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Annual Report: 2019 (Form 10-K)
OFG BANCORP - Annual Report: 2019 (Form 10-K)
UNITED STATES
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☑ ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31,
2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ______________ to ______________
Commission File
No. 001-12647
OFG
Bancorp
Incorporated in the Commonwealth of Puerto Rico
IRS Employer
Identification No. 66-0538893
Principal Executive
Offices:
254 Muñoz Rivera Avenue
San Juan, Puerto
Rico 00918
Telephone Number: (787) 771-6800
Securities Registered Pursuant to Section 12(b) of
the Act:
Common Stock
($1.00 par value per share)
7.125% Noncumulative
Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share)
7.0% Noncumulative
Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share)
7.125% Noncumulative
Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)
Securities Registered
Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate
by check mark if disclosure of delinquent filings pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
Large accelerated filer ☑
|
Accelerated filer ☐
|
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 Ac.t ☐
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The
aggregate market value of the common stock held by non-affiliates of OFG
Bancorp (the “Company”) was approximately $1.220 billion as of June
30, 2019 based upon 51,330,031 shares outstanding and the reported closing
price of $23.77 on the New York Stock Exchange on that date.
As of
January 31, 2020, the Company had 51,398,956 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Company’s definitive
proxy statement relating to the 2020 annual meeting of shareholders are
incorporated herein by reference in response to Items 10 through 14 of
Part III, except for certain information set forth herein under Item 12.
OFG Bancorp
FORM 10-K
For the Year Ended December 31, 2019
TABLE OF CONTENTS
FORWARD-LOOKING
STATEMENTS
The information
included in this annual report on Form 10-K contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements may relate to the financial condition, results of operations, plans,
objectives, future performance and business of OFG Bancorp (“we,” “our,” “us”
or “Oriental”), including, but not limited to, statements with respect to the
adequacy of the allowance for loan losses, delinquency trends, market risk and
the impact of interest rate changes, capital markets conditions, capital
adequacy and liquidity, and the effect of legal proceedings and new accounting
standards on 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;
·
a credit default by
municipalities of the government of Puerto Rico;
·
amendments to the
fiscal plan approved by the Financial Oversight and Management Board for 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, earthquakes
and other natural disasters;
·
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 and recent earthquakes;
·
the pace and magnitude
of Puerto Rico’s economic recovery;
·
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;
·
possible legislative,
tax or regulatory changes; and
·
difficulties in integrating the
acquired Puerto Rico operations of Scotiabank de Puerto Rico (“SBPR”) and
certain branch assets and liabilities of The Bank of Nova Scotia (“BNS”) in
Puerto Rico and the U.S. Virgin Islands (the “Scotiabank PR & USVI
Acquisition”) into the Company’s operations.
Other possible events or
factors that could cause results or performance to differ materially from those
expressed in these forward-looking statements include the following: negative economic
conditions that adversely affect the general economy, housing prices, the job
market, consumer confidence and spending habits which may affect, among other
things, the level of non-performing assets, charge-offs and provision expense;
changes in interest rates and market liquidity which may reduce interest
margins, impact funding sources and affect the ability to originate and
distribute financial products in the primary and secondary markets; adverse
movements and volatility in debt and equity capital markets; changes in market
rates and prices which may adversely impact the value of financial assets and
liabilities; liabilities resulting from litigation and regulatory
investigations; changes in accounting standards, rules and interpretations; increased
competition; Oriental’s ability to grow its core businesses; decisions to
downsize, sell or close units or otherwise change Oriental’s business mix; and
management’s ability to identify and manage these and other risks.
All forward-looking
statements included in this annual report on Form 10-K are based upon
information available to Oriental as of the date of this report, and other than
as required by law, including the requirements of applicable securities laws,
Oriental assumes no obligation to update or revise any such forward-looking
statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
ITEM 1. BUSINESS
General
Oriental is a publicly-owned financial holding company
incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto
Rico, providing a full range of banking and financial services through its
subsidiaries. Oriental is subject to the provisions of the U.S. Bank
Holding Company Act of 1956, as amended, (the “BHC Act”) and accordingly,
subject to the supervision and regulation of the Board of Governors of the
Federal Reserve System (the “Federal Reserve Board”).
Oriental provides comprehensive banking and financial
services to its clients through a complete range of banking and financial
solutions, including commercial, consumer, auto, and mortgage lending; checking
and savings accounts; financial planning, insurance, financial services, and
investment brokerage; and corporate and individual trust and retirement
services. Oriental operates through three major business segments: Banking,
Wealth Management, and Treasury, differentiating the Oriental brand through
customer segmentation and innovative solutions, primarily in Puerto Rico and
United States Virgin Islands (“USVI”). Oriental provides these services through
various subsidiaries including, a commercial bank, Oriental Bank (the
"Bank"), a securities broker-dealer, Oriental Financial Services LLC (“Oriental
Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental
Insurance”), a retirement plan administrator, Oriental Pension Consultants,
Inc. (“OPC”), and a commercial lender, OFG USA LLC ("OFG USA"), which
is a subsidiary of the Bank. OFG Ventures LLC (“OFG Ventures”), a limited
liability corporation, is also a subsidiary of Oriental. All our subsidiaries
are based in San Juan, Puerto Rico and the USVI, except for OPC which is based
in Boca Raton, Florida OFG USA which is based in Cornelius, North Carolina.
Oriental has 55 branches in Puerto Rico and 2 branches in USVI. Oriental’s
long-term goal is to strengthen its banking and financial services franchise by
expanding its lending businesses, increasing the level of integration in the
marketing and delivery of banking and financial services, maintaining effective
asset-liability management, growing non-interest revenue from banking and
financial services, and improving operating efficiencies.
