 

101,767

 

 

580,797

 

 

682,564

 

 

5,499

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Commercial secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Corporate

 

-

 

 

-

 

 

-

 

 

-

 

 

237,751

 

 

237,751

 

 

-

        Institutional

 

-

 

 

-

 

 

-

 

 

-

 

 

46,955

 

 

46,955

 

 

-

        Middle market

 

4,839

 

 

560

 

 

2,454

 

 

7,853

 

 

208,697

 

 

216,550

 

 

-

        Retail

 

939

 

 

640

 

 

9,113

 

 

10,692

 

 

231,981

 

 

242,673

 

 

-

        Floor plan

 

-

 

 

-

 

 

-

 

 

-

 

 

4,078

 

 

4,078

 

 

-

        Real estate

 

-

 

 

-

 

 

-

 

 

-

 

 

17,666

 

 

17,666

 

 

-

 

 

5,778

 

 

1,200

 

 

11,567

 

 

18,545

 

 

747,128

 

 

765,673

 

 

-

    Other commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Corporate

 

-

 

 

-

 

 

-

 

 

-

 

 

168,490

 

 

168,490

 

 

-

        Institutional

 

-

 

 

-

 

 

-

 

 

-

 

 

115,034

 

 

115,034

 

 

-

        Middle market

 

249

 

 

-

 

 

881

 

 

1,130

 

 

91,148

 

 

92,278

 

 

-

        Retail

 

759

 

 

140

 

 

919

 

 

1,818

 

 

176,225

 

 

178,043

 

 

-

        Floor plan

 

-

 

 

-

 

 

51

 

 

51

 

 

26,835

 

 

26,886

 

 

-

 

 

1,008

 

 

140

 

 

1,851

 

 

2,999

 

 

577,732

 

 

580,731

 

 

-

 

 

6,786

 

 

1,340

 

 

13,418

 

 

21,544

 

 

1,324,860

 

 

1,346,404

 

 

-



20 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

1,144

 

$

61

 

$

260

 

$

1,465

 

$

26,049

 

$

27,514

 

$

-

        Overdrafts

 

22

 

 

14

 

 

42

 

 

78

 

 

168

 

 

246

 

 

-

        Personal lines of credit

 

125

 

 

67

 

 

50

 

 

242

 

 

1,791

 

 

2,033

 

 

-

        Personal loans

 

3,310

 

 

2,410

 

 

1,278

 

 

6,998

 

 

283,137

 

 

290,135

 

 

-

        Cash collateral personal loans

 

238

 

 

87

 

 

21

 

 

346

 

 

14,591

 

 

14,937

 

 

-

 

 

4,839

 

 

2,639

 

 

1,651

 

 

9,129

 

 

325,736

 

 

334,865

 

 

-

Auto and leasing

 

45,003

 

 

16,555

 

 

13,594

 

 

75,152

 

 

882,045

 

 

957,197

 

 

-

    Total

$

70,235

 

$

36,117

 

$

101,240

 

$

207,592

 

$

3,113,438

 

$

3,321,030

 

$

5,499

21 


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

 

 

-

22 


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



At both March 31, 2018 and December 31, 2017, Oriental had a carrying balance of $94.9 million 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.

 

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 the acquisitions of 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.

 

 

 

23 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following tables present the aging of the recorded investment in gross acquired BBVAPR loans accounted for under ASC 310-20 as of March 31, 2018 and December 31, 2017, by class of loans:

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

-

 

 

-

 

 

921

 

 

921

 

 

363

 

 

1,284

 

 

-

 

 

-

 

 

-

 

 

1,040

 

 

1,040

 

 

363

 

 

1,403

 

 

-

    Other commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Retail

 

161

 

 

16

 

 

46

 

 

223

 

 

2,594

 

 

2,817

 

 

-

        Floor plan

 

-

 

 

-

 

 

2

 

 

2

 

 

-

 

 

2

 

 

-

 

 

161

 

 

16

 

 

48

 

 

225

 

 

2,594

 

 

2,819

 

 

-

 

 

161

 

 

16

 

 

1,088

 

 

1,265

 

 

2,957

 

 

4,222

 

 

-

    Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Credit cards

 

767

 

 

105

 

 

270

 

 

1,142

 

 

23,719

 

 

24,861

 

 

-

        Personal loans

 

84

 

 

7

 

 

61

 

 

152

 

 

2,222

 

 

2,374

 

 

-

 

 

851

 

 

112

 

 

331

 

 

1,294

 

 

25,941

 

 

27,235

 

 

-

    Auto

 

798

 

 

402

 

 

154

 

 

1,354

 

 

14,817

 

 

16,171

 

 

-

       Total

$

1,810

 

$

530

 

$

1,573

 

$

3,913

 

$

43,715

 

$

47,628

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 


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)

 

 

 

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

 

$

-

 

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 March 31, 2018 and  December 31, 2017 is as follows:

 

 

March 31,

 

December 31,

 

 

2018

 

 

2017

 

 

(In thousands)

Contractual required payments receivable:

$

1,444,070

 

 $  

1,481,616

Less: Non-accretable discount

 

354,590

 

 

352,431

Cash expected to be collected

 

1,089,480

 

 

1,129,185

Less: Accretable yield

 

296,465

 

 

308,913

Carrying amount, gross

 

793,015

 

 

820,272

Less: allowance for loan and lease losses

 

43,166

 

 

45,755

Carrying amount, net

$

749,849

 

 $  

774,517

 

 

 

 

 

 

25 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

At March 31, 2018 and December 31, 2017, Oriental had $50.2 million and $50.3 million, respectively, in loans granted to Puerto Rico municipalities as part of its acquired BBVAPR loans accounted for under ASC 310-30. These loans are primarily secured municipal general obligations.

 

The following tables describe the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the quarters ended March 31, 2018 and 2017:

 

 

Quarter Ended March 31, 2018

 

Mortgage

 

Commercial

 

Auto

 

Consumer

 

Total

 

(In thousands)

Accretable Yield Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

258,498

 

$

46,764

 

$

2,766

 

$

885

 

$

308,913

    Accretion

 

(7,073)

 

 

(3,685)

 

 

(869)

 

 

(256)

 

 

(11,883)

    Change in expected cash flows

 

-

 

 

3,156

 

 

426

 

 

58

 

 

3,640

    Transfer (to) non-accretable discount

 

(3,046)

 

 

(524)

 

 

(597)

 

 

(38)

 

 

(4,205)

Balance at end of period

$

248,379

 

$

45,711

 

$

1,726

 

$

649

 

$

296,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

299,501

 

$

10,596

 

$

23,050

 

$

19,284

 

$

352,431

    Change in actual and expected losses

 

(1,440)

 

 

(389)

 

 

(204)

 

 

(13)

 

 

(2,046)

    Transfer from accretable yield

 

3,046

 

 

524

 

 

597

 

 

38

 

 

4,205

Balance at end of period

$

301,107

 

$

10,731

 

$

23,443

 

$

19,309

 

$

354,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2017

 

Mortgage

 

Commercial

 

Auto

 

Consumer

 

Total

 

(In thousands)

Accretable Yield Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

292,115

 

$

50,366

 

$

8,538

 

$

3,682

 

$

354,701

    Accretion

 

(7,890)

 

 

(4,981)

 

 

(2,147)

 

 

(602)

 

 

(15,620)

    Change in actual and expected losses

 

1

 

 

198

 

 

52

 

 

36

 

 

287

    Transfer (to) from non-accretable discount

 

(7,409)

 

 

1,319

 

 

140

 

 

(58)

 

 

(6,008)

Balance at end of period

$

276,817

 

$

46,902

 

$

6,583

 

$

3,058

 

$

333,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

305,615

 

$

16,965

 

$

22,407

 

$

18,120

 

$

363,107

    Change in actual and expected losses

 

(3,031)

 

 

(843)

 

 

297

 

 

(19)

 

 

(3,596)

    Transfer from (to) accretable yield

 

7,409

 

 

(1,319)

 

 

(140)

 

 

58

 

 

6,008

Balance at end of period

$

309,993

 

$

14,803

 

$

22,564

 

$

18,159

 

$

365,519

26 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Acquired Eurobank Loans

 

The carrying amount of acquired Eurobank loans at March 31, 2018 and  December 31, 2017 is as follows:

 

 

March 31

 

December 31

 

2018

 

2017

 

(In thousands)

Contractual required payments receivable:

$

174,859

 

$

179,960

Less: Non-accretable discount

 

5,547

 

 

5,845

Cash expected to be collected

 

169,312

 

 

174,115

Less: Accretable yield

 

46,594

 

 

49,672

Carrying amount, gross

 

122,718

 

 

124,443

Less: Allowance for loan and lease losses

 

25,410

 

 

25,174

Carrying amount, net

$

97,308

 

$

99,269

 

The following tables describe the accretable yield and non-accretable discount activity of acquired Eurobank loans for the quarters ended March 31, 2018 and 2017:

 

 

Quarter Ended March 31, 2018

 

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 period

$

41,474

 

$

6,751

 

$

1,447

 

$

-

 

$

-

 

$

49,672

    Accretion

 

(1,605)

 

 

(1,606)

 

 

-

 

 

(34)

 

 

(96)

 

 

(3,341)

    Change in expected cash flows

 

(144)

 

 

898

 

 

-

 

 

(63)

 

 

178

 

 

869

    Transfer (to) from non-accretable discount

 

(103)

 

 

(427)

 

 

(91)

 

 

97

 

 

(82)

 

 

(606)

Balance at end of period

$

39,622

 

$

5,616

 

$

1,356

 

$

-

 

$

-

 

$

46,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

4,576

 

$

276

 

$

758

 

$

-

 

$

235

 

$

5,845

    Change in actual and expected losses

 

(200)

 

 

(703)

 

 

-

 

 

97

 

 

(98)

 

 

(904)

    Transfer from (to) accretable yield

 

103

 

 

427

 

 

91

 

 

(97)

 

 

82

 

 

606

Balance at end of period

$

4,479

 

$

-

 

$

849

 

$

-

 

$

219

 

$

5,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Quarter Ended March 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 period

$

45,839

 

$

16,475

 

$

2,194

 

 

-

 

$

-

 

$

64,508

    Accretion

 

(1,904)

 

 

(4,510)

 

 

(38)

 

 

-

 

 

(158)

 

 

(6,610)

    Change in actual and expected losses

 

81

 

 

778

 

 

37

 

 

(143)

 

 

310

 

 

1,063

    Transfer from (to) non-accretable discount

 

681

 

 

-

 

 

(322)

 

 

143

 

 

(152)

 

 

350

Balance at end of period

$

44,697

 

$

12,743

 

$

1,871

 

$

-

 

$

-

 

$

59,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accretable Discount Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

8,441

 

$

3,880

 

$

11

 

$

-

 

$

8

 

$

12,340

    Change in actual and expected losses

 

(334)

 

 

(1,409)

 

 

-

 

 

143

 

 

(154)

 

 

(1,754)

    Transfer (to) from accretable yield

 

(681)

 

 

-

 

 

322

 

 

(143)

 

 

152

 

 

(350)

Balance at end of period

$

7,426

 

$

2,471

 

$

333

 

$

-

 

$

6

 

$

10,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 


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 March 31, 2018 and December 31, 2017:

 

 

March 31,

 

December 31,

 

2018

 

2017

 

(In thousands)

Originated and other loans and leases held for investment

 

 

 

 

 

Mortgage

 

 

 

 

 

    Traditional (by origination year):

 

 

 

 

 

        Up to the year 2002

$

3,394

 

$

3,070

        Years 2003 and 2004

 

6,852

 

 

6,380

        Year 2005

 

3,235

 

 

3,280

        Year 2006

 

5,069

 

 

5,905

        Years 2007, 2008 and 2009

 

7,347

 

 

7,984

        Years 2010, 2011, 2012, 2013

 

7,652

 

 

6,259

        Years 2014, 2015, 2016 and 2017

 

1,383

 

 

1,649

 

 

34,932

 

 

34,527

        Non-traditional

 

3,415

 

 

3,543

        Loss mitigation program

 

17,456

 

 

16,783

 

 

55,803

 

 

54,853

Commercial

 

 

 

 

 

    Commercial secured by real estate

 

 

 

 

 

        Institutional

 

10,548

 

 

118

        Middle market

 

10,128

 

 

11,394

        Retail

 

16,638

 

 

14,438

 

 

37,314

 

 

25,950

    Other commercial and industrial

 

 

 

 

 

        Middle market

 

6,829

 

 

6,323

        Retail

 

2,850

 

 

2,929

        Floor plan

 

51

 

 

51

 

 

9,730

 

 

9,303

 

 

47,044

 

 

35,253

Consumer

 

 

 

 

 

    Credit cards

 

260

 

 

1,227

    Overdrafts

 

42

 

 

31

    Personal lines of credit

 

63

 

 

102

    Personal loans

 

1,877

 

 

900

    Cash collateral personal loans

 

21

 

 

312

 

 

2,263

 

 

2,572

Auto and leasing

 

13,594

 

 

4,232

    Total non-accrual originated loans

$

118,704

 

$

96,910

29 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

March 31,

 

December 31,

 

2018

 

2017

 

(In thousands)

Acquired BBVAPR loans accounted for under ASC 310-20

 

 

 

 

 

Commercial

 

 

 

 

 

    Commercial secured by real estate

 

 

 

 

 

        Retail

$

119

 

$

119

        Floor plan

 

921

 

 

928

 

 

1,040

 

 

1,047

    Other commercial and industrial

 

 

 

 

 

        Retail

 

46

 

 

221

        Floor plan

 

2

 

 

2

 

 

48

 

 

223

 

 

1,088

 

 

1,270

Consumer

 

 

 

 

 

    Credit cards

 

270

 

 

1,310

    Personal loans

 

61

 

 

45

 

 

331

 

 

1,355

Auto

 

154

 

 

179

    Total non-accrual acquired BBVAPR loans accounted for under ASC 310-20

 

1,573

 

 

2,804

            Total non-accrual loans

$

120,277

 

$

99,714

 

 

 

 

 

 

 

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 March 31, 2018 and December 31, 2017, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-accrual loans amounted to $98.2 million and $109.2 million, respectively, as they are performing under their new terms.

 

At March 31, 2018 and December 31, 2017, loans that are current in their monthly payments, but placed in non-accrual due to credit deterioration amounted to $28.0 million and $20.1 million, respectively.

30 


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 $68.6 million and $72.3 million at March 31, 2018 and December 31, 2017, 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 $13.3 million and $10.6 million at March 31, 2018 and December 31, 2017, respectively. The total investment in impaired mortgage loans that were individually evaluated for impairment was $84.3 million and $85.4 million at March 31, 2018 and December 31, 2017, 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 $9.0 million and $9.1 million at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and 2017 are as follows:

 

 

March 31, 2018

 

 

  

Unpaid

 

Recorded

 

Related

 

  

 

 

  

Principal

 

Investment

 

Allowance

 

Coverage

 

 

 

(In thousands)

 

 

Impaired loans with specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

        Commercial

$

57,169

 

 $  

52,049

 

 $  

13,274

 

26%

 

 

        Residential impaired and troubled-debt restructuring

 

94,405

 

 

84,283

 

 

9,022

 

11%

 

 

Impaired loans with no specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

        Commercial

 

19,020

 

 

15,784

 

 

N/A

 

0%

 

 

            Total investment in impaired loans

$

170,594

 

$

152,116

 

$

22,296

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 


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 March 31, 2018 and December 31, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

  

Unpaid

 

Recorded

 

Related

 

  

  

Principal

 

Investment

 

Allowance

 

Coverage

 

(In thousands)

Impaired loans with specific allowance

 

 

 

 

 

 

 

 

 

 

        Commercial

$

926

 

$

747

 

$

21

 

3%

Impaired loans with no specific allowance

 

 

 

 

 

 

 

 

 

 

        Commercial

$

-

 

$

-

 

 

N/A

 

0%

            Total investment in impaired loans

$

926

 

$

747

 

$

21

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

  

Unpaid

 

Recorded

 

Specific

 

  

  

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%

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2018 and December 31, 2017 are as follows:

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

Coverage

  

Unpaid

 

Recorded

 

 

 

to Recorded 

  

Principal

 

Investment

 

Allowance

 

Investment

 

(In thousands)

Impaired loan pools with specific allowance:

 

 

 

 

 

 

 

 

 

 

        Mortgage

$

536,514

 

$

526,089

 

$

14,331

 

3%

        Commercial  

 

239,976

 

 

229,216

 

 

22,045

 

10%

        Consumer 

 

1,892

 

 

932

 

 

21

 

2%

        Auto

 

35,560

 

 

35,006

 

 

6,769

 

19%

            Total investment in impaired loan pools

$

813,942

 

$

791,243

 

$

43,166

 

5%

 

 

 

 

 

 

 

 

 

 

 

32 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2018 and December 31, 2017 are as follows:

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

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

$

79,633

 

$

69,328

 

$

15,414

 

22%

        Commercial

 

56,087

 

 

52,418

 

 

9,992

 

19%

        Consumer

 

14

 

 

4

 

 

4

 

100%

            Total investment in impaired loan pools

$

135,734

 

$

121,750

 

$

25,410

 

21%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

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

$

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%

 

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.  

33 


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 quarters ended March 31, 2018 and 2017: 

 

 

Quarter Ended March 31,

 

2018

 

2017

 

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

$

263

 

$

51,331

 

$

125

 

$

12,809

        Residential troubled-debt restructuring

 

720

 

 

84,754

 

 

766

 

 

89,543

Impaired loans with no specific allowance

 

 

 

 

 

 

 

 

 

 

 

        Commercial

 

176

 

 

17,764

 

 

532

 

 

43,895

 

 

1,159

 

 

153,849

 

 

1,423

 

 

146,247

Acquired loans accounted for under ASC 310-20:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with specific allowance

 

 

 

 

 

 

 

 

 

 

 

        Commercial

 

-

 

 

747

 

 

-

 

 

917

            Total interest income from impaired loans

$

1,159

 

$

154,596

 

$

1,423

 

$

147,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Modifications

 

The following tables present the troubled-debt restructurings in all loan portfolios during the quarters ended March 31, 2018 and 2017.