Oriental’s strategy involves:
·
Expanding its ability to attract
deposits and build relationships with customers by refining service delivery
and providing innovative banking technologies for day-to-day customer
transactions, and achieving sustainable levels of differentiation in the
market;
·
Focusing on greater growth in
commercial and consumer lending, trust and financial services, and insurance
products;
·
Improving operating efficiencies,
and continuing to maintain effective asset-liability management;
·
Implementing a broad ranging
effort to instill in employees and make customers aware of Oriental’s
determination to effectively serve and advise its customer base in a responsive
and professional manner; and
·
Matching its portfolio of
investment securities with the related funding to achieve favorable spreads,
and primarily investing in U.S. government-sponsored agency obligations.
Together with a highly experienced group of senior and
mid-level executives and the benefits from the acquisitions of Eurobank Puerto
Rico, the Puerto Rico operations of Banco Bilbao Vizcaya Argentaria, S.A.
(“BBVA”) and the Puerto Rico and USVI operations of The Bank of Nova Scotia (“BNS”),
this strategy has resulted in sustained growth in Oriental’s deposit-taking
activities, commercial, consumer and mortgage lending and financial service
activities, allowing Oriental to distinguish itself in a highly competitive
industry. Oriental is not immune from general and local financial and economic
conditions. Past experience is not necessarily indicative of future performance
but given market uncertainties and on a reasonable time horizon of three to
five years, this strategy is expected to maintain its steady progress towards
Oriental’s long-term goal.
Oriental’s principal funding sources are branch
deposits, securities sold under agreements to repurchase, Federal Home Loan
Bank (“FHLB”) advances, wholesale deposits, and subordinated capital notes.
Through its branch network, Oriental Bank offers personal non-interest and
interest-bearing checking accounts, savings accounts, certificates of deposit,
individual retirement accounts (“IRAs”) and commercial non-interest bearing
checking accounts. The FDIC insures the Bank’s deposit accounts up to
applicable limits. Management makes retail deposit pricing decisions
periodically, adjusting the rates paid on retail deposits in response to
general market conditions and local competition. Pricing decisions take into
account the rates being offered by other local banks, the London Interbank
Offered Rate (“LIBOR”), and mainland U.S. market interest rates.
Significant
Transactions During 2019 – The Scotiabank PR & USVI Acquisition
On
December 31, 2019, Oriental purchased from BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”)
for an aggregate purchase price of $550 million. Immediately following the
closing of the Scotiabank PR & USVI Acquisition, Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank
continuing as the surviving entity. As part of this transaction, Oriental Bank
also acquired the U.S. Virgin Islands banking operations of BNS through an
acquisition of certain assets (including loans, ATMs and physical branch
locations) and an assumption of certain liabilities (including deposits) for
their net book value plus a $10 million premium on deposits. In addition,
Oriental acquired certain loans and assumed certain liabilities, from BNS’s
Puerto Rico branch for their net book value. As a result of the acquisition,
Oriental added $2.2 billion net loans and $3 billion dollars in core low-cost
deposits with a bargain purchase gain of $315 thousand, included as “Bargain
purchase from Scotiabank PR & USVI acquisition” in the consolidated
statement of operations. The audited consolidated financial statements
contemplate the effect of the Scotiabank PR & USVI Acquisition. Due to the acquisition closing occurring at year-end,
Oriental’s consolidated statement of operations reflect Oriental’s
pre-acquisition operations, except for $24.1 million acquisition related
expenses, while the Balance Sheet reflects the newly acquired assets and
liabilities.
Based on the
closing of the Scotiabank PR & USVI Acquisition as of December 31, 2019, Oriental
(a) acquired (at an estimated fair value) $2.216 billion in loans, $576.2
million in investment securities, $8.3 million in foreclosed real estate, $492.5
million in cash and cash equivalents, $9.9 million in premises and equipment, $54.8
million in a core deposit, customer relationship, and other intangibles, $40.5
million servicing asset, $59.9 million deferred tax asset, and $103.9 million
in other assets, and (b) assumed $3.025 billion in deposits and $105.7 million
in other liabilities.
In preparation to
the Scotiabank PR & USVI Acquisition, during 2019 Oriental sold $95.0
million non-performing loans increasing the provision for loan and lease losses
by $54.3 million; and sold $672 million available-for-sale securities at a gain
of $8.3 million.
Segment Disclosure
Oriental has three reportable segments: Banking,
Wealth Management, and Treasury. Management established the reportable segments
based on the internal reporting used to evaluate performance and to assess
where to allocate resources. Other factors such as Oriental’s organizational
structure, nature of products, distribution channels and economic
characteristics of the products were also considered in the determination of the
reportable segments. Oriental measures the performance of these reportable
segments based on pre-established annual goals involving different financial
parameters such as net income, interest rate spread, loan production, and fees
generated.
For detailed information regarding the performance of
Oriental’s operating segments, please refer to Note 31 in Oriental’s
accompanying consolidated financial statements.
Banking Activities
The Bank, Oriental’s main subsidiary, is a
full-service Puerto Rico commercial bank with its main office located in
San Juan, Puerto Rico. The Bank has 55 branches throughout Puerto Rico and
2 branches in USVI, and was incorporated in October 1964 as a federal mutual
savings and loan association. It became a federal mutual savings bank in July
1983 and converted to a federal stock savings bank in April 1987. Its
conversion from a federally-chartered savings bank to a commercial bank
chartered under the banking law of the Commonwealth of Puerto Rico, on
June 30, 1994, allowed the Bank to more effectively pursue opportunities
in its market and obtain more flexibility in its businesses. As an FDIC insured
Puerto Rico-chartered commercial bank, it is subject to examination by the FDIC
and the Office of the Commissioner of Financial Institutions of Puerto Rico
(the “OCFI”). The Bank offers banking services such as commercial, consumer,
and mortgage lending, savings and time deposit products, financial planning,
and corporate and individual trust services, and capitalizes on its retail
banking network to provide commercial and mortgage lending products to its
clients. The Bank has an operating subsidiary, OFG USA, which is organized in
Delaware. It also has three international banking entities (each an “IBE”)
organized in Puerto Rico pursuant to the International Banking Center
Regulatory Act of Puerto Rico, as amended (the “IBE Act”), two are units
operating within the Bank, named Oriental Overseas and Oriental International (the
“IBE Units”), and the other is a wholly-owned subsidiary of the Bank, named
Oriental International Bank, Inc. (the “IBE Subsidiary”). The IBE Unit and IBE
Subsidiary offer the Bank certain Puerto Rico tax advantages, and their
services are limited under Puerto Rico law to persons and assets/liabilities located
outside of Puerto Rico.
Banking activities include the Bank’s branches and
mortgage banking activities with traditional retail banking products such as
deposits, commercial loans, consumer loans and mortgage loans. The Bank’s
lending activities are primarily with consumers located in Puerto Rico. The
Bank’s lending transactions include a diversified number of industries and
activities, all of which are encompassed within four main categories:
commercial, consumer, mortgage and auto.
Oriental’s mortgage banking activities are conducted
through a division of the Bank. The mortgage banking activities include the
origination of mortgage loans for the Bank’s own portfolio, the sale of loans
directly into the secondary market or the securitization of conforming loans
into mortgage-backed securities, and the purchase or assumption of the right to
service loans originated by others. The Bank originates Federal Housing
Administration (“FHA”) insured mortgages, Veterans Administration (“VA”)
guaranteed mortgages, and Rural Housing Service (“RHS”) guaranteed loans that
are primarily securitized for issuance of Government National Mortgage
Association (“GNMA”) mortgage-backed securities which can be resold to
individual or institutional investors in the secondary market. Conventional
loans that meet the underwriting requirements for sale or exchange under
standard Federal National Mortgage Association (the “FNMA”) or the Federal Home
Loan Mortgage Corporation (the “FHLMC”) programs are referred to as conforming
mortgage loans and are also securitized for issuance of FNMA or FHLMC
mortgage-backed securities. The Bank is an approved seller of FNMA and FHLMC
mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The
Bank is also an approved issuer of GNMA mortgage-backed securities. The
servicing of the residential mortgage loan portfolio acquired in 2012 as part
of its acquisition of the Puerto Rico operations of BBVA (the "BBVAPR
Acquisition") is performed through a subservice that owns the servicing
rights to such loans. Oriental services the GNMA, FNMA, and FHLMC pools that it
issues and the rest of its residential mortgage loan portfolio.
Loan Underwriting
Auto loans: Oriental provides financing for the
purchase of new or used motor vehicles. These loans are generated mainly
through dealers authorized and approved by the auto credit department committee
of Oriental. The auto credit department has the specialized structure and
resources to provide the service required for this product according to market
demands and trends. The auto loan credit policy establishes specific guidance
and parameters for the underwriting and origination processes. Underwriting
procedures, lending limits, interest rate approval, insurance coverage, and
automobile brand restrictions are some parameters and internal controls
implemented to ensure the quality and profitability of the auto loan portfolio.
The proprietary credit scoring system is a fundamental part of the decision
process.
Consumer loans: Consumer loans include personal
loans, credit cards, lines of credit and other loans made by banks to
individual borrowers. All loan originations must be underwritten in accordance
with Oriental’s underwriting criteria and include an assessment of each borrower’s
personal financial condition, including verification of income, assets, Fair
Isaac Corporation ("FICO") score, and credit reports. The proprietary
credit scoring system is a fundamental part of the decision process.
Residential mortgage loans: All loan originations,
regardless of whether originated through Oriental’s retail banking network or
purchased from third parties, must be underwritten in accordance with
Oriental’s underwriting criteria, including loan-to-value ratios, borrower
income qualifications, debt ratios and credit history, investor requirements,
and title insurance and property appraisal requirements. Oriental’s mortgage
underwriting standards comply with the relevant guidelines set forth by the
Department of Housing and Urban Development (“HUD”), VA, FNMA, FHLMC, federal
and Puerto Rico banking regulatory authorities, as applicable. Oriental’s
underwriting personnel, while operating within Oriental’s loan offices, make
underwriting decisions independent of Oriental’s mortgage loan origination
personnel.
Commercial loans: Commercial loans include lines of
credit and term facilities to finance business operations and to provide
working capital for specific purposes, such as to finance the purchase of
assets, equipment or inventory. Since a borrower’s cash flow from operations is
generally the primary source of repayment, Oriental’s analysis of the credit
risk focuses heavily on the borrower’s debt-repayment capacity. Commercial term
loans generally have terms from one to five years, may be collateralized by the
asset being acquired, real estate, or other available assets, and bear interest
rates that float with the prime rate, LIBOR or another established index, or
are fixed for the term of the loan. Lines of credit are extended to businesses
based on an analysis of the financial strength and integrity of the borrowers
and are generally secured primarily by real estate, accounts receivables or
inventory, and have a maturity of one year or less. Such lines of credit bear
an interest rate that floats with a base rate, the prime rate, LIBOR, or
another established index.
Sale of Loans and Securitization Activities
Oriental may engage in the sale or securitization of
the residential mortgage loans that it originates. Oriental is an approved
issuer of GNMA-guaranteed mortgage-backed securities which involves the
packaging of FHA loans, RHS loans and VA loans into pools. Oriental can also
act as issuer in the case of conforming conventional loans which involves
grouping these types of loans into pools and issuing FNMA or FHLMC
mortgage-backed securities. The issuance of mortgage-backed securities provides
Oriental with the flexibility of either selling the security into the open
market or retaining it on books. In the case of conforming conventional loans,
Oriental may also sell such loans through the FNMA and FHLMC cash window
programs.
Wealth Management Activities
Wealth management activities are generated by such
businesses as securities brokerage, trust services, retirement planning,
insurance, pension administration, and other financial services.
Oriental Financial Services is a Puerto Rico limited liability
company and Oriental’s subsidiary engaged in securities brokerage activities in
accordance with Oriental’s strategy of providing fully integrated financial
solutions, covering various investment alternatives such as tax-advantaged
fixed income securities, mutual funds, stocks, and bonds to retail and
institutional clients. It also offers separately-managed accounts and mutual
fund asset allocation programs sponsored by unaffiliated professional asset
managers. These services are designed to meet each client’s specific needs and
preferences, including transaction-based pricing and asset-based fee pricing.