  

 

 

Quarter Ended March 31, 2018

 

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

38

 

 $  

5,747

 

5.69%

 

397

 

 $  

5,339

 

5.08%

 

363

Commercial

3

 

 

1,559

 

4.75%

 

72

 

 

1,555

 

4.75%

 

72

Consumer

28

 

 

354

 

15.75%

 

47

 

 

355

 

11.60%

 

69

34 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Quarter Ended March 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

32

 

 $  

4,004

 

6.53%

 

391

 

 $  

4,015

 

4.86%

 

387

Commercial

9

 

 

1,218

 

7.29%

 

55

 

 

1,219

 

5.93%

 

64

Consumer

25

 

 

392

 

10.94%

 

64

 

 

430

 

10.33%

 

74

Auto

3

 

 

45

 

8.90%

 

75

 

 

47

 

11.88%

 

39

 

The following table presents troubled-debt restructurings for which there was a payment default during the twelve month periods ended March 31, 2018 and 2017:

 

 

Twelve Month Period Ended  March 31,

 

2018

 

 

2017

 

Number of Contracts

 

Recorded Investment

 

 

Number of Contracts

 

Recorded Investment

 

(Dollars in thousands)

Mortgage

36

 

 $  

3,310

 

 

14

 

 $  

2,051

Commercial

4

 

$

398

 

 

1

 

$

50

Consumer

23

 

 $  

243

 

 

15

 

 $  

188

35 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

  

36 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As of March 31, 2018 and December 31, 2017, 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:

 

 

March 31, 2018

 

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

$

237,751

 

$

203,090

 

$

32,790

 

$

1,871

 

$

-

 

$

-

    Institutional

 

46,955

 

 

36,206

 

 

-

 

 

10,749

 

 

-

 

 

-

    Middle market

 

216,550

 

 

180,511

 

 

13,389

 

 

22,650

 

 

-

 

 

-

    Retail

 

242,673

 

 

213,262

 

 

4,178

 

 

25,233

 

 

-

 

 

-

    Floor plan

 

4,078

 

 

2,771

 

 

-

 

 

1,307

 

 

-

 

 

-

    Real estate

 

17,666

 

 

17,666

 

 

-

 

 

-

 

 

-

 

 

-

 

 

765,673

 

 

653,506

 

 

50,357

 

 

61,810

 

 

-

 

 

-

  Other commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Corporate

 

168,490

 

 

156,581

 

 

11,909

 

 

-

 

 

-

 

 

-

    Institutional

 

115,034

 

 

115,034

 

 

-

 

 

-

 

 

-

 

 

-

    Middle market

 

92,278

 

 

78,493

 

 

5,425

 

 

8,360

 

 

-

 

 

-

    Retail

 

178,043

 

 

174,727

 

 

333

 

 

2,983

 

 

-

 

 

-

    Floor plan

 

26,886

 

 

24,439

 

 

2,396

 

 

51

 

 

-

 

 

-

 

 

580,731

 

 

549,274

 

 

20,063

 

 

11,394

 

 

-

 

 

-

      Total

 

1,346,404

 

 

1,202,780

 

 

70,420

 

 

73,204

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - acquired loans

      (under ASC 310-20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Retail

 

119

 

 

-

 

 

-

 

 

119

 

 

-

 

 

-

    Floor plan

 

1,284

 

 

363

 

 

-

 

 

921

 

 

-

 

 

-

 

 

1,403

 

 

363

 

 

-

 

 

1,040

 

 

-

 

 

-

  Other commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Retail

 

2,817

 

 

2,812

 

 

-

 

 

5

 

 

-

 

 

-

    Floor plan

 

2

 

 

-

 

 

-

 

 

2

 

 

-

 

 

-

 

 

2,819

 

 

2,812

 

 

-

 

 

7

 

 

-

 

 

-

      Total

 

4,222

 

 

3,175

 

 

-

 

 

1,047

 

 

-

 

 

-

 

37 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

March 31, 2018

 

Risk Ratings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Outstanding

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Loss

 

(In thousands)

Retail - originated and other loans held for investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Traditional

 

548,399

 

 

511,814

 

 

-

 

 

36,585

 

 

-

 

 

-

    Non-traditional

 

16,956

 

 

13,541

 

 

-

 

 

3,415

 

 

-

 

 

-

    Loss mitigation program

 

104,445

 

 

84,383

 

 

-

 

 

20,062

 

 

-

 

 

-

    Home equity secured personal loans

 

249

 

 

249

 

 

-

 

 

-

 

 

-

 

 

-

    GNMA's buy-back option program

 

12,515

 

 

-

 

 

-

 

 

12,515

 

 

-

 

 

-

 

 

682,564

 

 

609,987

 

 

-

 

 

72,577

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Credit cards

 

27,514

 

 

27,254

 

 

-

 

 

260

 

 

-

 

 

-

    Overdrafts

 

246

 

 

168

 

 

-

 

 

78

 

 

-

 

 

-

    Unsecured personal lines of credit

 

2,033

 

 

1,983

 

 

-

 

 

50

 

 

-

 

 

-

    Unsecured personal loans

 

290,135

 

 

288,857

 

 

-

 

 

1,278

 

 

-

 

 

-

    Cash collateral personal loans

 

14,937

 

 

14,916

 

 

-

 

 

21

 

 

-

 

 

-

 

 

334,865

 

 

333,178

 

 

-

 

 

1,687

 

 

-

 

 

-

    Auto and Leasing

 

957,197

 

 

943,603

 

 

-

 

 

13,594

 

 

-

 

 

-

      Total

 

1,974,626

 

 

1,886,768

 

 

-

 

 

87,858

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Retail - acquired loans (accounted for under ASC 310-20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Credit cards

 

24,861

 

 

24,591

 

 

-

 

 

270

 

 

-

 

 

-

    Personal loans

 

2,374

 

 

2,313

 

 

-

 

 

61

 

 

-

 

 

-

 

 

27,235

 

 

26,904

 

 

-

 

 

331

 

 

-

 

 

-

    Auto

 

16,171

 

 

16,017

 

 

-

 

 

154

 

 

-

 

 

-

 

 

43,406

 

 

42,921

 

 

-

 

 

485

 

 

-

 

 

-

 

$

3,368,658

 

$

3,135,644

 

$

70,420

 

$

162,594

 

$

-

 

$

-

38 


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

 

 

-

 

 

-

39 


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

      (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

 

 

-

 

 

-

      Total

 

50,884

 

 

49,348

 

 

-

 

 

1,536

 

 

-

 

 

-

 

$

3,260,156

 

$

3,038,474

 

$

69,571

 

$

152,111

 

$

-

 

$

-

40 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The composition of Oriental’s allowance for loan and lease losses at March 31, 2018 and December 31, 2017  was as follows:

 

 

March 31,

 

December 31,

 

2018

 

2017

 

(In thousands)

Allowance for loans and lease losses:

 

 

 

 

 

    Originated and other loans and leases held for investment:

 

 

 

 

 

        Mortgage 

$

18,983

 

$

20,439

        Commercial

 

33,174

 

 

30,258

        Consumer

 

18,023

 

 

16,454

        Auto and leasing

 

26,652

 

 

25,567

      Total allowance for originated and other loans and lease losses

 

96,832

 

 

92,718

 

 

 

 

 

 

    Acquired BBVAPR loans:

 

 

 

 

 

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

 

 

 

 

 

        acquired at a premium)

 

 

 

 

 

        Commercial

 

37

 

 

42

        Consumer

 

2,659

 

 

3,225

        Auto

 

488

 

 

595

 

 

3,184

 

 

3,862

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

 

 

 

 

 

         credit quality, including those by analogy)

 

 

 

 

 

        Mortgage 

 

14,331

 

 

14,085

        Commercial

 

22,047

 

 

23,691

        Consumer

 

18

 

 

18

        Auto

 

6,770

 

 

7,961

 

 

43,166

 

 

45,755

      Total allowance for acquired BBVAPR loans and lease losses

 

46,350

 

 

49,617

  Acquired Eurobank loans:

 

 

 

 

 

    Loans secured by 1-4 family residential properties

 

15,414

 

 

15,187

    Commercial

 

9,992

 

 

9,982

    Consumer

 

4

 

 

5

      Total allowance for acquired Eurobank loan and lease losses

 

25,410

 

 

25,174

Total allowance for loan and lease losses

$

168,592

 

$

167,509

 

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.

 

41 


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. 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 percentage 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.

 

During the first quarter of 2018, Oriental updated the previous performed analysis to estimate probable losses related to the hurricanes. Analyses were based on the payment experience percentage of borrowers for which the deferral period expired in retail portfolios. For commercial portfolio, no changes in the level of impact assessed were identified based on communications with credit officers.

   

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.

 

At March 31, 2018 and December 31, 2017, Oriental's allowance for loan and lease losses incorporated all risks associated to our loan portfolio, including the impact of hurricanes Irma and Maria.

 

 

42 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Allowance for Originated and Other Loan and Lease Losses Held for Investment

 

The following tables present 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:

 

 

Quarter Ended March 31, 2018

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Total

 

(In thousands)

Allowance for loan and lease losses for originated and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Balance at beginning of period

$

20,439

 

$

30,258

 

$

16,454

 

$

25,567

 

$

92,718

          Charge-offs

 

(968)

 

 

(1,149)

 

 

(4,258)

 

 

(8,982)

 

 

(15,357)

          Recoveries

 

314

 

 

182

 

 

240

 

 

3,777

 

 

4,513

          (Recapture) provision for loan and lease losses

 

(802)

 

 

3,883

 

 

5,587

 

 

6,290

 

 

14,958

      Balance at end of period

$

18,983

 

$

33,174

 

$

18,023

 

$

26,652

 

$

96,832

 

 

March 31, 2018

 

Mortgage

 

Commercial

 

Consumer

 

Auto and Leasing

 

Total

 

(In thousands)

Allowance for loan and lease losses on originated and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Ending allowance balance attributable

      to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Individually evaluated for impairment

$

9,022

 

$

13,274

 

$

-

 

$

-

 

$

22,296

        Collectively evaluated for impairment

 

9,961

 

 

19,900

 

 

18,023

 

 

26,652

 

 

74,536

                Total ending allowance balance

$

18,983

 

 $  

33,174

 

 $  

18,023

 

 $  

26,652

 

 $  

96,832

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Individually evaluated for impairment

$

84,283

 

$

67,833

 

$

-

 

$

-

 

$

152,116

        Collectively evaluated for impairment

 

598,281

 

 

1,278,571

 

 

334,865

 

 

957,197

 

 

3,168,914

                Total ending loan balance

$

682,564

 

$

1,346,404

 

$

334,865

 

$

957,197

 

$

3,321,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended  March 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 period

$

17,344

 

$

8,995

 

$

13,067

 

$

19,463

 

$

431

 

$

59,300

          Charge-offs

 

(2,379)

 

 

(856)

 

 

(3,358)

 

 

(7,563)

 

 

-

 

 

(14,156)

          Recoveries

 

56

 

 

89

 

 

165

 

 

3,294

 

 

-

 

 

3,604

          Provision (recapture) for originated and other loan and lease losses

 

3,557

 

 

1,660

 

 

3,520

 

 

3,427

 

 

(429)

 

 

11,735

                Balance at end of period

$

18,578

 

$

9,888

 

$

13,394

 

$

18,621

 

$

2

 

$

60,483

 

43 


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

Quarter Ended March 31, 2018

 

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 period

$

42

 

$

3,225

 

$

595

 

 

$

3,862

          Charge-offs

 

-

 

 

(1,022)

 

 

(125)

 

 

 

(1,147)

          Recoveries

 

3

 

 

54

 

 

228

 

 

 

285

          (Recapture) provision for acquired BBVAPR

          loan and lease losses accounted for

          under ASC 310-20

 

(8)

 

 

402

 

 

(210)

 

 

 

184

                Balance at end of period

$

37

 

$

2,659

 

$

488

 

 

$

3,184

 

44 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

March 31, 2018

 

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

$

21

 

$

-

 

$

-

 

$

21

        Collectively evaluated for impairment

 

16

 

 

2,659

 

 

488

 

 

3,163

                Total ending allowance balance

$

37

 

$

2,659

 

$

488

 

$

3,184

Loans:

 

 

 

 

 

 

 

 

 

 

 

        Individually evaluated for impairment

$

747

 

$

-

 

$

-

 

$

747

         Collectively evaluated for impairment

 

3,475

 

 

27,235

 

 

16,171

 

 

46,881

                Total ending loan balance

$

4,222

 

$

27,235

 

$

16,171

 

$

47,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 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 period

$

169

 

$

3,028

 

$

1,103

 

$

4,300

          Charge-offs

 

(6)

 

 

(885)

 

 

(278)

 

 

(1,169)

          Recoveries

 

1

 

 

64

 

 

452

 

 

517

          Provision (recapture) for acquired

            loan and lease losses accounted for

            under ASC 310-20

 

19

 

 

384

 

 

(436)

 

 

(33)

                Balance at end of period

$

183

 

$

2,591

 

$

841

 

$

3,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45 


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

 

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.

 

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:

 

 

Quarter Ended March 31, 2018

 

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 period

$

14,085

 

$

23,691

 

$

18

$

7,961

 

45,755

Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30

 

314

 

 

752

 

 

-

 

(887)

 

179

Allowance de-recognition

 

(68)

 

 

(2,396)

 

 

-

 

(304)

 

(2,768)

                Balance at end of period

$

14,331

 

$

22,047

 

$

18

$

6,770

 

43,166

46 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

Quarter Ended March 31, 2017

 

Mortgage

 

Commercial

 

Auto

 

Total

 

(In thousands)

Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:

 

 

 

 

 

 

 

 

 

 

 

      Balance at beginning of period

$

2,682

 

$

23,452

 

$

4,922

 

$

31,056

Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30

 

923

 

 

223

 

 

3,186

 

 

4,332

Allowance de-recognition

 

(32)

 

 

(147)

 

 

(279)

 

 

(458)

                Balance at end of period

$

3,573

 

$

23,528

 

$

7,829

 

$

34,930

 

Allowance for Acquired Eurobank Loan Losses

 

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the quarters ended March 31, 2018 and 2017 were as follows:

 

 

Quarter Ended March 31, 2018

 

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 period

$

15,187

 

$

9,982

 

$

5

 

$

25,174

          Provision (recapture) for loan and lease losses, net

 

179

 

 

(40)

 

 

-

 

 

139

          Allowance de-recognition

 

48

 

 

49

 

 

-

 

 

97

                Balance at end of period

$

15,414

 

$

9,991

 

$

5

 

$

25,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 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 period

$

11,947

 

$

9,328

 

$

6

 

$

21,281

          Provision (recapture) for loan and lease losses, net

 

2,398

 

 

(778)

 

 

-

 

 

1,620

          Allowance de-recognition

 

(177)

 

 

(717)

 

 

(1)

 

 

(895)

                Balance at end of period

$

14,168

 

$

7,833

 

$

5

 

$

22,006

47 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 7- FDIC INDEMNIFICATION ASSET AND TRUE-UP PAYMENT OBLIGATION

 

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 quarters ended March 31, 2018 and 2017:

 

  

Quarter Ended March 31,

 

2018

 

2017

 

(In thousands)

FDIC indemnification asset:

 

 

 

 

 

Balance at beginning of period

$

-

 

$

14,411

    FDIC indemnification asset benefit

 

-

 

 

1,403

    Shared-loss termination settlement

 

-

 

 

(15,814)

Balance at end of period

$

-

 

$

-

 

 

 

 

 

 

True-up payment obligation:

 

 

 

 

 

Balance at beginning of period

$

-

 

$

26,786

    Shared-loss termination settlement

 

-

 

 

(26,786)

Balance at end of period

$

-

 

$

-

48 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 8 FORECLOSED REAL ESTATE

 

The following tables present the activity related to foreclosed real estate for the quarters ended March 31, 2018 and 2017:

  

 

 

Quarter Ended  March 31, 2018

 

Originated and other loans and leases held for investment

 

Acquired BBVAPR loans

 

Acquired Eurobank loans

 

Total

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

      Balance at beginning of period

$

14,283

 

$

18,347

 

$

11,544

 

$

44,174

           Decline in value

 

(488)

 

 

(1,036)

 

 

(462)

 

 

(1,986)

          Additions 

 

1,487

 

 

1,649

 

 

113

 

 

3,249

           Sales

 

(1,917)

 

 

(2,465)

 

 

(741)

 

 

(5,123)

                Balance at end of period

$

13,365

 

$

16,495

 

$

10,454

 

$

40,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended  March 31, 2017

 

Originated and other loans and leases held for investment

 

Acquired BBVAPR loans

 

Acquired Eurobank loans

 

Total

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

      Balance at beginning of period

$

12,390

 

$

21,379

 

$

13,751

 

$

47,520

           Decline in value

 

(237)

 

 

(693)

 

 

(748)

 

 

(1,678)

          Additions 

 

3,412

 

 

3,534

 

 

440

 

 

7,386

           Sales

 

(2,011)

 

 

(2,687)

 

 

(894)

 

 

(5,592)

          Other adjustments

 

(85)

 

 

-

 

 

-

 

 

(85)

                Balance at end of period

$

13,469

 

$

21,533

 

$

12,549

 

$

47,551

 

After hurricanes Irma and Maria in September 2017, management evaluated the potential impact these 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.

  

49 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 9 DERIVATIVES

 

The following table presents Oriental’s derivative assets and liabilities at March 31, 2018 and December 31, 2017:

 

   

March 31,

 

December 31,

 

2018

 

2017

 

(In thousands)

Derivative assets:

 

 

 

 

 

    Interest rate swaps designated as cash flow hedges

 

146

 

 

-

    Interest rate swaps not designated as hedges

$

459

 

$

618

    Interest rate caps

 

293

 

 

153

 

$

898

 

$

771

Derivative liabilities:

 

 

 

 

 

    Interest rate swaps designated as cash flow hedges

 

-

 

 

510

    Interest rate swaps not designated as hedges

 

459

 

 

618

    Interest rate caps

 

293

 

 

153

 

$

752

 

$

1,281

 

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 March 31, 2018:

 

 

 

Notional

 

Fixed

 

Variable

 

Trade

 

Settlement

 

Maturity

Type

 

Amount

 

Rate

 

Rate Index

 

Date

 

Date

 

Date

 

 

 (In thousands)

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

34,735

 

2.4210%

 

1-Month LIBOR

 

07/03/13

 

07/03/13

 

08/01/23

 

 

$

34,735

 

 

 

 

 

 

 

 

 

 

 

An accumulated unrealized gain of $146 thousand and a loss of $510 thousand were recognized in accumulated other comprehensive income related to the valuation of these swaps at March 31, 2018 and December 31, 2017, respectively, and the related asset or liability is being reflected in the consolidated statements of financial condition.

 

At March 31, 2018 and December 31, 2017, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $459 thousand and $618 thousand, 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 March 31, 2018 and December 31, 2017, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $459 thousand and $618 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition.

 

 

 

50 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table shows a summary of these interest rate swaps not designated as hedging instruments and their terms at March 31, 2018:

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2018 and  December 31, 2017, the outstanding total notional amount of interest rate caps was $152.2 million and $152.6 million, respectively. At March 31, 2018 and December 31, 2017, the interest rate caps sold to clients represented a liability of $293 thousand and $153 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition. At March 31, 2018 and December 31, 2017, the interest rate caps purchased as mirror-images represented an asset of $293 thousand and $153 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition.  