It has managed and participated in public offerings and private placements of
debt and equity securities in Puerto Rico and has engaged in municipal
securities business with the Commonwealth of Puerto Rico and its
instrumentalities, municipalities, and public corporations. Oriental Financial
Services, a member of FINRA and the Securities Investor Protection Corporation,
is a registered securities broker-dealer pursuant to Section 15(b) of the
Securities Exchange Act of 1934. The broker-dealer does not carry customer
accounts and is, accordingly, exempt from the Customer Protection Rule (SEC
Rule 15c3-3) pursuant to subsection (k)(2)(ii) of such rule. It clears
securities transactions through Pershing LLC, a clearing agent that carries the
accounts of its customers on a “fully disclosed” basis.
Oriental Insurance is a Puerto Rico limited liability
company and Oriental’s subsidiary engaged in insurance agency services. It
provides Oriental with cross-marketing opportunities under the legal framework
established by the financial modernization legislation. Oriental Insurance
currently earns commissions by acting as a licensed insurance agent in
connection with the issuance of insurance policies by unaffiliated insurance
companies and continues to cross market its services to Oriental’s existing
customer base.
OPC, a Florida corporation, is Oriental’s subsidiary
engaged in the administration of retirement plans in the U.S., Puerto Rico, and
the Caribbean.
Corporate and individual trust services
are provided by the Bank’s trust division.
Treasury Activities
Treasury activities encompass all of Oriental’s
treasury-related functions. Oriental’s investment portfolio consists of
mortgage-backed securities, obligations of U.S. government-sponsored
agencies and money market instruments. Agency mortgage-backed securities, the
largest component of the investment portfolio, consist principally of pools of
residential mortgage loans that are made to consumers and then resold in the
form of pass-through certificates in the secondary market, the payment of
interest and principal of which is guaranteed by GNMA, FNMA or FHLMC.
Market Area and Competition
The main geographic business and service area of
Oriental is in Puerto Rico, where the banking market is highly competitive.
Puerto Rico banks are subject to the same federal laws, regulations and
supervision that apply to similar institutions in the United States of America.
Oriental also competes with brokerage firms with retail operations, credit
unions, savings and loan cooperatives, small loan companies, insurance
agencies, and mortgage banks in Puerto Rico. Oriental encounters intense
competition in attracting and retaining deposits and in its consumer and
commercial lending activities. Management believes that Oriental has been able
to compete effectively for deposits and loans by offering a variety of
transactional account products and loans with competitive terms, emphasizing
the quality of its service, pricing its products at competitive interest rates,
offering convenient branch locations, and offering financial planning and
financial services at most of its branch locations. Puerto Rico has experienced
a significant consolidation of commercial banks since 2010, which has created
an environment for more rational loan and deposit pricing. Oriental’s ability
to originate loans depends primarily on the services that it provides to its
borrowers, in making prompt credit decisions, and on the rates and fees that it
charges.
Oriental is also developing new commercial
relationships in the United States, as it launched in late 2017 the U.S.
commercial loan program, generally consisting of purchases of loan
participations in credit facilities to commercial borrowers in the U.S.
mainland.
As part of the Scotiabank PR & USVI acquisition on
December 31, 2019, Oriental began to operate in the United States Virgin
Islands with the intention to grow the business acquired in the USVI.
Regulation and Supervision
General
Oriental is a financial holding company subject to
supervision and regulation by the Federal Reserve Board under the BHC Act, as
amended by the Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”). The qualification requirements
and the process for a bank holding company that elects to be treated as a
financial holding company requires that a bank holding company and all of the
subsidiary banks controlled by it at the time of election must be and remain at
all times “well capitalized” and “well managed.”
Oriental elected to be treated as a financial holding
company as permitted by the Gramm-Leach-Bliley Act. Under that law, if Oriental
fails to meet the requirements for being a financial holding company and is
unable to correct such deficiencies within certain prescribed time periods, the
Federal Reserve Board could require Oriental to divest control of its
depository institution subsidiary or alternatively cease conducting activities
that are not permissible for bank holding companies that are not financial
holding companies.
Financial holding companies may engage, directly or
indirectly, in any activity that is determined to be (i) financial in
nature or incidental to such financial activity, or (ii) complementary to
a financial activity provided it does not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally. The
Gramm-Leach-Bliley Act specifically provides that the following activities have
been determined to be “financial in nature”: (a) lending, trust and other
banking activities; (b) insurance activities; (c) financial, investment
or economic advisory services; (d) securitization of assets;
(e) securities underwriting and dealing; (f) existing bank holding
company domestic activities; (g) existing bank holding company foreign
activities; and (h) merchant banking activities. A financial holding
company may generally commence any activity, or acquire any company, that is
financial in nature without prior approval of the Federal Reserve Board. As
provided by the Dodd-Frank Act, a financial holding company may not acquire a
company, without prior Federal Reserve Board approval, in a transaction in
which the total consolidated assets to be acquired by the financial holding
company exceed $10 billion.
In addition, the Gramm-Leach-Bliley Act specifically
gives the Federal Reserve Board the authority, by regulation or order, to
expand the list of financial or incidental activities, but requires
consultation with the U.S. Treasury Department and gives the Federal
Reserve Board authority to allow a financial holding company to engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system.
Oriental is required to
file with the Federal Reserve Board and the SEC periodic reports and other
information concerning its own business operations and those of its
subsidiaries. In addition, Federal Reserve Board approval must also be obtained
before a bank holding company acquires all or substantially all of the assets
of another bank or merges or consolidates with another bank holding company.
The Federal Reserve Board also has the authority to issue cease and desist
orders against bank holding companies and their non-bank subsidiaries.