  

 

NOTE 10 ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

 

Accrued interest receivable at March 31, 2018 and December 31, 2017 consists of the following:

 

  

March 31,

 

December 31,

  

2018

 

2017

 

(In thousands)

Loans, excluding acquired loans

$

31,756

 

$

46,936

Investments

 

3,385

 

 

3,033

 

$

35,141

 

$

49,969

 

 

 

 

 

 

51 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Accrued interest receivable at December 31, 2017, included $39.7 million, resulting from the loan payment moratorium. Accrued interest receivable resulting from the loan payment moratorium has been decreasing, as most moratoriums have expired. Some of these accrued interests are payable at the end of the loan term.

 

Other assets at March 31, 2018 and December 31, 2017 consist of the following:

 

 

March 31,

 

December 31,

  

2018

 

2017

 

(In thousands)

Prepaid expenses

$

7,154

 

$

9,200

Other repossessed assets

 

5,082

 

 

3,548

Core deposit and customer relationship intangibles

 

4,357

 

 

4,687

Mortgage tax credits

 

2,277

 

 

4,277

Investment in Statutory Trust

 

1,083

 

 

1,083

Accounts receivable and other assets

 

35,515

 

 

41,898

 

$

55,468

 

$

64,693

 

Prepaid expenses amounting to $7.2 million and $9.2 million at March 31, 2018 and December 31, 2017, respectively, include prepaid municipal, property and income taxes aggregating to $4.2 million and $5.7 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 March 31, 2018 and December 31, 2017 this core deposit intangible amounted to $3.1 million and $3.3 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 March 31, 2018 and December 31, 2017, this customer relationship intangible amounted to $1.2 million and $1.4 million, respectively.

 

Other repossessed assets totaled $5.1 million and $3.5 million at March 31, 2018 and December 31, 2017, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.

 

At March 31, 2018 and December 31, 2017, tax credits for Oriental totaled $2.3 million and $4.3 million, respectively. These tax credits do not have an expiration date.

 

NOTE 11 DEPOSITS AND RELATED INTEREST  

 

Total deposits, including related accrued interest payable, as of March 31, 2018 and December 31, 2017 consist of the following:

 

 

March 31,

 

December 31,

  

2018

 

2017

 

(In thousands)

Non-interest bearing demand deposits

$

1,071,648

 

 $  

969,525

Interest-bearing savings and demand deposits

 

2,274,855

 

 

2,274,116

Individual retirement accounts

 

219,427

 

 

231,376

Retail certificates of deposit

 

592,307

 

 

595,983

Institutional certificates of deposit

 

200,595

 

 

209,951

       Total core deposits

 

4,358,832

 

 

4,280,951

Brokered deposits

 

474,596

 

 

518,531

       Total deposits

$

4,833,428

 

$

4,799,482

 

 

 

 

 

 

52 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Brokered deposits include $428.8 million in certificates of deposits and $45.8 million in money market accounts at March 31, 2018, and $471.6 million in certificates of deposits and $46.9 million in money market accounts at December 31, 2017.

 

The weighted average interest rate of Oriental’s deposits was 0.62% and 0.65% at March 31, 2018 and December 31, 2017, respectively. Interest expense for the quarters ended March 31, 2018 and 2017 was as follows:

 

  

Quarter Ended March 31,

  

2018

 

2017

 

(In thousands)

Demand and savings deposits

$

2,812

 

$

2,909

Certificates of deposit

 

4,486

 

 

4,444

 

$

7,298

 

$

7,353

 

 

 

 

 

 

 

At March 31, 2018 and December 31, 2017, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $352.5 million and $359.6 million, respectively. Such amounts include public funds time deposits from various Puerto Rico government municipalities, agencies, and corporations of $2.3 million and $3.5 million at a weighted average rate of 0.30% and 0.28% at March 31, 2018 and December 31, 2017, respectively.

 

At March 31, 2018 and December 31, 2017, total public fund deposits from various Puerto Rico government municipalities, agencies, and corporations amounted to $127.3 million and $153.1 million, respectively. These public funds were collateralized with commercial loans amounting to $172.0 million and $173.0 million at March 31, 2018 and December 31, 2017, respectively.

 

Excluding accrued interest of approximately $1.7 million, the scheduled maturities of certificates of deposit at March 31, 2018 and 2017 are as follows:

 

 

March 31,

 

December 31,

 

 

2018

 

 

2017

  

(In thousands)

Within one year:

 

 

 

 

 

    Three (3) months or less

$

318,599

 

$

316,382

    Over 3 months through 1 year

 

462,655

 

 

508,285

 

 

781,254

 

 

824,667

Over 1 through 2 years

 

462,528

 

 

470,670

Over 2 through 3 years

 

121,506

 

 

137,016

Over 3 through 4 years

 

36,936

 

 

36,125

Over 4 through 5 years

 

37,247

 

 

38,623

 

$

1,439,471

 

$

1,507,101

 

 

 

 

 

 

 

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 $1.1 million and $2.2 million as of March 31, 2018 and December 31, 2017, respectively.

53 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 12 BORROWINGS AND RELATED INTEREST  

 

Securities Sold under Agreements to Repurchase

 

At March 31, 2018, 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 March 31, 2018 and December 31, 2017, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $426 thousand and $369 thousand, respectively, were as follows:

 

 

March 31,

 

December 31,

 

2018

 

2017

 

 

 

 

Fair Value of

 

 

 

 

Fair Value of

 

Borrowing

 

Underlying

 

Borrowing

 

Underlying

 

Balance

 

Collateral

 

Balance

 

Collateral

 

(In thousands)

JP Morgan Chase Bank NA

 

152,500

 

 

164,749

 

 

82,500

 

 

88,974

KGS Alpha

 

11,000

 

 

11,730

 

 

-

 

 

-

Federal Home Loan Bank

 

110,000

 

 

116,589

 

 

110,000

 

 

116,509

      Total

$

273,500

 

$

293,068

 

$

192,500

 

$

205,483

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table shows a summary of Oriental’s repurchase agreements and their terms, excluding accrued interest in the amount of $426 thousand, at March 31, 2018:

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 Borrowing  

 

Average

 

  

 

Maturity

Year of Maturity

 

Balance

 

Coupon

 

Settlement Date

 

Date

 

 

(In thousands)

 

 

 

 

 

 

2018

 

 

72,500

 

1.52%

 

12/30/2015

 

4/29/2018

 

 

 

11,000

 

2.15%

 

3/28/2018

 

4/4/2018

 

 

 

 

 

 

 

 

 

 

2019

 

 

50,000

 

1.72%

 

3/2/2017

 

9/3/2019

 

 

 

 

 

 

 

 

 

 

2020

 

 

60,000

 

1.85%

 

3/2/2017

 

3/2/2020

 

 

 

50,000

 

2.61%

 

3/15/2018

 

3/15/2020

 

 

 

30,000

 

2.70%

 

3/23/2018

 

3/23/2020

 

 

$

273,500

 

1.96%

 

 

 

 

 

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

 

 

 

54 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 March 31, 2018 and December 31, 2017. There was no cash collateral at March 31, 2018 and December 31, 2017.

 

 

 

 

 

 

 

 

Market Value of Underlying Collateral

 

 

 

 

 

 

 

Market Value of Underlying Collateral

 

 

 

 

Weighted

 

FNMA and

 

 

 

 

Weighted

 

FNMA and

 

Repurchase

 

Average

FHLMC

 

Repurchase

 

Average

FHLMC

 

Liability

 

Rate

 

Certificates

 

Liability

 

Rate

 

Certificates

 

March 31, 2018

 

December 31, 2017

 

(Dollars in thousands)

Less than 90 days

$

83,500

 

 

1.52%

 

$

90,170

 

$

-

 

 

-

 

$

-

Over 90 days

 

190,000

 

 

2.15%

 

 

202,898

 

 

192,500

 

 

1.63%

 

 

205,483

      Total

$

273,500

 

 

1.96%

 

$

293,068

 

$

192,500

 

 

1.63%

 

$

205,483

 

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 March 31, 2018 and December 31, 2017, these advances were secured by mortgage and commercial loans amounting to $972.8 million and $1.3 billion, respectively. Also, at March 31, 2018 and December 31, 2017, Oriental had an additional borrowing capacity with the FHLB-NY of $925.2 million and $920.0 million, respectively. At March 31, 2018 and December 31, 2017, the weighted average remaining maturity of FHLB’s advances was 5.8 months and 3.2 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 March 31, 2018.

 

The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $75 thousand, at March 31, 2018:

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 Borrowing  

 

Average

 

  

 

Maturity

   Year of Maturity

 

 

Balance

 

Coupon

 

Settlement Date

 

Date

 

 

 

(In thousands)

 

 

 

 

 

 

2018

 

 

34,735

 

1.86%

 

3/1/2018

 

4/2/2018

 

 

 

 

 

 

 

 

 

 

2020

 

 

9,124

 

2.59%

 

7/19/2013

 

7/20/2020

 

 

$

43,859

 

2.01%

 

 

 

 

 

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.

 

Subordinated Capital Notes

 

Subordinated capital notes amounted to $36.1 million at March 31, 2018 and December 31, 2017, for both periods.

  

55 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 13 – 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 an account control agreement.

 

The following table presents the potential effect of rights of set-off associated with Oriental’s recognized financial assets and liabilities at March 31, 2018 and December 31, 2017:

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

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

 

 $  

898

 

 $  

-

 

 $  

898

 

 $  

2,003

 

 $  

 -  

 

 $  

(1,105)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

56 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

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

 

$

752

 

 $  

-

 

 $  

752

 

 $  

-

 

 $  

1,980

 

 $  

(1,228)

Securities sold under agreements to repurchase

 

 

273,500

 

 

-

 

 

273,500

 

 

293,068

 

 

-

 

 

(19,568)

Total

 

$

274,252

 

 $  

-

 

 $  

274,252

 

 $  

293,068

 

 $  

1,980

 

 $  

(20,796)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 14 INCOME TAXES

 

At March 31, 2018 and December 31, 2017, Oriental’s net deferred tax asset amounted to $128.3 million and $127.4 million, respectively. 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 deferred tax asset, net of the existing valuation allowances recorded at March 31, 2018 and December 31, 2017. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

 

Oriental classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At March 31, 2018 the amount of unrecognized tax benefits remained at $1.3 million when compared to December 31, 2017. Oriental had accrued $24 thousand at March 31, 2018  (December 31, 2017 - $97 thousand) for the payment of interest and penalties relating to unrecognized tax benefits.

 

Oriental is subject to the dispositions of the 2011 Puerto Rico Internal Revenue Code, as amended (the "Code").  The Code imposes a maximum corporate tax rate of 39%.  Oriental maintained a lower effective tax rate for the quarters ended March 31, 2018 and 2017 of 32.0% and 37.8%, respectively.

 

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.

 

Income tax expense for the quarters ended March 31, 2018 and 2017 was $8.0 million and $9.2 million, respectively.

58 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 15 — 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 previous 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 March 31, 2018 and December 31, 2017, OFG Bancorp and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 2018 and December 31, 2017, 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.

59 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of March 31, 2018 and December 31, 2017 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 March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

910,828

 

20.29%

 

$

359,130

 

8.00%

 

$

448,913

 

10.00%

Tier 1 capital to risk-weighted assets

$

852,882

 

19.00%

 

$

269,348

 

6.00%

 

$

359,130

 

8.00%

Common equity tier 1 capital to risk-weighted assets

$

652,012

 

14.52%

 

$

202,011

 

4.50%

 

$

291,793

 

6.50%

Tier 1 capital to average total assets

$

852,882

 

14.07%

 

$

242,395

 

4.00%

 

$

302,994

 

5.00%

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Minimum Capital

 

Minimum to be Well

 

Actual

 

Requirement

 

Capitalized

  

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

(Dollars in thousands)

Bank Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

888,557

 

19.81%

 

$

358,832

 

8.00%

 

$

448,541

 

10.00%

Tier 1 capital to risk-weighted assets

$

830,845

 

18.52%

 

$

269,124

 

6.00%

 

$

358,832

 

8.00%

Common equity tier 1 capital to risk-weighted assets

$

830,845

 

18.52%

 

$

201,843

 

4.50%

 

$

291,551

 

6.50%

Tier 1 capital to average total assets

$

830,845

 

13.76%

 

$

241,559

 

4.00%

 

$

301,948

 

5.00%

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%

 

NOTE 16 – 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 March 31, 2018 and December 31, 2017, accumulated issuance costs charged against additional paid-in capital amounted to $13.6 million and $10.1 million for preferred and common stock, respectively.

60 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 March 31, 2018 and December 31, 2017, the Bank’s legal surplus amounted to $83.1 million and $81.5 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 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. During the quarters ended March 31, 2018 and 2017, Oriental did not purchase any shares under the program.

 

At March 31, 2018 the number of shares that may yet be purchased under the $70 million program is estimated at 739,795 and was calculated by dividing the remaining balance of $7.7 million by $10.45 (closing price of Oriental's common stock at March 31, 2018).

 

The activity in connection with common shares held in treasury by Oriental for the quarters ended March 31, 2018 and 2017 is set forth below:

 

  

Quarter Ended March 31,

  

2018

 

2017

 

 

 

Dollar

 

 

 

Dollar

  

Shares

 

Amount

 

Shares

 

Amount

 

(In thousands, except shares data)

Beginning of period

8,678,427

 

 $  

104,502

 

8,711,025

 

 $  

104,860

Common shares used upon lapse of restricted stock units

(20,900)

 

 

(360)

 

(32,598)

 

 

(358)

End of period

8,657,527

 

 $  

104,142

 

8,678,427

 

 $  

104,502

 

NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Accumulated other comprehensive income, net of income taxes, as of March 31, 2018 and December 31, 2017 consisted of:

 

 

March 31,

 

December 31,

  

2018

 

2017

 

(In thousands)

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

    other-than-temporarily impaired

$

(14,329)

 

 $  

(3,003)

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

 

2,055

 

 

365

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

        other-than-temporarily impaired

 

(12,274)

 

 

(2,638)

Unrealized gain (loss) on cash flow hedges

 

146

 

 

(510)

Income tax effect of unrealized (gain) loss on cash flow hedges

 

(57)

 

 

199

    Net unrealized gain (loss) on cash flow hedges

 

89

 

 

(311)

Accumulated other comprehensive (loss), net of income taxes

$

(12,185)

 

 $  

(2,949)

61 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the quarters ended March 31, 2018 and 2017:

 

 

Quarter Ended March 31, 2018

 

Net unrealized

 

Net unrealized

 

Accumulated

 

gains on

 

loss on

 

other

 

securities

 

cash flow

 

comprehensive

  

available-for-sale

 

hedges

 

(loss) income

 

(In thousands)

Beginning balance

$

(2,638)

 

$

(311)

 

$

(2,949)

Other comprehensive loss before reclassifications

 

(9,576)

 

 

26

 

 

(9,550)

Amounts reclassified out of accumulated other comprehensive income (loss)

 

(60)

 

 

374

 

 

314

Other comprehensive income (loss)

 

(9,636)

 

 

400

 

 

(9,236)

Ending balance

$

(12,274)

 

$

89

 

$

(12,185)

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 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

 

1,707

 

 

(38)

 

 

1,669

Amounts reclassified out of accumulated other comprehensive income (loss)

 

(66)

 

 

149

 

 

83

Other comprehensive income (loss)

 

1,641

 

 

111

 

 

1,752

Ending balance

$

3,850

 

$

(502)

 

$

3,348

62 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents reclassifications out of accumulated other comprehensive income for the quarters ended March 31, 2018 and 2017:  

 

Amount reclassified out of accumulated other comprehensive income

Affected Line Item in Consolidated Statement of Operations

  

 

Quarter Ended March 31,

 

 

2018

 

 

2017

 

(In thousands)

 

Cash flow hedges:

 

 

 

 

 

 

Interest-rate contracts

$

374

 

$

149

Net interest expense

Available-for-sale securities:

 

 

 

 

 

 

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

 

5

 

 

8

Income tax expense

Tax effect from changes in tax rates

 

(65)

 

 

(74)

 Income tax expense

 

$

314

 

$

83

 

 

NOTE 18 – EARNINGS PER COMMON SHARE

 

The calculation of earnings per common share for the quarters ended March 31, 2018 and 2017 is as follows:

 

  

Quarter Ended March 31,

  

2018

 

2017

 

 

(In thousands, except per share data)

Net income

 $  

16,917

 

 $  

15,150

 

    Less: Dividends on preferred stock

 

 

 

 

 

 

      Non-convertible preferred stock (Series A, B, and D)

 

(1,627)

 

 

(1,627)

 

      Convertible preferred stock (Series C)

 

(1,838)

 

 

(1,838)

 

Income available to common shareholders

$

13,452

 

$

11,685

 

    Effect of assumed conversion of the convertible preferred stock

 

1,838

 

 

1,838

 

Income available to common shareholders assuming conversion

$

15,290

 

$

13,523

 

 

 

 

 

 

 

 

 

Weighted average common shares and share equivalents:

 

 

 

 

 

 

  Average common shares outstanding

 

43,955

 

 

43,916

 

  Effect of dilutive securities:

 

 

 

 

 

 

    Average potential common shares-options

 

28

 

 

77

 

    Average potential common shares-assuming conversion of convertible preferred stock

 

7,138

 

 

7,138

 

Total weighted average common shares outstanding and equivalents

 

51,121

 

 

51,131

 

Earnings per common share - basic

 $  

0.31

 

 $  

0.27

 

Earnings per common share - diluted

$

0.30

 

$

0.26

 

63 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In computing diluted earnings per common share, the 84,000 shares of convertible preferred stock, which remain outstanding at March 31, 2018, 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 quarters ended March 31, 2018 and 2017 on the convertible preferred stock were added back as income available to common shareholders.

 

For the quarters ended March 31, 2018 and 2017, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 859,322 and 507,786, respectively.

 

NOTE 19 – GUARANTEES

At March 31, 2018 and December 31, 2017 , the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $18.6 million and $21.1 million, respectively.

 

Oriental has a liability for residential mortgage loans sold subject to credit recourse, pursuant to FNMA’s residential mortgage loan sales and securitization programs. At March 31, 2018 and December 31, 2017, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $6.3 million and $6.4 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 quarters ended March 31, 2018 and 2017.

 

  

Quarter Ended March 31,

 

2018

 

2017

 

(In thousands)

Balance at beginning of period

$

358

 

$

710

    Net (charge-offs/terminations) recoveries

 

(94)

 

 

(140)

Balance at end of period

$

264

 

$

570

 

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 the quarter ended March 31, 2018, Oriental did not repurchase any mortgage loans subject to credit recourse provisions. During the quarter ended March 31, 2017, Oriental repurchased approximately $41 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 March 31, 2018, Oriental’s liability for estimated credit losses related to loans sold with credit recourse amounted to $264 thousand (December 31, 2017– $358 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 quarter ended March 31, 2018, Oriental repurchased $2.3 million (March 31, 2017 – $978 thousand) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above.  

64 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

During the quarters ended March 31, 2018 and 2017, Oriental recognized $100 thousand in losses from the repurchase of residential mortgage loans sold subject to credit recourse, at both periods. During the quarters ended March 31, 2018 and 2017, Oriental recognized $1 thousand and $308 thousand, 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 March 31, 2018, Oriental serviced $872.2 million (December 31, 2017 - 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 March 31, 2018, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements was approximately $605 thousand (December 31, 2017 - $440 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 20 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 March 31, 2018 and December 31, 2017 were as follows:

 

 

March 31,

 

December 31,

  

2018

 

2017

 

(In thousands)

Commitments to extend credit

$

508,955

 

 $  

485,019

Commercial letters of credit

 

1,402

 

 

494

65 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 March 31, 2018 and December 31, 2017, 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 at both March 31, 2018 and December 31, 2017

 

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.

 

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at March 31, 2018 and December 31, 2017, is as follows:

 

 

March 31,

 

December 31,

  

2018

 

2017

 

(In thousands)

Standby letters of credit and financial guarantees

$

18,648

 

 $  

21,107

Loans sold with recourse

 

6,332

 

 

6,420

 

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 quarters ended March 31, 2018 and 2017, amounted to $2.2 million and $2.0 million, respectively, and is included in the "occupancy and equipment" caption in the unaudited consolidated statements of operations. Future rental commitments under leases in effect at March 31, 2018, exclusive of taxes, insurance, and maintenance expenses payable by Oriental, are summarized as follows:

 

 

Minimum Rent

Year Ending December 31,

(In thousands)

2018

$

6,593

2019

 

6,345

2020

 

5,679

2021

 

4,796

2022

 

3,379

Thereafter

 

6,869

 

$

33,661

 

 

 

66 


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.

 

67 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 21 – BANKING AND FINANCIAL SERVICE REVENUES

 

The following table presents the major categories of banking and financial service revenues for the quarters ended March 31, 2018 and 2017:

 

 

 

Quarter Ended March 31,

  

 

2018

 

2017

 

 

 

(In thousands)

Banking service revenues:

 

 

 

 

 

 

 

Checking accounts fees

 

$

1,519

 

$

1,852

 

Savings accounts fees

 

 

154

 

 

155

 

Electronic banking fees

 

 

7,571

 

 

7,683

 

Credit life commissions

 

 

119

 

 

149

 

Branch service commissions

 

 

327

 

 

147

 

Servicing and other loan fees

 

 

601

 

 

484

 

International fees

 

 

169

 

 

146

 

Miscellaneous income

 

 

3

 

 

10

 

 Total banking service revenues

 

 

10,463

 

 

10,626

 

 

 

 

 

 

 

 

 

Wealth management revenue:

 

 

 

 

 

 

 

Insurance income

 

 

1,238

 

 

1,551

 

Broker fees

 

 

1,789

 

 

1,876

 

Trust fees

 

 

2,696

 

 

2,548

 

Retirement plan and administration fees

 

 

287

 

 

240

 

Investment banking fees

 

 

9

 

 

-

 

 Total wealth management revenue

 

 

6,019

 

 

6,215

 

 

 

 

 

 

 

 

 

Mortgage banking activities:

 

 

 

 

 

 

 

Net servicing fees

 

 

1,754

 

 

820

 

Net gains (losses) on sale of mortgage loans and valuation

 

 

3

 

 

174

 

Other

 

 

-

 

 

(407)

 

 Total mortgage banking activities

 

 

1,757

 

 

587

 

Total banking and financial service revenues

 

$

18,239

 

$

17,428

 

68 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 22 - 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"), an 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 March 31, 2018 and December 31, 2017, Oriental did not have investment securities classified as Level 3.

 

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.

 

 

 

69 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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:

 

  

March 31, 2018

  

Fair Value Measurements

  

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Recurring fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

    Investment securities available-for-sale

$

-

 

$

801,641

 

$

-

 

$

801,641

    Trading securities

 

-

 

 

293

 

 

-

 

 

293

    Money market investments

 

7,428

 

 

-

 

 

-

 

 

7,428

    Derivative assets

 

-

 

 

898

 

 

-

 

 

898

    Servicing assets

 

-

 

 

-

 

 

10,533

 

 

10,533

    Derivative liabilities

 

-

 

 

(752)

 

 

-

 

 

(752)

 

$

7,428

 

$

802,080

 

$

10,533

 

$

820,041

Non-recurring fair value measurements:

 

 

 

 

 

 

 

 

 

 

 

    Impaired commercial loans

$

-

 

$

-

 

$

68,580

 

$

68,580

    Foreclosed real estate

 

-

 

 

-

 

 

40,314

 

 

40,314

    Other repossessed assets

 

-

 

 

-

 

 

5,082

 

 

5,082

 

$

-

 

$

-

 

$

113,976

 

$

113,976

 

 

 

 

 

 

 

 

 

 

 

 

70 


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

 

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2018 and 2017:

 

 

Servicing assets

 

Quarter Ended  March 31,

Level 3 Instruments Only

2018

 

2017

 

(In thousands)

Balance at beginning of period

$

9,821

 

$

9,858

    New instruments acquired

 

352

 

 

534

    Principal repayments

 

(199)

 

 

(162)

    Changes in fair value of servicing assets

 

559

 

 

(542)

Balance at end of period

$

10,533

 

$

9,688

 

During the quarters ended March 31, 2018 and 2017, 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.

71 


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 March 31, 2018:

 

 

 

March 31, 2018

 

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing assets

 

$

10,533

 

Cash flow valuation

 

Constant prepayment rate

 

4.08% -8.50%

 

 

 

 

 

 

 

Discount rate

 

10.00% - 12.00%

Collateral dependent

    impaired loans

 

$

35,239

 

Fair value of property

    or collateral

 

Appraised value less disposition costs

 

19.20% - 35.20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other non-collateral dependent  impaired loans

 

$

33,341

 

Cash flow valuation

 

Discount rate

 

4.15% - 10.50%

 

 

 

 

 

 

 

 

 

 

Foreclosed real estate

 

$

40,314

 

Fair value of property

    or collateral

 

Appraised value less disposition costs

 

19.20% - 35.20%

 

 

 

 

 

 

 

 

 

 

Other repossessed assets

 

$

5,082

 

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.

72 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The estimated fair value and carrying value of Oriental’s financial instruments at March 31, 2018 and December 31, 2017 is as follows:  

 

 

March 31,

 

December 31,

  

2018

 

2017

  

Fair

 

Carrying

 

Fair

 

Carrying

  

Value

 

Value

 

Value

 

Value

 

(In thousands)

Level 1

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 $  

362,358

 

 $  

362,358

 

 $  

485,203

 

 $  

485,203

    Restricted cash

$

3,030

 

$

3,030

 

$

3,030

 

$

3,030

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

    Trading securities

 $  

293

 

 $  

293

 

 $  

191

 

 $  

191

    Investment securities available-for-sale

$

801,641

 

$

801,641

 

$

645,797

 

$

645,797

    Investment securities held-to-maturity

 $  

467,980

 

 $  

485,143

 

 $  

497,681

 

 $  

506,064

    Federal Home Loan Bank (FHLB) stock

$

11,499

 

$

11,499

 

$

13,995

 

$

13,995

    Other investments

 $  

3

 

 $  

3

 

 $  

3

 

 $  

3

    Derivative assets

$

898

 

$

898

 

$

771

 

$

771

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Derivative liabilities

$

752

 

$

752

 

$

1,281

 

$

1,281

Level 3

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

    Total loans (including loans held-for-sale)

 $  

3,735,449

 

 $  

4,133,429

 

 $  

3,842,907

 

 $  

4,056,329

    Accrued interest receivable

$

35,141

 

$

35,141

 

$

49,969

 

$

49,969

    Servicing assets

 $  

10,533

 

 $  

10,533

 

 $  

9,821

 

 $  

9,821

    Accounts receivable and other assets

$

35,515

 

$

35,515

 

$

41,898

 

$

41,898

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Deposits

$

4,767,479

 

$

4,833,428

 

$

4,782,197

 

$

4,799,482

    Securities sold under agreements to repurchase

 $  

271,811

 

 $  

273,926

 

 $  

191,104

 

 $  

192,869

    Advances from FHLB

$

43,880

 

$

43,934

 

$

99,509

 

$

99,643

    Other borrowings

 $  

394

 

 $  

394

 

 $  

153

 

 $  

153

    Subordinated capital notes

$

34,158

 

$

36,083

 

$

33,080

 

$

36,083

    Accrued expenses and other liabilities

 $  

85,886

 

 $  

85,886

 

 $  

86,791

 

 $  

86,791

73 


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 March 31, 2018 and 2017:

 

•    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 and non-performing loans) is based on the exit market price, which 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. The fair value 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.

 

•    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.

74 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 23 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.

75 


OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Following are the results of operations and the selected financial information by operating segment for the quarters ended March 31, 2018 and 2017:

 

 

Quarter Ended March 31, 2018

  

 

  

 

Wealth

 

 

  

 

Total Major

 

 

  

 

Consolidated

  

Banking

 

Management

 

Treasury

 

Segments

 

Eliminations

 

Total

 

(In thousands)

Interest income

$

74,374

 

$

12

 

$

8,784

 

$

83,170

 

$

-

 

$

83,170

Interest expense

 

(6,290)

 

 

-

 

 

(2,886)

 

 

(9,176)

 

 

-

 

 

(9,176)

Net interest income

 

68,084

 

 

12

 

 

5,898

 

 

73,994

 

 

-

 

 

73,994

Provision for loan and  lease losses, net

 

(15,455)

 

 

-

 

 

(5)

 

 

(15,460)

 

 

-

 

 

(15,460)

Non-interest income, net

 

12,193

 

 

6,308

 

 

13

 

 

18,514

 

 

-

 

 

18,514

Non-interest expenses

 

(48,081)

 

 

(3,286)

 

 

(754)

 

 

(52,121)

 

 

-

 

 

(52,121)

Intersegment revenue

 

361

 

 

-

 

 

-

 

 

361

 

 

(361)

 

 

-

Intersegment expenses

 

-

 

 

(179)

 

 

(182)

 

 

(361)

 

 

361

 

 

-

Income before income taxes

$

17,102

 

$

2,855

 

$

4,970

 

$

24,927

 

$

-

 

$

24,927

Income tax expense (benefit)

 

6,670

 

 

1,113

 

 

227

 

 

8,010

 

 

-

 

 

8,010

Net income

$

10,432

 

$

1,742

 

$

4,743

 

$

16,917

 

$

-

 

$

16,917

Total assets

$

5,661,759

 

$

28,377

 

$

1,529,912

 

$

7,220,048

 

$

(972,927)

 

$

6,247,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2017

  

 

  

 

Wealth

 

 

  

 

Total Major

 

 

  

 

Consolidated

  

Banking

 

Management

 

Treasury

 

Segments

 

Eliminations

 

Total

 

(In thousands)

Interest income

$

77,573

 

$

12

 

$

8,593

 

$

86,178

 

$

-

 

$

86,178

Interest expense

 

(6,814)

 

 

-

 

 

(4,746)

 

 

(11,560)

 

 

-

 

 

(11,560)

Net interest income

 

70,759

 

 

12

 

 

3,847

 

 

74,618

 

 

-

 

 

74,618

Provision for loan and  lease losses, net

 

(17,642)

 

 

-

 

 

(12)

 

 

(17,654)

 

 

-

 

 

(17,654)

Non-interest income, net

 

13,227

 

 

5,928

 

 

(81)

 

 

19,074

 

 

-

 

 

19,074

Non-interest expenses

 

(46,054)

 

 

(4,220)

 

 

(1,410)

 

 

(51,684)

 

 

-

 

 

(51,684)

Intersegment revenue

 

464

 

 

-

 

 

71

 

 

535

 

 

(535)

 

 

-

Intersegment expenses

 

(71)

 

 

(311)

 

 

(153)

 

 

(535)

 

 

535

 

 

-

Income before income taxes

$

20,683

 

$

1,409

 

$

2,262

 

$

24,354

 

$

-

 

$

24,354

Income tax expenses (benefit)

 

8,066

 

 

550

 

 

588

 

 

9,204

 

 

-

 

 

9,204

Net income

$

12,617

 

$

859

 

$

1,674

 

$

15,150

 

$

-

 

$

15,150

Total assets

$

5,485,678

 

$

24,866

 

$

1,861,616

 

$

7,372,160

 

$

(957,553)

 

$

6,414,607

76 


 

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

 

INTRODUCTION

 

The following discussion of Oriental’s financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and Oriental’s consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements. Please see “Forward-Looking Statements” and the risk factors set forth in our Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), for discussion of the uncertainties, risks and assumptions associated with these statements.

 

Oriental is a publicly-owned financial holding company that provides a full range of banking and financial services through its subsidiaries, including commercial, consumer, auto and mortgage lending; checking and savings accounts; financial planning, insurance and securities brokerage services; and corporate and individual trust and retirement services. Oriental operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. Oriental has 39 branches in Puerto Rico and a subsidiary in Boca Raton, Florida, and a non-bank operating subsidiary in Cornelius, North Carolina. 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 diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance agency, and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, Oriental’s commitment is to continue producing a balanced and growing revenue stream.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies” of our 2017 Form 10-K.

 

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” section of our 2017 Form 10-K, we identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition:

 

·        Fair value measurements of financial instruments

·        Interest on loans and allowance for loan losses

·        Acquisition accounting for loans

·        Income taxes

·        Goodwill 

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. Management has reviewed and approved these critical accounting policies and has discussed its judgments and assumptions with the Audit Committee of our Board of Directors. There have been no material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2017 Form 10-K.

 

77 


 

OVERVIEW OF FINANCIAL PERFORMANCE

 

SELECTED FINANCIAL DATA

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

 

 

 

 

 

 

 

Variance

 

2018

 

2017

 

%

EARNINGS DATA:

(In thousands, except per share data)

Interest income

$

83,170

 

$

86,178

 

-3.5%

Interest expense

 

9,176

 

 

11,560

 

-20.6%

    Net interest income

 

73,994

 

 

74,618

 

-0.8%

Provision for loan and lease losses, net

 

15,460

 

 

17,654

 

-12.4%

        Net interest income after provision for loan

            and lease losses

 

58,534

 

 

56,964

 

2.8%

Non-interest income

 

18,514

 

 

19,074

 

-2.9%

Non-interest expenses

 

52,121

 

 

51,684

 

0.8%

    Income before taxes

 

24,927

 

 

24,354

 

2.4%

Income tax expense

 

8,010

 

 

9,204

 

-13.0%

    Net income

 

16,917

 

 

15,150

 

11.7%

Less: dividends on preferred stock

 

(3,465)

 

 

(3,465)

 

0.0%

    Income available to common shareholders

$

13,452

 

$

11,685

 

15.1%

PER SHARE DATA:

 

 

 

 

 

 

 

  Basic

$

0.31

 

$

0.27

 

14.8%

  Diluted

$

0.30

 

$

0.26

 

15.4%

Average common shares outstanding

 

43,955

 

 

43,915

 

0.1%

Average common shares outstanding and equivalents

 

51,121

 

 

51,131

 

0.0%

Cash dividends declared per common share

$

0.06

 

$

0.06

 

0.0%

Cash dividends declared on common shares

$

2,638

 

$

2,637

 

0.0%

PERFORMANCE RATIOS:

 

 

 

 

 

 

 

  Return on average assets (ROA)

 

1.09%

 

 

0.95%

 

14.7%

  Return on average tangible common equity

 

7.73%

 

 

7.00%

 

10.4%

  Return on average common equity (ROE)

 

6.84%

 

 

6.15%

 

11.2%

  Equity-to-assets ratio

 

15.16%

 

 

14.52%

 

4.4%

  Efficiency ratio

 

56.51%

 

 

56.15%

 

0.6%

  Interest rate spread

 

5.13%

 

 

5.02%

 

2.2%

  Interest rate margin

 

5.22%

 

 

5.10%

 

2.4%

78 


 

SELECTED FINANCIAL DATA - (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

Variance

 

2018

 

2017

 

%

PERIOD END BALANCES AND CAPITAL RATIOS:

(In thousands, except per share data)

Investments and loans

 

 

 

 

 

 

 

    Investment securities

$

1,298,579

 

$

1,166,050

 

11.4%

    Loans and leases, net

 

4,133,429

 

 

4,056,329

 

1.9%

        Total investments and loans

$

5,432,008

 

$

5,222,379

 

4.0%

Deposits and borrowings

 

 

 

 

 

 

 

    Deposits

$

4,833,428

 

$

4,799,482

 

0.7%

    Securities sold under agreements to repurchase

 

273,926

 

 

192,869

 

42.0%

    Other borrowings

 

80,411

 

 

135,879

 

-40.8%

        Total deposits and borrowings

$

5,187,765

 

$

5,128,230

 

1.2%

Stockholders’ equity

 

 

 

 

 

 

 

    Preferred stock

$

176,000

 

$

176,000

 

0.0%

    Common stock

 

52,626

 

 

52,626

 

0.0%

    Additional paid-in capital

 

541,404

 

 

541,600

 

0.0%

    Legal surplus

 

83,138

 

 

81,454

 

2.1%

    Retained earnings

 

210,008

 

 

200,878

 

4.5%

    Treasury stock, at cost

 

(104,142)

 

 

(104,502)

 

0.3%

    Accumulated other comprehensive (loss)

 

(12,185)

 

 

(2,949)

 

-313.2%

        Total stockholders' equity

$

946,849

 

$

945,107

 

0.2%

Per share data

 

 

 

 

 

 

 

    Book value per common share

$

17.76

 

$

17.73

 

0.2%

    Tangible book value per common share

$

15.71

 

$

15.67

 

0.3%

    Market price at end of period

$

10.45

 

$

9.40

 

11.2%

Capital ratios

 

 

 

 

 

 

 

    Leverage capital

 

14.07%

 

 

13.92%

 

1.1%

    Common equity Tier 1 capital ratio

 

14.52%

 

 

14.59%

 

-0.5%

    Tier 1 risk-based capital

 

19.00%

 

 

19.05%

 

-0.3%

    Total risk-based capital

 

20.29%

 

 

20.34%

 

-0.2%

Financial assets managed

 

 

 

 

 

 

 

    Trust assets managed

$

2,939,723

 

$

3,039,998

 

-3.3%

    Broker-dealer assets gathered

$

2,200,176

 

$

2,250,460

 

-2.2%

79 


 

OVERVIEW OF FINANCIAL PERFORMANCE

 

Our first quarter results reflect the success of our strategies and Puerto Rico’s recovery. Oriental earned $0.30 per share fully diluted, 15% higher than a year ago. Our strong capital position continued to build.

The island benefited from loan payment moratoriums by Oriental and other banks, an increased availability of electric power, improvement in communications, and the return of day to day stability, as well as rebuild spending by FEMA, the start of payments of insurance claims, and the prospect of growing assignments of federal funds.