The Bank is regulated by various agencies in the
United States and the Commonwealth of Puerto Rico. Its main regulators are the
OCFI and the FDIC. The Bank is subject to extensive regulation and examination
by the OCFI and the FDIC and is subject to the Federal Reserve Board’s
regulation of transactions between the Bank and its affiliates. The Bank’s
activities in USVI are also subject to regulation and examination by the USVI
Banking Board. The federal and Puerto Rico laws and regulations which are
applicable to the Bank regulate, among other things, the scope of its business,
its investments, its reserves against deposits, the timing of the availability
of deposited funds, and the nature and amount of and collateral for certain
loans. In addition to the impact of such regulations, commercial banks are
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
control inflation in the economy.
Oriental’s mortgage banking business is subject to the
rules and regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA with respect
to the origination, processing, servicing and selling of mortgage loans and the
sale of mortgage-backed securities. Those rules and regulations, among other
things, prohibit discrimination and establish underwriting guidelines which
include provisions for inspections and appraisal reports, require credit
reports on prospective borrowers and fix maximum loan amounts, and, with
respect to VA loans, fix maximum interest rates. Mortgage origination
activities are subject to, among others, the Equal Credit Opportunity Act, the
Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. Oriental is also
subject to regulation by the OCFI with respect to, among other things,
licensing requirements and maximum origination fees on certain types of
mortgage loan products.
Oriental and its subsidiaries are subject to the rules
and regulations of certain other regulatory agencies. Oriental Financial
Services, as a registered broker-dealer, is subject to the supervision,
examination and regulation of FINRA, the SEC, and the OCFI in matters relating
to the conduct of its securities business, including record keeping and
reporting requirements, supervision and licensing of employees, and obligations
to customers.
Oriental Insurance is subject to the supervision,
examination and regulation of the Office of the Commissioner of Insurance of
Puerto Rico in matters relating to insurance sales, including but not limited
to, licensing of employees, sales practices, charging of commissions and
reporting requirements.
Dodd-Frank Wall Street Reform and Consumer Protection
Act
The Dodd-Frank Act implemented a variety of
far-reaching changes and has been described as the most sweeping reform of the
financial services industry since the 1930’s. It has a broad impact on the
financial services industry, including significant regulatory and compliance
changes, such as: (i) enhanced resolution authority of troubled and
failing banks and their holding companies; (ii) enhanced lending limits
strengthening the existing limits on a depository institution’s credit exposure
to one borrower; (iii) increased capital and liquidity requirements;
(iv) increased regulatory examination fees; (v) changes to
assessments to be paid to the FDIC for federal deposit insurance; (vi) prohibiting
bank holding companies, such as Oriental, from including in regulatory
Tier 1 capital future issuances of trust preferred securities or other
hybrid debt and equity securities; and (vii) numerous other provisions
designed to improve supervision and oversight of, and strengthening safety and
soundness for, the financial services sector. Additionally, the Dodd-Frank Act
established a new framework for systemic risk oversight within the financial
system to be distributed among new and existing federal regulatory agencies,
including the Financial Stability Oversight Council, the Federal Reserve Board,
the Office of the Comptroller of the Currency and the FDIC. Further, the
Dodd-Frank Act addresses many corporate governance and executive compensation
matters that affect most U.S. publicly traded companies, including
Oriental. A few provisions of the Dodd-Frank Act became effective immediately,
while various provisions have become effective in stages. Many of the
requirements called for in the Dodd-Frank Act have been implemented over time
and most are subject to implementing regulations.
The Dodd-Frank Act also created a new consumer
financial services regulator, the Bureau of Consumer Financial Protection (the
“CFPB”), which assumed most of the consumer financial services regulatory
responsibilities previously exercised by federal banking regulators and other
agencies. The CFPB’s primary functions include the supervision of “covered
persons” (broadly defined to include any person offering or providing a
consumer financial product or service and any affiliated service provider) for
compliance with federal consumer financial laws. It has primary authority to
enforce the federal consumer financial laws, as well as exclusive authority to
require reports and conduct examinations for compliance with such laws, in the
case of any insured depository institution with total assets of more than $10
billion and any affiliate thereof. The CFPB also has broad powers to prescribe
rules applicable to a covered person or service provider in connection with any
transaction with a consumer for a consumer financial product or service, or the
offering of a consumer financial product or service.
Holding Company Structure
The Bank is subject to restrictions under federal laws
that limit the transfer of funds to its affiliates (including Oriental),
whether in the form of loans, other extensions of credit, investments or asset
purchases, among others. Such transfers are limited to 10% of the transferring
institution’s capital stock and surplus with respect to any affiliate
(including Oriental), and, with respect to all affiliates, to an aggregate of
20% of the transferring institution’s capital stock and surplus. Furthermore,
such loans and extensions of credit are required to be secured in specified
amounts, carried out on an arm’s length basis, and consistent with safe and
sound banking practices.
Under the Dodd-Frank Act, a bank holding company, such
as Oriental, must serve as a source of financial strength for any subsidiary
depository institution. The term “source of financial strength” is defined as
the ability of a company to provide financial assistance to its insured
depository institution subsidiaries in the event of financial distress at such
subsidiaries. This support may be required at times when, absent such
requirement, the bank holding company might not otherwise provide such support.
In the event of a bank holding company’s bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain capital of a
subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a
priority of payment. In addition, any capital loans by a bank holding company
to any of its subsidiary banks are subordinate in right of payment to deposits
and to certain other indebtedness of such subsidiary bank. The Bank is
currently the only depository institution subsidiary of Oriental.
Since Oriental is a financial holding company, its
right to participate in the assets of any subsidiary upon the latter’s
liquidation or reorganization will be subject to the prior claims of the
subsidiary’s creditors (including depositors in the case of the Bank) except to
the extent that Oriental is a creditor with recognized claims against the
subsidiary.