Nearly every metric in the quarter ended March 31, 2018 confirmed this progress. For the second quarter in a row, our originated loan growth outpaced the pay down of acquired loans, resulting in a net increase of $77.1 million from December 31, 2017.

Auto, consumer and mortgage lending production at $192.3 million increased 52% from the preceding quarter and more than 11% from the year ago quarter. In particular, auto lending was at a record level, up more than 46% from the preceding and year ago quarters. Commercial loan production in Puerto Rico, while lower than the prior quarter, rose more than 13% year over year. Meanwhile, our US commercial and industrial loan program added close to $74 million in participations.

With nearly all of our loan moratoriums expiring during this quarter, credit quality remained solid. Most metrics were better than, or returned to, pre-hurricanes levels.

Fee revenues rebounded with a 24% sequential increase in Banking Services and a 43% increase in mortgage banking. Core wealth management held steady at pre-hurricanes levels.

Customer deposits (excluding brokered-deposits) increased 2% from December 31, 2017 and 5% from a year ago. Our net interest margin expanded to 5.22%, and net new customer accounts grew at an annualized rate of 8%, significantly exceeding 2017’s hurricanes affected 2% rise.

Our effort to differentiate Oriental through superior service and digital banking technology is proving effective. Our team of dedicated bankers continually reaching out to our customers and clients is clearly working. During the quarter ended March 31, 2018, we introduced another new technology-based service—My Payments (Mis Pagos), which enables loan customers to pay online instead of standing in line.

While we remain cautious due to the uncertain economic environment on the island, we are confident positive momentum will prevail for both Oriental and Puerto Rico. We will continue to sharpen our focus on our retail and commercial clients, improve our service levels, and provide faster and more agile ways to do banking.

Summary of first quarter of 2018

·        Net income available to shareholders was $13.5 million, or $0.30 per fully diluted share. This was in line with the $13.6 million, or $0.30 per share from the preceding quarter, and exceeded the year ago quarter’s $11.7 million, or $0.26 per share.

·        Return on average assets and average tangible common equity was 1.09% and 7.73%, respectively.

·        Tangible book value per common share was $15.71, and the tangible common equity ratio was 11.22%.

·        Loan production of $309.4 million increased 22.0% from the preceding and 41.4% from the year ago quarter.

·        Total provision for loan and lease losses, net, declined $2.2 million from the year ago quarter.

·        Core non-interest income of $18.2 million increased 9.0% from the preceding quarter and 4.7% from the year ago quarter as banking service fees and mortgage banking revenues rebounded.

80 


 

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 quarters ended March 31, 2018 and 2017:

  

 

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

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Interest

 

Average rate

 

Average balance

 

March

 

March

 

March

 

March

 

March

 

March

 

2018

 

2017

 

2018

2017

 

2018

 

2017

 

(Dollars in thousands)

A - TAX EQUIVALENT SPREAD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

$

83,170

 

$

86,178

 

5.86%

 

5.89%

 

$

5,751,783

 

$

5,932,923

Tax equivalent adjustment

 

1,162

 

 

1,225

 

0.08%

 

0.08%

 

 

-

 

 

-

Interest-earning assets - tax equivalent

 

84,332

 

 

87,403

 

5.94%

 

5.97%

 

 

5,751,783

 

 

5,932,923

Interest-bearing liabilities

 

9,174

 

 

11,560

 

0.72%

 

0.87%

 

 

5,127,188

 

 

5,399,122

Tax equivalent net interest income / spread

 

75,158

 

 

75,843

 

5.22%

 

5.10%

 

 

624,595

 

 

533,801

Tax equivalent interest rate margin

 

 

 

 

 

 

5.29%

 

5.18%

 

 

 

 

 

 

B - NORMAL SPREAD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

7,351

 

 

7,682

 

2.40%

 

2.29%

 

 

1,239,794

 

 

1,360,186

Interest bearing cash and money market investments

 

1,207

 

 

846

 

1.49%

 

0.80%

 

 

328,214

 

 

431,110

        Total investments

 

8,558

 

 

8,528

 

2.21%

 

1.93%

 

 

1,568,008

 

 

1,791,296

Non-acquired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

 

9,006

 

 

9,531

 

5.34%

 

5.43%

 

 

683,398

 

 

711,553

Commercial

 

18,274

 

 

15,997

 

5.66%

 

5.21%

 

 

1,310,444

 

 

1,245,530

Consumer

 

8,433

 

 

7,648

 

10.78%

 

11.09%

 

 

317,295

 

 

279,558

Auto and leasing

 

21,068

 

 

18,780

 

9.15%

 

9.78%

 

 

933,456

 

 

778,815

        Total non-acquired loans

 

56,781

 

 

51,956

 

7.10%

 

6.99%

 

 

3,244,593

 

 

3,015,456

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired BBVAPR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage

 

7,073

 

 

7,890

 

5.54%

 

5.73%

 

 

517,839

 

 

558,864

Commercial

 

3,690

 

 

4,985

 

7.08%

 

7.81%

 

 

211,319

 

 

258,755

Consumer

 

2,388

 

 

2,932

 

16.82%

 

19.15%

 

 

57,568

 

 

62,097

Auto

 

1,339

 

 

3,278

 

9.89%

 

11.27%

 

 

54,912

 

 

117,933

        Total acquired BBVAPR loans

 

14,490

 

 

19,085

 

6.98%

 

7.76%

 

 

841,638

 

 

997,649

Acquired Eurobank

 

3,341

 

 

6,610

 

13.89%

 

20.86%

 

 

97,544

 

 

128,522

            Total loans

 

74,612

 

 

77,651

 

7.23%

 

7.60%

 

 

4,183,775

 

 

4,141,627

                Total interest-earning assets

 

83,170

 

 

86,179

 

5.86%

 

5.89%

 

 

5,751,783

 

 

5,932,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81 


 

 

Interest

 

 

Average rate

 

Average balance

 

March

 

March

 

 

March

March

March

 

March

 

2018

 

2017

 

 

2018

 

2017

 

2018

 

2017

 

(Dollars in thousands)

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW Accounts

 

898

 

 

1,041

 

 

0.34%

 

0.39%

 

 

1,059,129

 

 

1,092,389

Savings and money market

 

1,497

 

 

1,481

 

 

0.50%

 

0.52%

 

 

1,206,100

 

 

1,164,040

Individual retirement accounts

 

336

 

 

426

 

 

0.61%

 

0.68%

 

 

224,299

 

 

253,626

Retail certificates of deposits

 

2,460

 

 

1,650

 

 

1.67%

 

1.24%

 

 

596,479

 

 

541,706

        Total core deposits

 

5,191

 

 

4,598

 

 

0.68%

 

0.61%

 

 

3,086,007

 

 

3,051,761

Institutional deposits

 

6

 

 

641

 

 

0.01%

 

1.16%

 

 

203,962

 

 

224,196

Brokered deposits

 

1,886

 

 

1,885

 

 

1.64%

 

1.33%

 

 

466,638

 

 

574,549

        Total wholesale deposits

 

1,892

 

 

2,526

 

 

1.14%

 

1.28%

 

 

670,600

 

 

798,745

 

 

7,083

 

 

7,124

 

 

0.76%

 

0.75%

 

 

3,756,607

 

 

3,850,506

Non-interest bearing deposits

 

-

 

 

-

 

 

0.00%

 

0.00%

 

 

1,018,789

 

 

832,665

Core deposit intangible amortization

 

215

 

 

229

 

 

0.00%

 

0.00%

 

 

-

 

 

-

            Total deposits

 

7,298

 

 

7,353

 

 

0.62%

 

0.64%

 

 

4,775,396

 

 

4,683,171

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

1,076

 

 

3,245

 

 

1.73%

 

2.29%

 

 

251,582

 

 

574,771

Advances from FHLB and other borrowings

 

374

 

 

596

 

 

2.37%

 

2.30%

 

 

64,127

 

 

105,097

Subordinated capital notes

 

428

 

 

366

 

 

4.79%

 

4.12%

 

 

36,083

 

 

36,083

        Total borrowings

 

1,878

 

 

4,207

 

 

2.16%

 

2.38%

 

 

351,792

 

 

715,951

            Total interest bearing liabilities

 

9,176

 

 

11,560

 

 

0.73%

 

0.87%

 

 

5,127,188

 

 

5,399,122

Net interest income / spread

$

73,994

 

$

74,618

 

 

5.13%

 

5.02%

 

 

 

 

 

 

Interest rate margin

 

 

 

 

 

 

 

5.22%

 

5.10%

 

 

 

 

 

 

Excess of average interest-earning assets

    over average interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

$

624,595

 

$

533,801

Average interest-earning assets to average

    interest-bearing liabilities ratio

 

 

 

 

 

 

 

 

 

 

 

 

112.18%

 

 

109.89%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C - CHANGES IN NET INTEREST INCOME DUE TO:

 

 

 

 

 

 

 

 

Volume

 

Rate

 

Total

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

$

(1,063)

 

$

1,092

 

$

29

 

 

 

 

 

 

 

 

Loans

 

(630)

 

 

(2,408)

 

 

(3,038)

 

 

 

 

 

 

 

 

        Total interest income

 

(1,693)

 

 

(1,316)

 

 

(3,009)

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

145

 

 

(200)

 

 

(55)

 

 

 

 

 

 

 

 

Repurchase agreements

 

(1,825)

 

 

(344)

 

 

(2,169)

 

 

 

 

 

 

 

 

Other borrowings

 

(279)

 

 

117

 

 

(162)

 

 

 

 

 

 

 

 

        Total interest  expense

 

(1,959)

 

 

(427)

 

 

(2,386)

 

 

 

 

 

 

 

 

Net Interest Income

$

266

 

$

(889)

 

$

(623)

 

 

 

 

 

 

 

 

82 


 

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 quarters ended March 31, 2018 and 2017

 

Net interest income of $74.0 million decreased $623 thousand from $74.6 million. Interest rate spread increased 11 basis points to 5.13% from 5.02% and net interest margin increased 12 basis points to 5.22% from 5.10%. These increases are mainly due to the net effect of a decrease of 3 basis points in the average yield of total interest earning assets and a decrease of 14 basis points in the total average of interest bearing liabilities.

 

Net interest income was positively impacted by:

 

·         Higher interest income from originated loans of $4.8 million reflecting higher balances in the commercial and retail loan portfolios; and

 

·         Lower interest expenses on securities sold under agreements to repurchase due to decreases in volume and interest rate of $1.8 million and $344 thousand, 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 $100.0 million repurchase agreements in June 2017.

  

Net interest income was adversely impacted by:

 

·         A decrease of $7.9 million in the interest income from the acquired BBVAPR and Eurobank loan portfolios as such loans continue to be repaid.

 

Comparison of quarters ended March 31, 2017 and 2016

 

Net interest income of $74.6 million slightly decreased 0.5% compared with $75.0 million, reflecting a decrease in interest income of 5.6%, partially offset by a decrease in interest expenses of 29.2%. Interest rate spread increase 43 basis points from 4.59% to 5.02%.  This increase is mainly due to the net effect of 20 basis points increase in the average yield of interest-earning assets from 5.69% to 5.89% and to 23 basis points decrease in average costs of interest-bearing liabilities from 1.10% to 0.87%

 

Net interest income was positively impacted by:

 

·         Higher interest income from originated loans of $4.0 million reflecting higher yields on commercial and retail loan portfolios; and

 

·         Lower interest expenses on repurchase agreements and other borrowings of $5.0 million as a result of the repayment of high cost repurchase agreements and FHLB advances.

 

Net interest income was adversely impacted by:

 

·         A decrease of $7.5 million in the interest income from acquired loans as such loans continue to be repaid; and

 

·         A decrease in interest income from investments by $1.6 million due to lower volume and yield.

  

 

83 


 

TABLE 2 - NON-INTEREST INCOME SUMMARY

 

 

 

 

 

 

 

 

 

Quarter Ended  March 31,

  

2018

 

2017

 

Variance

 

(Dollars in thousands)

Banking service revenue

$

10,463

 

$

10,626

 

-1.5%

Wealth management revenue

 

6,019

 

 

6,215

 

-3.2%

Mortgage banking activities

 

1,757

 

 

587

 

199.3%

    Total banking and financial service revenue

 

18,239

 

 

17,428

 

4.7%

FDIC shared-loss benefit

 

-

 

 

1,403

 

-100.0%

Net gain on:

 

 

 

 

 

 

 

    Derivatives

 

-

 

 

81

 

-100.0%

   Other non-interest income

 

275

 

 

162

 

69.7%

 

 

275

 

 

1,646

 

-83.3%

Total non-interest income, net

$

18,514

 

$

19,074

 

-2.9%

 

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 quarters ended March 31, 2018 and 2017

 

Oriental recorded non-interest income, net, in the amount of $18.5 million, compared to $19.1 million, a decrease of 2.9%, or $560 thousand. The decrease in non-interest income was mainly due to:

 

·         The termination of the FDIC shared-loss agreement during the first quarter of 2017 resulting in the recognition of a $1.4 million gain during such period.

 

The decrease in non-interest income was partially offset by:

 

·         An increase in mortgage banking activities of $1.2 million, reflecting $881 thousand from mortgage servicing and $407 thousand from decrease in repurchased loans.

 

 

Comparison of quarters ended March 31, 2017 and 2016

 

Oriental recorded non-interest income, net, in the amount of $19.1 million, compared to $13.5 million, an increase of 41.3%, or $5.6 million. The increase in non-interest income was mainly due to the termination of the FDIC shared-loss agreement during the first quarter of 2017 resulting in the recognition of a $1.4 million gain during such period, compared to $4.0 million expenses related to the aforementioned agreement in the year ago period.

84 


 

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2018

 

2017

 

Variance %

 

(Dollars in thousands)

Compensation and employee benefits

$

20,608

 

$

20,347

 

1.3%

Professional and service fees

 

2,694

 

 

3,237

 

-16.8%

Occupancy and equipment

 

7,768

 

 

7,199

 

7.9%

Insurance

 

1,478

 

 

1,600

 

-7.6%

Electronic banking charges

 

4,966

 

 

4,902

 

1.3%

Information technology expenses

 

2,009

 

 

1,998

 

0.6%

Advertising, business promotion, and strategic initiatives

 

1,347

 

 

1,395

 

-3.4%

Loss on sale of foreclosed real estate and other repossessed assets

 

1,226

 

 

1,326

 

-7.5%

Loan servicing and clearing expenses

 

1,161

 

 

1,189

 

-2.4%

Taxes, other than payroll and income taxes

 

2,260

 

 

2,372

 

-4.7%

Communication

 

885

 

 

914

 

-3.2%

Printing, postage, stationery and supplies

 

644

 

 

637

 

1.1%

Director and investor relations

 

240

 

 

280

 

-14.3%

Credit related expenses

 

2,419

 

 

2,626

 

-7.9%

Other

 

2,416

 

 

1,661

 

45.5%

Total non-interest expenses

$

52,121

 

$

51,683

 

0.8%

Relevant ratios and data:

 

 

 

 

 

 

 

    Efficiency ratio

 

56.51%

 

 

56.15%

 

 

    Compensation and benefits to

        non-interest expense

 

39.5%

 

 

39.4%

 

 

    Compensation to average total assets owned

 

1.32%

 

 

1.27%

 

 

    Average number of employees

 

1,367

 

 

1,429

 

 

    Average compensation per employee

$

15.1

 

$

14.2

 

 

   Average loans per average employee

$

3,061

 

$

2,898

 

 

 

85 


 

Non-Interest Expenses

 

Comparison of quarters ended March 31, 2018 and 2017

 

Non-interest expense was $52.1 million, representing a slight increase of 0.8% compared to $51.7 million.

 

The increase in non-interest expenses was driven by:

 

·        Higher other operating expense by $754 thousand, particularly attributed to an increase in claims and settlements accruals and to minor repairs to physical assets related to the impact of the hurricanes.

 

·        Higher occupancy and equipment expenses by $568 thousand, primarily due to an increase in rent expenses driven by less rent income and to an increase in internet services.

 

The increases in the foregoing non-interest expenses were partially offset by:

·        Lower professional and service fees by $543 thousand as a result lower consulting and advisory expenses; and

 

·        Lower credit related expenses by $207 thousand, mainly due to a decrease in legal expenses from foreclosures of $249 thousand.

 

The efficiency ratio increased to 56.51% from 56.15%. 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 the quarters ended March 31, 2018 and 2017 amounted to $275 thousand and $1.6 million, 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 at December 31, 2017 amounted to $6.6 million. No additional losses have been incurred at March 31, 2018.

 

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 and a $0.7 million payment during the first quarter of 2018. Accordingly, a receivable of $0.5 million and $1.2 million was included in other assets at March 31, 2018 and December 31, 2017, respectively, for the expected recovery.

 

Comparison of quarters ended March 31, 2017 and 2016

Non-interest expense for 2017 was $51.7 million, representing a decrease of 5.8% compared to $54.9 million in the previous year. The decrease in non-interest expenses was driven by:

 

·         Lower insurance expense by $1.6 million, primarily as a result of a change in the calculation method of the FDIC Savings Association Insurance Fund (SAIF) 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 expense by $941 thousand, mainly due to mortgage servicing migration expenses amounting to $900 thousand during the first quarter of 2016.

·         Lower electronic banking charges by $687 thousand, primarily as a result of a decrease of $885 thousand in credit cards merchant fees, partially offset by an increase in debit card billing fees of $135 thousand.

86 


 

The efficiency ratio improved to 56.15% from 59.56% for the same period in 2016. Amounts presented as part of non-interest income that are excluded from efficiency ratio computation for the quarters ended March 31, 2017 and 2016 amounted to $1.6 million and $3.6 million, respectively.

 

Provision for Loan and Lease Losses

 

Comparison of quarters ended March 31, 2018 and 2017

 

Based on an analysis of the credit quality and the composition of Oriental’s loan portfolio, management determined that the provision for the quarter 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.

Provision for loan and lease losses decreased 12.4%, or $2.2 million, to $15.5 million. The decrease in the provision was mostly due to:

·        A decrease in the provision for acquired BBVAPR loan and lease losses of $3.9 million, mainly due to an additional provision recognized during the year ago quarter from the periodic assessment of loans remaining in these portfolios.

The decrease in the provision for loan and lease losses was partially offset by:

·        An increase of $8.6 million to replenish the allowance for loan charge-offs of $8.2 million related to the hurricanes. It also included an increase in the allowance related to auto loan portfolio growth and one commercial loan placed in non-accrual.

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 quarters ended March 31, 2017 and 2016

Provision for loan and lease losses increased 28.0%, or $3.9 million, to $17.7 million. The increase in the provision was mostly due to:

·        An increase in the provision for acquired BBVAPR and Eurobank loan and lease losses of $3.2 million from the periodic assessment of loans remaining in these portfolios during the quarter ended March 31, 2017; and

·        An increase in the provision for originated and other loan losses of $1.1 million due to continued growth of the portfolio.

Income Taxes

Comparison of quarters ended March 31, 2018 and 2017

Income tax expense was $8.0 million, compared to $9.2 million, reflecting the effective income tax rate of 32.0% and the net income before income taxes of $24.9 million for 2018, due to a higher proportion of exempt income and income subject to preferential rates.

 

Comparison of quarters ended March 31, 2017 and 2016

 

Income tax expense was $9.2 million, compared to $5.7 million. The effective tax rate for 2017 was 37.8% compared to 28.5% for 2016.

87 


 

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 quarters ended March 31, 2018 and 2017.

 

 

Quarter Ended March 31, 2018

  

 

  

 

Wealth

 

 

  

 

Total Major

 

 

  

 

Consolidated

  

Banking

 

Management

 

Treasury

 

Segments

 

Eliminations

 

Total

 

(In thousands)

Interest income

$

74,374

 

$

12

 

$

8,784

 

$

83,170

 

$

-

 

$

83,170

Interest expense

 

(6,290)

 

 

-

 

 

(2,886)

 

 

(9,176)

 

 

-

 

 

(9,176)

Net interest income

 

68,084

 

 

12

 

 

5,898

 

 

73,994

 

 

-

 

 

73,994

Provision for 

   loan and lease losses

 

(15,455)

 

 

-

 

 

(5)

 

 

(15,460)

 

 

-

 

 

(15,460)

Non-interest income

 

12,193

 

 

6,308

 

 

13

 

 

18,514

 

 

-

 

 

18,514

Non-interest expenses

 

(48,081)

 

 

(3,286)

 

 

(754)

 

 

(52,121)

 

 

-

 

 

(52,121)

Intersegment revenue

 

361

 

 

-

 

 

-

 

 

361

 

 

(361)

 

 

-

Intersegment expenses

 

-

 

 

(179)

 

 

(182)

 

 

(361)

 

 

361

 

 

-

Income before income taxes

$

17,102

 

$

2,855

 

$

4,970

 

$

24,927

 

$

-

 

$

24,927

Income tax expense

 

6,670

 

 

1,113

 

 

227

 

 

8,010

 

 

-

 

 

8,010

Net income

$

10,432

 

$

1,742

 

$

4,743

 

$

16,917

 

$

-

 

$

16,917

Total assets

$

5,661,759

 

$

28,377

 

$

1,529,912

 

$

7,220,048

 

$

(972,927)

 

$

6,247,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31, 2017

  

 

  

 

Wealth

 

 

  

 

Total Major

 

 

  

 

Consolidated

  

Banking

 

Management

 

Treasury

 

Segments

 

Eliminations

 

Total

 

(In thousands)

Interest income

$

77,573

 

$

12

 

$

8,593

 

$

86,178

 

$

-

 

$

86,178

Interest expense

 

(6,814)

 

 

-

 

 

(4,746)

 

 

(11,560)

 

 

-

 

 

(11,560)

Net interest income

 

70,759

 

 

12

 

 

3,847

 

 

74,618

 

 

-

 

 

74,618

Provision for loan and lease losses

 

(17,642)

 

 

-

 

 

(12)

 

 

(17,654)

 

 

-

 

 

(17,654)

Non-interest income (loss)

 

13,227

 

 

5,928

 

 

(81)

 

 

19,074

 

 

-

 

 

19,074

Non-interest expenses

 

(46,054)

 

 

(4,220)

 

 

(1,410)

 

 

(51,684)

 

 

-

 

 

(51,684)

Intersegment revenue

 

464

 

 

-

 

 

71

 

 

535

 

 

(535)

 

 

-

Intersegment expenses

 

(71)

 

 

(311)

 

 

(153)

 

 

(535)

 

 

535

 

 

-

Income before income taxes

$

20,683

 

$

1,409

 

$

2,262

 

$

24,354

 

$

-

 

$

24,354

Income tax expense

 

8,066

 

 

550

 

 

588

 

 

9,204

 

 

-

 

 

9,204

Net income

$

12,617

 

$

859

 

$

1,674

 

$

15,150

 

$

-

 

$

15,150

Total assets

$

5,485,678

 

$

24,866

 

$

1,861,616

 

$

7,372,160

 

$

(957,553)

 

$

6,414,607

88 


 

Comparison of quarters ended March 31, 2018 and 2017

 

Banking

 

Oriental's banking segment net income before taxes decreased $3.6 million to $17.1 million, reflecting:

 

·        A decrease in net interest income by $2.7 million, mainly from the acquired BBVAPR and Eurobank loan portfolios as such loans continue to be repaid;

 

·        Lower provision for loan and lease losses by $2.2 million, mainly from acquired loans due to an additional provision recognized during the year ago quarter from the periodic assessment of loans remaining in these portfolios.

·        Lower non-interest income by $1.0 million, reflecting the termination of the FDIC shared-loss agreement in the first quarter of 2017.

 

·        Higher non-interest expenses by $2.0 million mainly as a result of higher occupancy and equipment expenses, primarily due to an increase in rent expenses driven by less rent income and to an increase in internet services and other expenses; and

 

 

Wealth Management


Wealth management segment revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, increased $1.4 million to $2.9 million mainly due to higher income by $380 thousand, mainly from changes in volume and market rates, and lower expenses by $934 thousand from lower broker related expenses.

 

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 $5.0 million, compared to $2.3 million, reflecting:

 

·         Lower interest expenses on securities sold under agreements to repurchase due to decreases in volume and interest rate of $1.8 million and $344 thousand, 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 $100.0 million repurchase agreements in June 2017.

 

Comparison of quarters ended March 31, 2017 and 2016

 

Banking

Oriental's banking segment net income before taxes increased $283 thousand in 2017, reflecting:

 

·        A decrease in net interest income by $3.6 million, mainly from the acquired loan portfolios as such loans continue to be repaid;

 

·         An increase in provision for loan and lease losses of $3.9 million.  Provision for acquired loan and lease losses increased $2.8 million due to the periodic assessment of loans remaining in these portfolios;

 

·         Higher non-interest income from the FDIC shared-loss benefit of $1.4 million related to the termination of the FDIC shared-loss agreements during the first quarter of 2017 compared to a $4.0 million expense in the year ago quarter.

 

·         Lower non-interest expense by $2.2 million, primarily reflecting a decrease in loan servicing and clearing expenses of $941 thousand, mainly due to mortgage servicing migration expenses during the first quarter of 2016, and a decrease in electronic banking charges of $687 thousand, as a result of a decrease of $885 thousand in credit cards merchant fees, partially offset by an increase in debit card billing fees of $135 thousand.

 

89 


 

Wealth Management


Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, slightly increased $146 thousand to $1.4 million, mainly from changes in volume and market rates.

Treasury

 

Treasury segment net income before taxes increased to $2.3 million, compared to a loss of $1.8 million, reflecting:

 

·         Lower interest expenses on repurchases agreements and other borrowings by $5.0 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.



ANALYSIS OF FINANCIAL CONDITION

 

Assets Owned

 

At March 31, 2018, Oriental’s total assets amounted to $6.247 billion representing an increase of 0.9% when compared to $6.189 billion at December 31, 2017. This increase is attributable to an increase in the investment and loan portfolios of $132.5 million and $77.1 million, respectively, partially offset by a decrease in cash and cash equivalents of $122.8 million.

 

Oriental's investment portfolio increased 11.4% to $1.299 billion at March 31, 2018, mainly attributed to the purchase of $155.8 million mortgage-backed securities available-for-sale, partially offset by paydowns in the investment securities held-to-maturity portfolio of $20.9 million during the first quarter of 2018.   

 

Oriental’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate, other commercial and industrial loans, consumer loans, and auto loans. At March 31, 2018, Oriental’s loan portfolio increased 1.9%. Loan production during the first quarter of 2018 reached $309.4 million compared to $218.9 million in the year ago quarter, a 41.3% increase. The non-acquired loan portfolio increased $116.1 million from December 31, 2017 to $3.321 billion at March 31, 2018. The BBVAPR acquired loan portfolio decreased $31.6 million from December 31, 2017 to $794.3 million at March 31, 2018. The Eurobank acquired loan portfolio decreased $2.0 million from December 31, 2017 to $97.3 million at March 31, 2018.

 

Cash and cash equivalents decreased 25.3% to $362.4 million, mainly attributed to the funding of new loan growth.

 

Accrued interest receivable resulting from the loan payment moratorium has been decreasing from December 31, 2017, as most moratoriums have expired. Some of these accrued interests are payable at the end of the loan term.

 

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 March 31, 2018, total assets managed by Oriental’s trust division and OPC amounted to $2.940 billion, compared to $3.040 billion at December 31, 2017. 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 March 31, 2018, total assets gathered by Oriental Financial Services and Oriental Insurance from its customer investment accounts amounted to $2.200 billion, compared to $2.250 billion at December 31, 2017. Changes in trust and broker-dealer related assets primarily reflect changes in portfolio balances and differences in market values.

 

 

 

90 


 

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 March 31, 2018, 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 $236.4 million, or 26%. 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 quarter ended March 31, 2018, 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 March 31, 2018.

91 


 

TABLE 4 - ASSETS SUMMARY AND COMPOSITION

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

March 31

 

December 31

 

Variance

  

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Investments:

 

 

 

 

 

 

 

    FNMA and FHLMC certificates

$

1,015,238

 

$

887,779

 

14.4%

    Obligations of US government-sponsored agencies

 

2,701

 

 

2,879

 

-6.2%

    US Treasury securities

 

10,124

 

 

10,163

 

-0.4%

    CMOs issued by US government-sponsored agencies

 

75,375

 

 

80,071

 

-5.9%

    GNMA certificates

 

179,502

 

 

167,338

 

7.3%

    Puerto Rico government and public instrumentalities

 

2,412

 

 

2,093

 

15.2%

    FHLB stock

 

11,499

 

 

13,995

 

-17.8%

    Other debt securities

 

1,432

 

 

1,538

 

-6.9%

    Other investments

 

296

 

 

194

 

52.6%

        Total investments

 

1,298,579

 

 

1,166,050

 

11.4%

Loans

 

4,133,429

 

 

4,056,329

 

1.9%

Total investments and loans

 

5,432,008

 

 

5,222,379

 

4.0%

Other assets:

 

 

 

 

 

 

 

    Cash and due from banks (including restricted cash)

 

357,960

 

 

481,212

 

-25.6%

    Money market investments

 

7,428

 

 

7,021

 

5.8%

    Foreclosed real estate

 

40,314

 

 

44,174

 

-8.7%

    Accrued interest receivable

 

35,141

 

 

49,969

 

-29.7%

    Deferred tax asset, net

 

128,270

 

 

127,421

 

0.7%

    Premises and equipment, net

 

67,163

 

 

67,860

 

-1.0%

    Servicing assets

 

10,533

 

 

9,821

 

7.2%

    Derivative assets

 

898

 

 

771

 

16.5%

    Goodwill

 

86,069

 

 

86,069

 

0.0%

    Other assets and customers' liability on acceptances

 

81,337

 

 

92,356

 

-11.9%

        Total other assets

 

815,113

 

 

966,674

 

-15.7%

        Total assets

$

6,247,121

 

$

6,189,053

 

0.9%

Investment portfolio composition:

 

 

 

 

 

 

 

    FNMA and FHLMC certificates

 

78.2%

 

 

76.1%

 

 

    Obligations of US government-sponsored agencies

 

0.2%

 

 

0.2%

 

 

    US Treasury securities

 

0.8%

 

 

0.9%

 

 

    CMOs issued by US government-sponsored agencies

 

5.8%

 

 

6.9%

 

 

    GNMA certificates

 

13.8%

 

 

14.4%

 

 

    Puerto Rico government and public instrumentalities

 

0.2%

 

 

0.2%

 

 

    FHLB stock

 

0.9%

 

 

1.2%

 

 

    Other debt securities and other investments

 

0.1%

 

 

0.1%

 

 

 

 

100.0%

 

 

100.0%

 

 

92 


 

TABLE 5 — LOANS RECEIVABLE COMPOSITION

 

March 31

 

December 31

 

Variance

 

2018

 

2017

 

%

 

(In thousands)

 

 

Originated and other loans and leases held for investment:

 

 

 

 

 

 

 

        Mortgage 

$

682,564

 

$

683,607

 

-0.2%

        Commercial

 

1,346,404

 

 

1,307,261

 

3.0%

        Consumer

 

334,865

 

 

330,039

 

1.5%

        Auto and leasing

 

957,197

 

 

883,985

 

8.3%

 

 

3,321,030

 

 

3,204,892

 

3.6%

        Allowance for loan and lease losses on originated and other loans and leases

 

(96,832)

 

 

(92,718)

 

4.4%

 

 

3,224,198

 

 

3,112,174

 

3.6%

        Deferred loan costs, net

 

7,125

 

 

6,695

 

6.4%

    Total originated and other loans loans held for investment, net

 

3,231,323

 

 

3,118,869

 

3.6%

Acquired loans:

 

 

 

 

 

 

 

    Acquired BBVAPR loans:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

        acquired at a premium)

 

 

 

 

 

 

 

        Commercial

 

4,222

 

 

4,380

 

-3.6%

        Consumer

 

27,235

 

 

28,915

 

-5.8%

        Auto

 

16,171

 

 

21,969

 

-26.4%

 

 

47,628

 

 

55,264

 

-13.8%

        Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20

 

(3,184)

 

 

(3,862)

 

-17.6%

 

 

44,444

 

 

51,402

 

-13.5%

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

 

 

 

 

 

 

 

         credit quality, including those by analogy)

 

 

 

 

 

 

 

        Mortgage 

 

526,089

 

 

532,053

 

-1.1%

        Commercial

 

230,988

 

 

243,092

 

-5.0%

        Consumer

 

932

 

 

1,431

 

-34.9%

        Auto

 

35,006

 

 

43,696

 

-19.9%

 

 

793,015

 

 

820,272

 

-3.3%

         Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30

 

(43,166)

 

 

(45,755)

 

-5.7%

 

 

749,849

 

 

774,517

 

-3.2%

    Total acquired BBVAPR loans, net

 

794,293

 

 

825,919

 

-3.8%

  Acquired Eurobank loans:

 

 

 

 

 

 

 

    Loans secured by 1-4 family residential properties

 

69,328

 

 

69,538

 

-0.3%

    Commercial

 

52,418

 

 

53,793

 

-2.6%

    Consumer

 

972

 

 

1,112

 

-12.6%

 

 

122,718

 

 

124,443

 

-1.4%

        Allowance for loan and lease losses on Eurobank loans

 

(25,410)

 

 

(25,174)

 

0.9%

    Total acquired Eurobank loans, net

 

97,308

 

 

99,269

 

-2.0%

    Total acquired loans, net

 

891,601

 

 

925,188

 

-3.6%

Total held for investment, net

 

4,122,924

 

 

4,044,057

 

2.0%

Mortgage loans held for sale

 

10,505

 

 

12,272

 

-14.4%

Total loans, net

$

4,133,429

 

$

4,056,329

 

1.9%

93 


 

94 


 

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 $4.133 billion at March 31, 2018 and $4.056 billion at December 31, 2017. Oriental’s originated and other loans held-for-investment portfolio composition and trends were as follows:

 

·        Mortgage loan portfolio amounted to $682.6 million (20.6% of the gross originated loan portfolio) compared to $683.6 million (21.3% of the gross originated loan portfolio) at December 31, 2017. Mortgage loan production totaled $26.6 million for the quarter ended March 31, 2018, which represents a decrease of 38.7% from $43.5 million for the same period in 2017. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $12.5 million and $8.3 million at March 31, 2018 and December 31, 2017, 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 $1.346 billion (40.5% of the gross originated loan portfolio) compared to $1.307 billion (40.8% of the gross originated loan portfolio) at December 31, 2017. Commercial loan production, including the U.S. loan program production of $74.4 million, increased 152.2% to $117.1 million for the quarter ended March 31, 2018, from $46.5 million for the same period in 2017.

 

·        Consumer loan portfolio amounted to $334.9 million (10.1% of the gross originated loan portfolio) compared to $330.0 million (10.3% of the gross originated loan portfolio) at December 31, 2017. Consumer loan production decreased 11.0% to $37.5 million for the quarter ended March 31, 2018 from $42.1 million for the same period in 2017.

 

·        Auto and leasing portfolio amounted to $957.2 million (28.8% of the gross originated loan portfolio) compared to $884.0 million (27.6% of the gross originated loan portfolio) at December 31, 2017. Auto production increased by 47.6% to $128.1 million for the quarter ended March 31, 2018 compared to $86.8 million for the same period in 2017.

95 


 

TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

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

$

9,448

 

$

276

 

2.92%

 

$

9,143

 

$

416

 

4.55%

 

$

66,873

 

$

1,487

 

2.22%

90 - 119 days

 

172

 

 

17

 

9.88%

 

 

128

 

 

5

 

3.91%

 

 

1,831

 

 

43

 

2.35%

120 - 179 days

 

13

 

 

1

 

7.69%

 

 

219

 

 

29

 

13.24%

 

 

1,689

 

 

63

 

3.73%

180 - 364 days

 

98

 

 

12

 

12.24%

 

 

121

 

 

17

 

14.05%

 

 

1,510

 

 

51

 

3.38%

365+ days

 

222

 

 

32

 

14.41%

 

 

1,725

 

 

269

 

15.59%

 

 

8,087

 

 

651

 

8.05%

Total

$

9,953

 

$

338

 

3.40%

 

$

11,336

 

$

736

 

6.49%

 

$

79,990

 

$

2,295

 

2.87%

Percentage of total loans excluding

    acquired loans accounted for under ASC 310-30

 

0.30%

 

 

 

 

 

 

 

0.34%

 

 

 

 

 

 

 

2.37%

 

 

 

 

 

Refinanced or Modified Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

$

1,941

 

$

213

 

10.97%

 

$

529

 

$

58

 

10.96%

 

$

16,321

 

$

1,249

 

7.65%

Percentage of Higher-Risk Loan

    Category

 

19.50%

 

 

 

 

 

 

 

4.67%

 

 

 

 

 

 

 

20.40%

 

 

 

 

 

Loan-to-Value Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under 70%

$

6,652

 

$

233

 

3.50%

 

$

1,163

 

$

48

 

4.13%

 

$

-

 

$

-

 

-  

70% - 79%

 

1,396

 

 

70

 

5.01%

 

 

2,518

 

 

104

 

4.13%

 

 

-

 

 

-

 

-  

80% - 89%

 

860

 

 

19

 

2.21%

 

 

3,022

 

 

201

 

6.65%

 

 

-

 

 

-

 

-  

90% and over

 

1,045

 

 

16

 

1.53%

 

 

4,633

 

 

383

 

8.27%

 

 

79,990

 

 

2,295

 

2.87%

 

$

9,953

 

$

338

 

3.40%

 

$

11,336

 

$

736

 

6.49%

 

$

79,990

 

$

2,295

 

2.87%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

96 


 

Deposits from the Puerto Rico government totaled $127.3 million at March 31, 2018. 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

Maturity

 

 

 

 

 

 

 

 

Loans and Securities:

 

 

Carrying Value

 

 

Less than 1 Year

 

 

1 to 3 Years

 

 

More than 3 Years

 

Comments

 

 

(In thousands)

 

 

 

 

 

Municipalities

 

$

145,028

 

$

5,264

 

$

95,626

 

$

44,138

 

 

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

 

 

2,412

 

 

2,412

 

 

-

 

 

-

 

 

A PRHTA security maturing July 1, 2018 issued for P3 Project Teodoro Moscoso Bridge operated by private companies that have the payment obligation.