Dividend Restrictions
The principal source of funds for Oriental is the
dividends from the Bank. The ability of the Bank to pay dividends on its common
stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the
“Banking Act”), the Federal Deposit Insurance Act, as amended (the “FDIA”), and
the FDIC regulations. In general terms, the Banking Act provides that when the
expenditures of a bank are greater than its receipts, the excess of
expenditures over receipts shall be charged against the undistributed profits
of the bank and the balance, if any, shall be charged against the required
reserve fund of the bank. If there is no sufficient reserve fund to cover such
balance in whole or in part, the outstanding amount shall be charged against
the bank’s capital account. The Banking Act provides that until said capital
has been restored to its original amount and the reserve fund to 20% of the
original capital, the bank may not declare any dividends. In general terms, the
FDIA and the FDIC regulations restrict the payment of dividends when a bank is
undercapitalized, when a bank has failed to pay insurance assessments, or when
there are safety and soundness concerns regarding a bank.
The payment of dividends by the Bank may also be
affected by other regulatory requirements and policies, such as maintenance of
adequate capital. If, in the opinion of the regulatory authority, a depository
institution under its jurisdiction is engaged in, or is about to engage in, an
unsafe or unsound practice (that, depending on the financial condition of the
depository institution, could include the payment of dividends), such authority
may require, after notice and hearing, that such depository institution cease
and desist from such practice. The Federal Reserve Board has a policy statement
that provides that an insured bank or bank holding company should not maintain
its existing rate of cash dividends on common stock unless (i) the
organization’s net income available to common shareholders over the past year has
been sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the organization’s capital needs,
asset quality, and overall financial condition. In addition, all insured
depository institutions are subject to the capital-based limitations required
by the Federal Deposit Insurance Corporation Improvement Act of 1991
(“FDICIA”).
Federal Home Loan
Bank System
The FHLB system, of which the Bank is a member,
consists of 12 regional FHLBs governed and regulated by the Federal Housing
Finance Agency. The FHLB serves as a credit facility for member institutions
within their assigned regions. They are funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB system. They make loans
(i.e., advances) to members in accordance with policies and procedures
established by the FHLB and the boards of directors of each regional FHLB.
As a system member, the Bank is entitled to borrow
from the FHLB of New York (the “FHLB-NY”) and is required to invest in FHLB
membership and activity-based stock. The Bank must purchase membership stock
equal to the greater of $1,000 or 0.15% of certain mortgage-related assets held
by the Bank. The Bank is also required to purchase activity-based stock equal
to 4.50% of outstanding advances to the Bank by the FHLB. The Bank is in
compliance with the membership and activity-based stock ownership requirements
described above. All loans, advances and other extensions of credit made by the
FHLB to the Bank are secured by a portion of the Bank’s mortgage loan
portfolio, certain other investments, and the capital stock of the FHLB held by
the Bank. The Bank is required to maintain a minimum amount of qualifying
collateral with a fair value of at least 110% of the outstanding advances.
Prompt Corrective Action Regulations
Pursuant
to the Dodd-Frank Act, federal banking agencies adopted capital rules based on
the framework of the Basel Committee on Banking Supervision in “Basel III: A Global
Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel
III”), which became effective January 1, 2014 for advanced approaches banking
organizations (i.e., those with consolidated assets greater than $250 billion
or consolidated on-balance sheet foreign exposures of at least $10 billion) and
January 1, 2015 for all other covered organizations replaced their general
risk-based capital rules, advanced approaches rule, market risk rule, and
leverage rules.
The
Basel III capital rules provide certain changes to the prompt corrective action
regulations adopted by the agencies under Section 38 of the FDIA, as amended by
FDICIA. These regulations are designed to place restrictions on U.S. insured
depository institutions if their capital levels begin to show signs of
weakness. The five capital categories established by the agencies under their
prompt corrective action framework are: “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically
undercapitalized”.
The
Basel III capital rules expand such categories by introducing a common equity
tier 1 capital requirement for all depository institutions, revising the
minimum risk-based capital ratios and, beginning in 2018, the proposed supplementary
leverage requirement for advanced approaches banking organizations. The common
equity tier 1 capital ratio is a new minimum requirement designed to ensure
that banking organizations hold sufficient high-quality regulatory capital that
is available to absorb losses on a going-concern basis. Under such rules, an
insured depository institution is:
(i) “well
capitalized,” if it has a total risk-based capital ratio of 10% or more, a tier
1 risk-based capital ratio of 8% or more, a common equity tier 1 capital ratio
of 6.5% or more, and a tier 1 leverage capital ratio of 5% or more, and is
not subject to any written capital order or directive;
(ii) “adequately
capitalized,” if it has a total risk-based capital ratio of 8% or more, a
tier 1 risk-based capital ratio of 6% or more, a common equity tier 1
capital ratio of 4.5% or more, and a tier 1 leverage capital ratio of 4%
or more;
(iii) “undercapitalized,”
if it has a total risk-based capital ratio that is less than 8%, a tier 1
risk-based ratio that is less than 6%, a common equity tier 1 capital ratio
that is less than 4.5%, or a tier 1 leverage capital ratio that is less
than 4%;
(iv)
“significantly undercapitalized,” if it has a total risk-based capital ratio
that is less than 6%, a tier 1 risk-based capital ratio that is less than
4%, a common equity tier 1 capital ratio that is less than 3%, or a tier 1
leverage capital ratio that is less than 3%; and
(v) “critically
undercapitalized,” if it has a ratio of tangible equity (defined as tier 1
capital plus non-tier 1 perpetual preferred stock) to total assets that is
equal to or less than 2%.
The
new capital rules also include a policy statement by the agencies that all
banking organizations should maintain capital commensurate with their risk
profiles, which may entail holding capital
significantly above the minimum requirements. They also provide a reservation
of authority permitting examiners to require that such organizations hold
additional regulatory capital.
FDICIA generally prohibits a depository institution
from making any capital distribution (including payment of a dividend) or
paying any management fees to its holding company if the depository institution
would thereafter be undercapitalized. Undercapitalized depository institutions
are subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution’s holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution’s assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution’s capital. Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets, and cessation of receipt of
deposits from correspondent banks. Critically undercapitalized depository
institutions are subject to the appointment of a receiver or conservator.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance
assessments. The Federal Deposit Insurance Reform Act of 2005 (the “Reform
Act”) merged the Bank Insurance Fund (“BIF”) and the Savings Association
Insurance Fund (“SAIF”) into a single Deposit Insurance Fund, and increased the
maximum amount of the insurance coverage for certain retirement accounts, and
possible “inflation adjustments” in the maximum amount of coverage available
with respect to other insured accounts. In addition, it granted a one-time
initial assessment credit (of approximately $4.7 billion) to recognize
institutions’ past contributions to the fund. As a result of the merger of the
BIF and the SAIF, all insured institutions are subject to the same assessment
rate schedule.