Total

 

$

147,440

 

$

7,676

 

$

95,626

 

$

44,138

 

 

 

 

 

97 


 

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 March 31, 2018, Oriental’s allowance for loan and lease losses amounted to $168.6 million, a $1.1 million increase from $167.5 million at December 31, 2017.

 

As discussed in Note 2, during 2017, hurricanes Irma and Maria caused catastrophic damages throughout Puerto Rico. 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 percentage 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. During 2017, and in accordance with ASC 450-20-25-2, Oriental increased its allowance for loan and lease losses in relation to these events.

 

During the first quarter of 2018, Oriental updated the previous performed analysis to estimate probable losses related to the hurricanes. Analyses were based on the payment experience percentage of borrowers for which the deferral period expired in retail portfolios. For commercial portfolio, no changes in the level of impact assessed were identified based on communications with credit officers.

 

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.

 

At March 31, 2018 and December 31, 2017, Oriental's allowance for loan and lease losses incorporated all risks associated to our loan portfolio, including the impact of hurricanes Irma and Maria.

 

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.

98 


 

Non-performing Assets

 

Oriental’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At March 31, 2018 and December 31, 2017, Oriental had $120.3 million and $99.7 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 March 31, 2018 and December 31, 2017, loans whose terms have been extended and which are classified as troubled-debt restructuring that are not included in non-performing assets amounted to $98.2 million and $109.2 million, respectively.

 

At March 31, 2018 and December 31, 2017, loans that are current in their monthly payments, but placed in non-accrual amounted to $28.0 million and $20.1 million, respectively. During the quarter ended March 31, 2018, a $10.5 million loan that is current in its monthly payments was placed in non-accrual due to credit deterioration after the hurricanes.

 

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.

 

Following hurricanes Irma and Maria, Oriental offered automatic payment deferrals and 90-day extensions for most loan categories. Most of these payment moratoriums ended during the quarter ended March 31, 2018 with most credit metrics better than, or returned to, pre-hurricanes levels.

 

At March 31, 2018, Oriental’s non-performing assets increased by 10.9% to $173.7 million (2.87% of total assets, excluding acquired loans with deteriorated credit quality) from $156.7 million (2.95% of total assets, excluding acquired loans with deteriorated credit quality) at December 31, 2017. Oriental does not expect non-performing loans to result in significantly higher losses. At March 31, 2018, the allowance for originated loan and lease losses to non-performing loans coverage ratio was 76.39% (87.35% at December 31, 2017).

 

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 March 31, 2018, Oriental’s originated non-performing mortgage loans totaled $63.9 million (49.8% of Oriental’s non-performing loans), a 0.3% decrease from $64.1 million (58.9% of Oriental’s non-performing loans) at December 31, 2017.

 

Commercial loans — are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any. At March 31, 2018, Oriental’s originated non-performing commercial loans amounted to $47.0 million (36.7% of Oriental’s non-performing loans), a 33.4% increase from $35.3 million at December 31, 2017 (32.4% of Oriental’s non-performing loans). This increase is mainly from a $10.5 million loan that is current in its monthly payments but was placed in non-accrual during the quarter ended March 31, 2018 due to credit deterioration after the hurricanes.

 

99 


 

Consumer loans — are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit. At March 31, 2018, Oriental’s originated non-performing consumer loans amounted to $2.3 million (1.8% of Oriental’s non-performing loans), a 12.0% decrease from $2.6 million at December 31, 2017 (2.4% 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 March 31, 2018, Oriental’s originated non-performing auto loans and leases amounted to $13.6 million (10.6% of Oriental’s total non-performing loans), an increase of 221.2% from $4.2 million at December 31, 2017 (3.9% of Oriental’s total non-performing loans).

 

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, RURAL, 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.

100 


 

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

Variance

  

 

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Originated and other loans held for investment

 

 

 

 

 

 

 

 Allowance balance:

 

 

 

 

 

 

 

    Mortgage

$

18,983

 

 $  

20,439

 

-7.1%

    Commercial

 

33,174

 

 

30,258

 

9.6%

    Consumer

 

18,023

 

 

16,454

 

9.5%

    Auto and leasing

 

26,652

 

 

25,567

 

4.2%

        Total allowance balance

$

96,832

 

$

92,718

 

4.4%

 Allowance composition:

 

 

 

 

 

 

 

    Mortgage

 

19.6%

 

 

22.0%

 

-11.1%

    Commercial

 

34.3%

 

 

32.6%

 

5.0%

    Consumer

 

18.6%

 

 

17.8%

 

4.8%

    Auto and leasing

 

27.5%

 

 

27.6%

 

-0.2%

 

 

100.0%

 

 

100.0%

 

 

 Allowance coverage ratio at end of period applicable to:

 

 

 

 

 

 

 

    Mortgage

 

2.78%

 

 

2.99%

 

-7.0%

    Commercial

 

2.46%

 

 

2.31%

 

6.5%

    Consumer

 

5.38%

 

 

4.99%

 

7.8%

    Auto and leasing

 

2.78%

 

 

2.89%

 

-3.8%

        Total allowance to total originated loans

 

2.92%

 

 

2.89%

 

1.0%

 Allowance coverage ratio to non-performing loans:

 

 

 

 

 

 

 

    Mortgage

 

29.72%

 

 

31.89%

 

-6.8%

    Commercial

 

70.52%

 

 

85.83%

 

-17.8%

    Consumer

 

796.42%

 

 

639.74%

 

24.5%

    Auto and leasing

 

196.06%

 

 

604.14%

 

-67.5%

        Total

 

76.39%

 

 

87.35%

 

-12.5%

 

101 


 

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

Variance

  

 

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Acquired BBVAPR loans accounted for under ASC 310-20

 

 

 

 

 

 

 

 Allowance balance:

 

 

 

 

 

 

 

    Commercial

$

37

 

$

42

 

-11.9%

    Consumer

 

2,659

 

 

3,225

 

-17.6%

    Auto

 

488

 

 

595

 

-18.0%

        Total allowance balance

$

3,184

 

$

3,862

 

-17.6%

 Allowance composition:

 

 

 

 

 

 

 

    Commercial

 

1.2%

 

 

1.09%

 

6.4%

    Consumer

 

83.5%

 

 

83.50%

 

0.0%

    Auto

 

15.3%

 

 

15.41%

 

-0.5%

 

 

100.0%

 

 

100.00%

 

 

 Allowance coverage ratio at end of period applicable to:

 

 

 

 

 

 

 

    Commercial

 

0.88%

 

 

0.96%

 

-8.3%

    Consumer

 

9.76%

 

 

11.15%

 

-12.5%

    Auto

 

3.02%

 

 

2.71%

 

11.4%

        Total allowance to total acquired loans

 

6.69%

 

 

6.99%

 

-4.3%

 Allowance coverage ratio to non-performing loans:

 

 

 

 

 

 

 

    Commercial

 

3.40%

 

 

3.31%

 

2.7%

    Consumer

 

803.32%

 

 

238.01%

 

237.5%

    Auto

 

316.88%

 

 

332.40%

 

-4.7%

        Total

 

202.42%

 

 

137.73%

 

47.0%

 

102 


 

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)

 

March 31,

 

December 31,

 

Variance

  

 

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Acquired BBVAPR loans accounted for under ASC 310-30

 

 

 

 

 

 

 

 Allowance balance:

 

 

 

 

 

 

 

    Mortgage

$

14,331

 

$

14,085

 

1.7%

    Commercial

 

22,047

 

 

23,691

 

-6.9%

    Consumer

 

18

 

 

18

 

0.0%

    Auto

 

6,770

 

 

7,961

 

-15.0%

        Total allowance balance

$

43,166

 

$

45,755

 

-5.7%

 Allowance composition:

 

 

 

 

 

 

 

    Mortgage

 

33.2%

 

 

30.8%

 

7.9%

    Commercial

 

51.1%

 

 

51.8%

 

-1.4%

    Auto

 

15.7%

 

 

17.4%

 

-9.9%

 

 

100.0%

 

 

100.0%

 

 

 

 

 

 

 

 

 

 

Acquired Eurobank loans accounted for under ASC 310-30

 

 

 

 

 

 

 

 Allowance balance:

 

 

 

 

 

 

 

    Mortgage

$

15,414

 

$

15,187

 

1.5%

    Commercial

 

9,992

 

 

9,982

 

0.1%

    Consumer

 

4

 

 

5

 

-20.0%

        Total allowance balance

$

25,410

 

$

25,174

 

0.9%

 Allowance composition:

 

 

 

 

 

 

 

    Mortgage

 

60.7%

 

 

60.3%

 

0.5%

    Commercial

 

39.3%

 

 

39.6%

 

-0.8%

 

 

100.0%

 

 

100.0%

 

 

103 


 

TABLE 9 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

  

 

 

Variance

  

2018

 

2017

 

%

 

(Dollars in thousands)

 Originated and other loans:

 

 

 

 

 

 

 

    Balance at beginning of period

$

92,718

 

$

59,300

 

56.4%

      Provision for loan and lease losses

 

14,958

 

 

11,735

 

27.5%

      Charge-offs

 

(15,357)

 

 

(14,156)

 

8.5%

      Recoveries

 

4,513

 

 

3,604

 

25.2%

    Balance at end of period

$

96,832

 

$

60,483

 

60.1%

Acquired loans:

 

 

 

 

 

 

 

BBVAPR loans

 

 

 

 

 

 

 

 Acquired loans accounted for

   under ASC 310-20:

 

 

 

 

 

 

 

    Balance at beginning of period

$

3,862

 

$

4,300

 

-10.2%

      Provision for loan and lease losses

 

184

 

 

(33)

 

-657.6%

      Charge-offs

 

(1,147)

 

 

(1,169)

 

-1.9%

      Recoveries

 

285

 

 

517

 

-44.9%

    Balance at end of period

$

3,184

 

$

3,615

 

-11.9%

 Acquired loans accounted for

   under ASC 310-30:

 

 

 

 

 

 

 

    Balance at beginning of period

$

45,755

 

$

31,056

 

47.3%

      Provision for loan and lease losses

 

179

 

 

4,332

 

-95.9%

      Allowance de-recognition

 

(2,768)

 

 

(458)

 

504.4%

    Balance at end of period

$

43,166

 

$

34,930

 

23.6%

 

 

 

 

 

 

 

 

Eurobank loans

 

 

 

 

 

 

 

    Balance at beginning of period

$

25,174

 

$

21,281

 

18.3%

      Provision for loan and lease losses

 

139

 

 

1,620

 

-91.4%

      Allowance de-recognition

 

97

 

 

(895)

 

-110.8%

    Balance at end of period

$

25,410

 

$

22,006

 

15.5%

104 


 

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

 

 

 

Variance

  

2018

 

2017

 

%

 

(Dollars in thousands)

Originated and other loans and leases:

 

 

 

 

 

 

 

Mortgage

 

 

 

 

 

 

 

    Charge-offs

$

(968)

 

$

(2,379)

 

-59.3%

    Recoveries

 

314

 

 

56

 

460.7%

        Total

 

(654)

 

 

(2,323)

 

-71.8%

Commercial

 

 

 

 

 

 

 

    Charge-offs

 

(1,149)

 

 

(856)

 

34.2%

    Recoveries

 

182

 

 

89

 

104.5%

        Total

 

(967)

 

 

(767)

 

26.1%

Consumer

 

 

 

 

 

 

 

    Charge-offs

 

(4,258)

 

 

(3,358)

 

26.8%

    Recoveries

 

240

 

 

165

 

45.5%

        Total

 

(4,018)

 

 

(3,193)

 

25.8%

Auto

 

 

 

 

 

 

 

    Charge-offs

 

(8,982)

 

 

(7,563)

 

18.8%

    Recoveries

 

3,777

 

 

3,294

 

14.7%

        Total

 

(5,205)

 

 

(4,269)

 

21.9%

Net credit losses

 

 

 

 

 

 

 

    Total charge-offs

 

(15,357)

 

 

(14,156)

 

8.5%

    Total recoveries

 

4,513

 

 

3,604

 

25.2%

        Total

$

(10,844)

 

$

(10,552)

 

2.8%

Net credit losses to average

    loans outstanding:

 

 

 

 

 

 

 

    Mortgage

 

0.38%

 

 

1.31%

 

-71.0%

    Commercial

 

0.30%

 

 

0.25%

 

20.0%

    Consumer

 

5.07%

 

 

4.57%

 

10.9%

    Auto

 

2.23%

 

 

2.19%

 

1.8%

        Total  

 

1.34%

 

 

1.40%

 

-4.3%

Recoveries to charge-offs

 

29.39%

 

 

25.46%

 

15.4%

Average originated loans:

 

 

 

 

 

 

 

    Mortgage

$

683,398

 

 

711,553

 

-4.0%

    Commercial

 

1,310,444

 

 

1,245,530

 

5.2%

    Consumer

 

317,295

 

 

279,558

 

13.5%

    Auto

 

933,456

 

 

778,815

 

19.9%

        Total

$

3,244,593

 

$

3,015,456

 

7.6%

105 


 

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

 

 

 

 

Variance

  

2018

 

2017

 

 

%

 

(Dollars in thousands)

Acquired loans accounted for under ASC 310-20:

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

    Charge-offs

$

-

 

$

(6)

 

 

-100.0%

    Recoveries

 

3

 

 

1

 

 

200.0%

        Total

 

3

 

 

(5)

 

 

-160.0%

Consumer

 

 

 

 

 

 

 

 

    Charge-offs

 

(1,022)

 

 

(885)

 

 

15.5%

    Recoveries

 

54

 

 

64

 

 

-15.6%

        Total

 

(968)

 

 

(821)

 

 

17.9%

Auto

 

 

 

 

 

 

 

 

    Charge-offs

 

(125)

 

 

(278)

 

 

-55.0%

    Recoveries

 

228

 

 

452

 

 

-49.6%

        Total

 

103

 

 

174

 

 

-40.8%

Net credit losses

 

 

 

 

 

 

 

 

    Total charge-offs

 

(1,147)

 

 

(1,169)

 

 

-1.9%

    Total recoveries

 

285

 

 

517

 

 

-44.9%

        Total

$

(862)

 

$

(652)

 

 

32.2%

Net credit losses to average

    loans outstanding:

 

 

 

 

 

 

 

 

    Commercial

 

-3.17%

 

 

4.88%

 

 

-165.1%

    Consumer

 

6.69%

 

 

5.60%

 

 

19.5%

    Auto

 

-1.20%

 

 

-1.42%

 

 

-15.3%

        Total  

 

3.73%

 

 

2.41%

 

 

54.5%

Recoveries to charge-offs

 

24.85%

 

 

44.23%

 

 

-43.8%

Average loans accounted for under ASC 310-20:

 

 

 

 

 

 

 

 

    Commercial

$

378

 

 

411

 

 

-8.0%

    Consumer

 

57,839

 

 

58,614

 

 

-1.3%

    Auto

 

34,334

 

 

49,115

 

 

-30.1%

        Total

$

92,551

 

$

108,140

 

 

-14.4%

 

 

 

 

 

 

 

 

 

106 


 

TABLE 11 — NON-PERFORMING ASSETS

 

 

 

 

 

 

 

 

  

March 31,

 

December 31,

 

Variance

  

2018

 

2017

 

(%)

 

(Dollars in thousands)

 

 

Non-performing assets:

 

 

 

 

 

 

 

    Non-accruing loans

 

 

 

 

 

 

 

        Troubled-Debt Restructuring loans

$

34,261

 

 $  

25,354

 

35.1%

        Other loans

 

86,016

 

 

74,360

 

15.7%

    Accruing loans

 

 

 

 

 

 

 

        Troubled-Debt Restructuring loans

 

6,577

 

 

6,704

 

-1.9%

        Other loans

 

1,486

 

 

2,528

 

-41.2%

            Total non-performing loans

$

128,340

 

$

108,946

 

17.8%

   Foreclosed real estate

 

40,314

 

 

44,174

 

-8.7%

   Other repossessed assets

 

5,082

 

 

3,548

 

43.2%

 

$

173,736

 

$

156,668

 

10.9%

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

 

2.87%

 

 

2.95%

 

-2.7%

Non-performing assets to total capital

 

18.38%

 

 

16.58%

 

10.9%

 

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

  

2018

 

2017

 

(In thousands)

Interest that would have been recorded in the period if the

    loans had not been classified as non-accruing loans

$

996

 

$

934

 

 

 

 

 

 

107 


 

TABLE 12 — NON-PERFORMING LOANS

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

Variance

 

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Non-performing loans:

 

 

 

 

 

 

 

  Originated and other loans held for investment

 

 

 

 

 

 

 

    Mortgage

$

63,866

 

$

64,085

 

-0.3%

    Commercial

 

47,044

 

 

35,253

 

33.4%

    Consumer

 

2,263

 

 

2,572

 

-12.0%

    Auto and leasing

 

13,594

 

 

4,232

 

221.2%

 

 

126,767

 

 

106,142

 

19.4%

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

        revolving feature and/or acquired at a premium)

 

 

 

 

 

 

 

    Commercial

 

1,088

 

 

1,270

 

-14.3%

    Consumer

 

331

 

 

1,355

 

-75.6%

    Auto

 

154

 

 

179

 

-14.0%

 

 

1,573

 

 

2,804

 

-43.9%

        Total

$

128,340

 

$

108,946

 

17.8%

Non-performing loans composition percentages:

 

 

 

 

 

 

 

  Originated loans

 

 

 

 

 

 

 

    Mortgage

 

49.7%

 

 

58.7%

 

 

    Commercial

 

36.7%

 

 

32.4%

 

 

    Consumer

 

1.8%

 

 

2.4%

 

 

    Auto and leasing

 

10.6%

 

 

3.9%

 

 

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

        revolving feature and/or acquired at a premium)

 

 

 

 

 

 

 

    Commercial

 

0.8%

 

 

1.2%

 

 

    Consumer

 

0.3%

 

 

1.2%

 

 

    Auto

 

0.1%

 

 

0.2%

 

 

        Total

 

100.0%

 

 

100.0%

 

 

Non-performing loans to:

 

 

 

 

 

 

 

    Total loans, excluding loans accounted for

        under ASC 310-30 (including those by analogy)

 

3.81%

 

 

3.34%

 

14.1%

    Total assets, excluding loans accounted for

        under ASC 310-30 (including those by analogy)

 

2.12%

 

 

2.05%

 

3.4%

    Total capital

 

13.58%

 

 

11.53%

 

17.8%

Non-performing loans with partial charge-offs to:

 

 

 

 

 

 

 

    Total loans, excluding loans accounted for

        under ASC 310-30 (including those by analogy)

 

1.09%

 

 

1.15%

 

-5.22%

    Non-performing loans

 

28.62%

 

 

34.49%

 

-17.0%

Other non-performing loans ratios:

 

 

 

 

 

 

 

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

        on which charge-offs have been taken

 

58.96%

 

 

57.69%

 

2.2%

    Allowance for loan and lease losses to non-performing

        loans on which no charge-offs have been taken

 

109.17%

 

 

134.26%

 

-18.7%

 

 

 

 

 

 

 

 

108 


 

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 shared-loss agreements related to the FDIC assisted acquisition.