The Dodd-Frank Act contains several important deposit
insurance reforms, including the following: (i) the maximum deposit
insurance amount was permanently increased to $250,000; (ii) the deposit
insurance assessment is now based on the insured depository institution’s
average consolidated assets minus its average tangible equity, rather than on
its deposit base; (iii) the minimum reserve ratio for the Deposit
Insurance Fund was raised from 1.15% to 1.35% of estimated insured deposits by
September 30, 2020; (iv) the FDIC is required to “offset the effect”
of increased assessments on insured depository institutions with total
consolidated assets of less than $10 billion; (v) the FDIC is no
longer required to pay dividends if the Deposit Insurance Fund’s reserve ratio
is greater than the minimum ratio; and (vi) the FDIC temporarily insured
the full amount of qualifying “noninterest-bearing transaction accounts” until
December 31, 2012. As defined in the Dodd-Frank Act, a “noninterest-bearing
transaction account” is a deposit or account maintained at a depository
institution with respect to which interest is neither accrued nor paid, on
which the depositor or account holder is permitted to make withdrawals by
negotiable or transferrable instrument, payment orders of withdrawals,
telephone or other electronic media transfers, or other similar items for the
purpose of making payments or transfers to third parties or others, and on
which the insured depository institution does not reserve the right to require
advance notice of an intended withdrawal.
The FDIC amended its regulations under the FDIA, as
amended by the Dodd-Frank Act, to modify the definition of a depository
institution’s insurance assessment base; to revise the deposit insurance
assessment rate schedules in light of the new assessment base and altered
adjustments; to implement the dividend provisions of the Dodd-Frank Act; and to
revise the large insured depository institution assessment system to better
differentiate for risk and better take into account losses from large
institution failures that the FDIC may incur. Since the new assessment base
under the Dodd-Frank Act is larger than the current assessment base, the new
assessment rates adopted by the FDIC are lower than the former rates.
In 2016, the FDIC adopted two new rules to require
large institutions to bear the burden of raising the reserve ratio from 1.15%
to 1.35% and amended the pricing for small institutions after the reserve ratio
reaches 1.15%. Once the reserve ratio reaches 1.38%, small institutions will
receive credits to offset their contribution to raising the reserve ratio above
1.35%. Effective June 30, 2016, the reserve ratio reached 1.15%, and
assessment collections decreased for small institutions like the Bank.
Furthermore, on September 30, 2018, the reserve ratio reached 1.36%, exceeding
the statutorily required minimum reserve ratio of 1.35% ahead of the September
30, 2020 deadline required under the Dodd-Frank Act, and small institutions
like the Bank were awarded assessment credits for the portion of their
assessments that contributed to the growth in the reserve ratio from 1.15% to
1.35%, which will be applied when the reserve ratio is at least 1.38%.
Brokered
Deposits
FDIC regulations adopted
under the FDIA govern the receipt of brokered deposits by banks. Well
capitalized institutions are not subject to limitations on brokered deposits,
while adequately capitalized institutions are able to accept, renew or rollover
brokered deposits only with a waiver from the FDIC and subject to certain
restrictions on the interest paid on such deposits. Undercapitalized
institutions are not permitted to accept brokered deposits. As of December 31,
2019, the Bank is a well capitalized institution and is therefore not subject
to these limitations on brokered deposits.
However, under the Economic Growth, Regulatory Relief,
and Consumer Protection Act of 2018, which amended the FDIA, reciprocal
deposits are excluded from such limitations if the total reciprocal deposits of
the institution do not exceed 20% of its total liabilities. Reciprocal
deposits are deposits that banks make with each other in equal amounts.
Regulatory Capital Requirements
Under the Dodd-Frank Act, federal banking regulators
are required to establish minimum leverage and risk-based capital requirements,
on a consolidated basis, for insured institutions, depository institution
holding companies, and non-bank financial companies supervised by the Federal
Reserve Board. The minimum leverage and risk-based capital requirements are to
be determined based on the minimum ratios established for insured depository
institutions under prompt corrective action regulations. In effect, such
provision of the Dodd-Frank Act, which is commonly known as the Collins
Amendment, applies to bank holding companies the same leverage and risk-based
capital requirements that apply to insured depository institutions. Because the
capital requirements must be the same for insured depository institutions and
their holding companies, the Collins Amendment generally excludes certain debt
or equity instruments, such as cumulative perpetual preferred stock and trust
preferred securities, from Tier 1 Capital. However, such instruments issued
before May 19, 2010 by a bank holding company, such as Oriental, with
total consolidated assets of less than $15 billion as of December 31, 2009, are
not affected by the Collins Amendments, are “grandfathered” under the new
capital rules, and may continue to be included in tier 1 Capital as a
restricted core capital element.
The Basel III capital rules adopted by the federal
banking agencies revise the agencies’ risk-based and leverage capital
requirements for banking organizations and consolidate three separate notices
of proposed rulemaking that the OCC, Federal Reserve Board and FDIC published
in the Federal Register on August 30, 2012, with selected changes. In
particular, and consistent with the Basel III framework, the capital rules
include a minimum ratio of common equity tier 1 capital to risk-weighted assets
of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of
risk-weighted assets that apply to all banking organizations. The rules also
raise the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6%
and include a minimum leverage ratio of 4% for all banking organizations. In
addition, for the largest, most internationally active banking organizations,
the rules include a new minimum supplementary leverage ratio that takes into
account off-balance sheet exposures. The rules incorporate these new
requirements into the agencies’ prompt corrective action framework. In
addition, the rules establish limits on a banking organization’s capital
distributions and certain discretionary bonus payments if the banking
organization does not hold a specified amount of common equity tier 1 capital
in addition to the amount necessary to meet its minimum risk-based capital
requirements. Further, the rules amend the methodologies for determining
risk-weighted assets for all banking organizations; introduce disclosure
requirements that would apply to top-tier banking organizations domiciled in
the United States with $50 billion or more in total assets; and adopt changes
to the agencies’ regulatory capital requirements that meet the requirements of
Section 171 and Section 939A of the Dodd-Frank Act. These rules also codify
the agencies’ capital rules, which have previously resided in various
appendices to their respective regulations, into a harmonized integrated
regulatory framework.