 

TABLE 13 - ACTIVITY OF FDIC INDEMNIFICATION ASSET

 

 

 

 

 

 

 

 

 

 

 

  

Quarter Ended March 31,

 

2018

 

2017

 

(In thousands)

FDIC indemnification asset:

 

 

 

 

 

Balance at beginning of period

$

-

 

$

14,411

    FDIC indemnification asset benefit (expense)

 

-

 

 

1,403

    Shared-loss termination settlement

 

 

-

 

 

(15,814)

Balance at end of period

$

-

 

$

-

109 


 

TABLE 15 - LIABILITIES SUMMARY AND COMPOSITION

 

March 31,

 

December 31,

 

Variance

  

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Deposits:

 

 

 

 

 

 

 

    Non-interest bearing deposits

$

1,071,648

 

$

969,525

 

10.5%

    NOW accounts

 

1,046,179

 

 

1,069,572

 

-2.2%

    Savings and money market accounts

 

1,274,411

 

 

1,251,396

 

1.8%

    Certificates of deposit

 

1,439,473

 

 

1,507,101

 

-4.5%

        Total deposits

 

4,831,711

 

 

4,797,594

 

0.7%

    Accrued interest payable

 

1,717

 

 

1,888

 

-9.1%

        Total deposits and accrued interest payable

 

4,833,428

 

 

4,799,482

 

0.7%

Borrowings:

 

 

 

 

 

 

 

    Securities sold under agreements to repurchase

 

273,926

 

 

192,869

 

42.0%

    Advances from FHLB

 

43,934

 

 

99,643

 

-55.9%

    Subordinated capital notes

 

36,083

 

 

36,083

 

0.0%

    Other term notes

 

394

 

 

153

 

157.5%

        Total borrowings

 

354,337

 

 

328,748

 

7.8%

            Total deposits and borrowings

 

5,187,765

 

 

5,128,230

 

1.2%

 

 

 

 

 

 

 

 

Other Liabilities:

 

 

 

 

 

 

 

Derivative liabilities

 

752

 

 

1,281

 

-41.3%

Acceptances outstanding

 

25,869

 

 

27,644

 

-6.4%

Other liabilities

 

85,886

 

 

86,791

 

-1.0%

            Total liabilities

$

5,300,272

 

$

5,243,946

 

1.1%

Deposits portfolio composition percentages:

 

 

 

 

 

 

 

    Non-interest bearing deposits

 

22.2%

 

 

20.2%

 

 

    NOW accounts

 

21.7%

 

 

22.3%

 

 

    Savings and money market accounts

 

26.3%

 

 

26.1%

 

 

    Certificates of deposit

 

29.8%

 

 

31.4%

 

 

 

 

100.0%

 

 

100.0%

 

 

Borrowings portfolio composition percentages:

 

 

 

 

 

 

 

    Securities sold under agreements to repurchase

 

77.3%

 

 

58.7%

 

 

    Advances from FHLB

 

12.4%

 

 

30.3%

 

 

    Other term notes

 

0.1%

 

 

0.0%

 

 

    Subordinated capital notes

 

10.2%

 

 

11.0%

 

 

 

 

100.0%

 

 

100.0%

 

 

Securities sold under agreements to repurchase (excluding accrued interest)

 

 

 

 

 

 

 

    Amount outstanding at period-end

$

273,500

 

$

192,500

 

 

    Daily average outstanding balance

$

251,582

 

$

393,133

 

 

    Maximum outstanding balance at any month-end

$

273,500

 

$

606,210

 

 

110 


 

Liabilities and Funding Sources

 

As shown in Table 15 above, at March 31, 2018, Oriental’s total liabilities were $5.300 billion, 1.1% more than the $5.244 billion reported at December 31, 2017. Deposits and borrowings, Oriental’s funding sources, amounted to $5.188 billion at March 31, 2018 versus $5.128 billion at December 31, 2017, a 1.2% increase.

 

Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At March 31, 2018, borrowings amounted to $354.3 million, representing an increase of 7.8% when compared with the $328.7 million reported at December 31, 2017. The increase in borrowings reflects:

 

·         An increase of $81.1 million in repurchase agreements used for the purchase of investment securities during the quarter ended March 31, 2018; and

 

·         A decrease of $55.7 million attributable to the maturing of $90.0 million FHLB advances which were not renewed, partially offset by $34.7 million in new advances.  

 

At March 31, 2018, deposits represented 93% and borrowings represented 7% of interest-bearing liabilities. At March 31, 2018, deposits, the largest category of Oriental’s interest-bearing liabilities, were $4.833 billion, an increase of 0.7% from $4.799 billion at December 31, 2017.

 

Stockholders’ Equity

 

At March 31, 2018, Oriental’s total stockholders’ equity was $946.8 million, a 0.2% increase when compared to $945.1 million at December 31, 2017. This increase in stockholders’ equity reflects increases in retained earnings of $9.1 million, legal surplus of $1.7 million and a decrease in treasury stock, at cost, of $360 thousand, partially offset by a decrease in accumulated other comprehensive income, net of tax of $9.2 million and in additional paid in capital of $196 thousand, respectively. Book value per share was $17.76 at March 31, 2018 compared to $17.73 at December 31, 2017.

 

From December 31, 2017 to March 31, 2018, tangible common equity to total assets decreased to 11.05% from 11.12%, Leverage capital ratio increased to 14.07% from 13.92%, Common Equity Tier 1 capital ratio decreased to 14.52% from 14.59%, Tier 1 Risk-Based capital ratio decreased to 19.00% from 19.05%, and Total Risk-Based capital ratio decreased to 20.29% from 20.34%.

 

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 March 31, 2018, 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 March 31, 2018 and December 31, 2017, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

111 


 

The following are the consolidated capital ratios of Oriental under the Basel III capital rules at March 31, 2018 and December 31, 2017:

 

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA

 

March 31,

 

December 31,

 

Variance

  

2018

 

2017

 

%

 

(Dollars in thousands, except per share data)

 

 

Capital data:

 

 

 

 

 

 

 

    Stockholders’ equity

$

946,849

 

$

945,107

 

0.2%

Regulatory Capital Ratios data:

 

 

 

 

 

 

 

    Common equity tier 1 capital ratio

 

14.52%

 

 

14.59%

 

-0.5%

    Minimum common equity tier 1 capital ratio required

 

4.50%

 

 

4.50%

 

0.0%

    Actual common equity tier 1 capital

$

652,012

 

 

644,804

 

1.1%

    Minimum common equity tier 1 capital required

$

202,011

 

 

198,930

 

1.5%

    Minimum capital conservation buffer required

$

84,189

 

 

55,258

 

52.4%

    Excess over regulatory requirement

$

365,812

 

 

390,615

 

-6.3%

    Risk-weighted assets

$

4,489,130

 

 

4,420,667

 

1.5%

    Tier 1 risk-based capital ratio

 

19.00%

 

 

19.05%

 

-0.3%

    Minimum tier 1 risk-based capital ratio required

 

6.00%

 

 

6.00%

 

0.0%

    Actual tier 1 risk-based capital

$

852,882

 

$

842,133

 

1.3%

    Minimum tier 1 risk-based capital required

$

269,348

 

$

265,240

 

1.5%

    Excess over regulatory requirement

$

583,534

 

$

576,893

 

1.2%

    Risk-weighted assets

$

4,489,130

 

$

4,420,667

 

1.5%

    Total risk-based capital ratio

 

20.29%

 

 

20.34%

 

-0.2%

    Minimum total risk-based capital ratio required

 

8.00%

 

 

8.00%

 

0.0%

    Actual total risk-based capital

$

910,828

 

$

899,258

 

1.3%

    Minimum total risk-based capital required

$

359,130

 

$

353,653

 

1.5%

    Excess over regulatory requirement

$

551,698

 

$

545,604

 

1.1%

    Risk-weighted assets

$

4,489,130

 

$

4,420,667

 

1.5%

    Leverage capital ratio

 

14.07%

 

 

13.92%

 

1.1%

    Minimum leverage capital ratio required

 

4.00%

 

 

4.00%

 

0.0%

    Actual tier 1 capital

$

852,882

 

$

842,133

 

1.3%

    Minimum tier 1 capital required

$

242,395

 

$

242,057

 

0.1%

    Excess over regulatory requirement

$

610,487

 

$

600,076

 

1.7%

    Tangible common equity to total assets

 

11.05%

 

 

11.12%

 

-0.6%

    Tangible common equity to risk-weighted assets

 

15.38%

 

 

15.57%

 

-1.2%

    Total equity to total assets

 

15.16%

 

 

15.27%

 

-0.7%

    Total equity to risk-weighted assets

 

21.09%

 

 

21.38%

 

-1.4%

Stock data:

 

 

 

 

 

 

 

    Outstanding common shares

 

43,968,342

 

 

43,947,442

 

0.0%

    Book value per common share

$

17.76

 

$

17.73

 

0.2%

    Tangible book value per common share

$

15.71

 

$

15.67

 

0.2%

    Market price at end of year

$

10.45

 

$

9.40

 

11.2%

    Market capitalization at end of year

$

459,469

 

$

413,106

 

11.2%

 

112 


 

The following table presents a reconciliation of Oriental’s total stockholders’ equity to tangible common equity and total assets to tangible assets at March 31, 2018, and December 31, 2017:

 

 

March 31,

 

December 31,

 

2018

 

2017

 

(In thousands, except share or per

share information)

Total stockholders' equity

$

946,849

 

$

945,107

Preferred stock

 

(176,000)

 

 

(176,000)

Preferred stock issuance costs

 

10,130

 

 

10,130

Goodwill

 

(86,069)

 

 

(86,069)

Core deposit intangible

 

(3,124)

 

 

(3,339)

Customer relationship intangible

 

(1,233)

 

 

(1,348)

Total tangible common equity

$

690,553

 

$

688,481

Total assets

 

6,247,121

 

 

6,189,053

Goodwill

 

(86,069)

 

 

(86,069)

Core deposit intangible

 

(3,124)

 

 

(3,339)

Customer relationship intangible

 

(1,233)

 

 

(1,348)

Total tangible assets

$

6,156,695

 

$

6,098,297

Tangible common equity to tangible assets

 

11.22%

 

 

11.29%

Common shares outstanding at end of period

 

43,968,342

 

 

43,947,442

Tangible book value per common share

$

15.71

 

$

15.67

 

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.

  

113 


 

The following table presents Oriental’s capital adequacy information under the Basel III capital rules:

 

 

March 31,

 

December 31,

 

Variance

 

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Risk-based capital:

 

 

 

 

 

 

 

    Common equity tier 1 capital

$

652,012

 

$

644,804

 

1.1%

    Additional tier 1 capital

 

200,870

 

 

197,329

 

1.8%

        Tier 1 capital

 

852,882

 

 

842,133

 

1.3%

    Additional Tier 2 capital

 

57,946

 

 

57,125

 

1.4%

        Total risk-based capital

$

910,828

 

$

899,258

 

1.3%

Risk-weighted assets:

 

 

 

 

 

 

 

    Balance sheet items

$

4,308,428

 

$

4,249,042

 

1.4%

    Off-balance sheet items

 

180,702

 

 

171,625

 

5.3%

        Total risk-weighted assets

$

4,489,130

 

$

4,420,667

 

1.5%

Ratios:

 

 

 

 

 

 

 

    Common equity tier 1 capital (minimum required - 4.5%)

 

14.52%

 

 

14.59%

 

-0.5%

    Tier 1 capital (minimum required - 6%)

 

19.00%

 

 

19.05%

 

-0.3%

    Total capital (minimum required - 8%)

 

20.29%

 

 

20.34%

 

-0.2%

    Leverage ratio (minimum required - 4%)

 

14.07%

 

 

13.92%

 

1.1%

    Equity to assets

 

15.16%

 

 

15.27%

 

-0.7%

    Tangible common equity to assets

 

11.05%

 

 

11.12%

 

-0.6%

114 


 

The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the Bank’s regulatory capital ratios at March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

Variance

 

2018

 

2017

 

%

 

(Dollars in thousands)

 

 

Oriental Bank Regulatory Capital Ratios:

 

 

 

 

 

 

 

    Common Equity Tier 1 Capital to Risk-Weighted Assets

 

18.52%

 

 

18.63%

 

-0.6%

    Actual common equity tier 1 capital

$

830,845

 

$

822,776

 

1.0%

    Minimum capital requirement (4.5%)

$

201,843

 

$

198,712

 

1.6%

    Minimum capital conservation buffer requirement (1.875% at March 31, 2018 - 1.25% at December 31, 2017)

$

84,189

 

$

55,198

 

52.5%

    Minimum to be well capitalized (6.5%)

$

291,551

 

$

287,028

 

1.6%

    Tier 1 Capital to Risk-Weighted Assets

 

18.52%

 

 

18.63%

 

-0.6%

    Actual tier 1 risk-based capital

$

830,845

 

$

822,776

 

1.0%

    Minimum capital requirement (6%)

$

269,124

 

$

264,949

 

1.6%

    Minimum to be well capitalized (8%)

$

358,832

 

$

353,265

 

1.6%

    Total Capital to Risk-Weighted Assets

 

19.81%

 

 

19.92%

 

-0.6%

    Actual total risk-based capital

$

888,557

 

$

879,648

 

1.0%

    Minimum capital requirement (8%)

$

358,832

 

$

353,265

 

1.6%

    Minimum to be well capitalized (10%)

$

448,541

 

$

441,581

 

1.6%

    Total Tier 1 Capital to Average Total Assets

 

13.76%

 

 

13.63%

 

1.0%

    Actual tier 1 capital

$

830,845

 

$

822,776

 

1.0%

    Minimum capital requirement (4%)

$

241,559

 

$

241,417

 

0.1%

    Minimum to be well capitalized (5%)

$

301,948

 

$

301,771

 

0.1%

115 


 

Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At March 31, 2018 and December 31, 2017, Oriental’s market capitalization for its outstanding common stock was $459.5 million ($10.45 per share) and $413.1 million ($9.40 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 two calendar years:

 

  

 

 

 

 

 

 

Cash

 

Price

 

Dividend

  

High

 

Low

 

Per share

2018

 

 

 

 

 

 

 

 

     March 31, 2018

$

12.05

 

$

8.60

 

$

0.06

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

 

 

 

 

 

 

 

 

 

 

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 quarter ended March 31, 2018.

 

At March 31, 2018, the number of shares that may yet be purchased under such program is estimated at 739,795 and was calculated by dividing the remaining balance of $7.7 million by $10.45  (closing price of Oriental's common stock at March 31, 2018).

116 


 

ITEM 3. 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 and Compliance Officer, the Board Risk and Compliance Committee and the executive Risk and Compliance Team. 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.

  

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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 March 31, 2018 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

$

10,578

 

3.66%

 

$

11,514

 

3.83%

+ 100 Basis points

$

5,357

 

1.82%

 

$

5,735

 

1.91%

- 100 Basis points

$

(5,335)

 

-1.82%

 

$

(5,639)

 

-1.88%

 

The impact of -200 basis point reduction 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 March 31, 2018.

 

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 9 to the accompanying consolidated financial statements for further information concerning Oriental’s derivative activities.

 

 

 

118 


 

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 asset of $146 thousand (notional amount of $34.7 million) was recognized at March 31, 2018 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 March 31, 2018, interest rate swaps offered to clients not designated as hedging instruments represented a derivative asset of $459 thousand (notional amounts of $12.5 million), and the mirror-image interest rate swaps in which Oriental entered into represented a derivative liability of $459 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 March 31, 2018, Oriental had $34.7 million in interest rate swaps at an average rate of 2.4% designated as cash flow hedges for $34.7 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 Team, composed of its Chief Operating Officer, Chief Risk and Compliance 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.

 

 

 

119 


 

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 March 31, 2018, Oriental had $273.5 million in repurchase agreements, excluding accrued interest, and $474.6 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 March 31, 2018, Oriental had approximately $362.4 million in unrestricted cash and cash equivalents, $953.3 million in investment securities that are not pledged as collateral, $925.2 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 Team. 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.

 

120 


 

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 Risk and Compliance Officer who reports to the Chief Executive Officer and supervises the BSA Officer and Regulatory Compliance Officer. The Chief Risk and 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 4.   CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of 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 (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, 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 Exchange Act. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within Oriental to disclose material information otherwise required to be set forth in Oriental’s periodic reports.

 

Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

121 


 

PART - II OTHER INFORMATION

 

ITEM 1.   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 1A.   RISK FACTORS

 

There have been no material changes to the risk factors previously disclosed in Oriental’s annual report on Form 10-K for the year ended December 31, 2017. In addition to other information set forth in this report, you should carefully consider the risk factors included in Oriental’s annual report on Form 10-K, as updated by this report or other filings Oriental makes with the SEC under the Exchange Act. Additional risks and uncertainties not presently known to Oriental at this time or that Oriental currently deems immaterial may also adversely affect Oriental’s business, financial condition or results of operations.

 

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

 

None

 

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.     OTHER INFORMATION

 

None.

122 


 

ITEM 6.      EXHIBITS 

 

Exhibit No. Description of Document:

 

 

10.1   Employment Agreement between Oriental and José R. Fernández.

 

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

 

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

 

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

 

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

 

101   The following materials from OFG Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

123 


 

Signatures

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

OFG Bancorp

(Registrant)

 

 

 

 

 

By:

/s/ José Rafael Fernández

 

 

Date: May 4, 2018

 

José Rafael Fernández

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

By:

/s/ Maritza Arizmendi

 

 

Date: May 4, 2018

 

Maritza Arizmendi

 

 

 

Executive Vice President and Chief Financial Officer

 

 

       

By:

/s/ Vanessa de Armas

 

 

Date: May 4, 2018

 

Vanessa de Armas

   
 

Controller

   

 

124