Under the Economic Growth, Regulatory Relief, and
Consumer Protection Act of 2018, federal banking agencies must develop a
Community Bank Leverage Ratio (i.e., the ratio of a bank’s equity capital to
its average total consolidated assets) for banks with assets of less than $10
billion. Such banks that exceed this ratio will generally be deemed to in
compliance with all other capital and leverage requirements. On November 21,
2018, the federal banking agencies issued a proposal to simplify regulatory
capital requirements for qualifying community banking organizations, as
required by this law.
Failure to meet the capital rules could subject an
institution to a variety of enforcement actions including the termination of
deposit insurance by the FDIC and to certain restrictions on its business. At
December 31, 2019, Oriental was in compliance with all applicable capital
requirements. For more information, please refer to the accompanying
consolidated financial statements.
Safety and Soundness
Standards
Section 39 of the FDIA, as amended by FDICIA,
requires each federal banking agency to prescribe for all insured depository
institutions standards relating to internal control, information systems, and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, and such other
operational and managerial standards as the agency deems appropriate. In
addition, each federal banking agency is also required to adopt for all insured
depository institutions standards relating to asset quality, earnings and stock
valuation that the agency determines to be appropriate. Finally, each federal
banking agency is required to prescribe standards for the employment contracts
and other compensation arrangements of executive officers, employees, directors
and principal stockholders of insured depository institutions that would
prohibit compensation, benefits and other arrangements that are excessive or
that could lead to a material financial loss for the institution. If an
institution fails to meet any of the standards described above, it will be
required to submit to the appropriate federal banking agency a plan specifying
the steps that will be taken to cure the deficiency. If the institution fails
to submit an acceptable plan or fails to implement the plan, the appropriate
federal banking agency will require the institution to correct the deficiency
and, until it is corrected, may impose other restrictions on the institution,
including any of the restrictions applicable under the prompt corrective action
provisions of FDICIA.
The FDIC and the other federal banking agencies have
adopted Interagency Guidelines Establishing Standards for Safety and Soundness
that, among other things, set forth standards relating to internal controls,
information systems and internal audit systems, loan documentation, credit,
underwriting, interest rate exposure, asset growth and employee compensation.
Activities and Investments of Insured State-Chartered
Banks
Section 24 of the FDIA, as amended by FDICIA,
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
FDIC regulations of equity investments, an insured state bank generally may not
directly or indirectly acquire or retain any equity investment of a type, or in
an amount, that is not permissible for a national bank. An insured state bank,
such as the Bank, is not prohibited from, among other things,
(i) acquiring or retaining a majority interest in a subsidiary engaged in
permissible activities, (ii) investing as a limited partner in a
partnership, or as a non-controlling interest holder of a limited liability
company, the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such investments may not exceed 2% of the bank’s total assets,
(iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors’, trustees’ and officers’ liability insurance
coverage or bankers’ blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting stock
of an insured depository institution if certain requirements are met, including
that it is owned exclusively by other banks. Under the FDIC regulations
governing the activities and investments of insured state banks which further
implemented Section 24 of the FDIA, as amended by FDICIA, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as “principal” in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the Deposit Insurance Fund and the bank is in compliance with applicable
regulatory capital requirements.
Transactions with
Affiliates and Related Parties
Transactions between the Bank and any of its
affiliates are governed by sections 23A and 23B of the Federal Reserve
Act. These sections are important statutory provisions designed to protect a
depository institution from transferring to its affiliates the subsidy arising
from the institution’s access to the Federal safety net. An affiliate of a bank
is any company or entity that controls, is controlled by, or is under common
control with the bank, including investment funds for which the bank or any of
its affiliates is an investment advisor. Generally, sections 23A and 23B
(i) limit the extent to which a bank or its subsidiaries may engage in
“covered transactions” with any one affiliate to an amount equal to 10% of the
bank’s capital stock and surplus, and limit such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and
(ii) require that all such transactions be on terms that are consistent
with safe and sound banking practices. The term “covered transactions” includes
the making of loans, purchase of or investment in securities issued by the
affiliate, purchase of assets, acceptance of securities issued by the affiliate
as collateral for a loan or extension of credit, issuance of guarantees and
other similar types of transactions. The Dodd-Frank Act expanded the scope of
transactions treated as “covered transactions” to include credit exposure to an
affiliate on derivatives transactions, credit exposure resulting from a
securities borrowing or lending transaction, or derivative transaction, and
acceptances of affiliate-issued debt obligations as collateral for a loan or
extension of credit. Most loans by a bank to any of its affiliates must be
secured by collateral in amounts ranging from 100% to 130% of the loan
amount, depending on the nature of the collateral. In addition, any covered
transaction by a bank with an affiliate and any sale of assets or provision of
services to an affiliate must be on terms that are substantially the same, or
at least as favorable to the bank, as those prevailing at the time for
comparable transactions with nonaffiliated companies. Regulation W of the Federal
Reserve Board comprehensively implements sections 23A and 23B. The
regulation unified and updated staff interpretations issued over the years
prior to its adoption, incorporated several interpretative proposals (such as
to clarify when transactions with an unrelated third party will be attributed
to an affiliate), and addressed issues arising as a result of the expanded
scope of non-banking activities engaged in by banks and bank holding companies
and authorized for financial holding companies under the Gramm-Leach-Bliley
Act.
Sections 22(g) and 22(h) of the Federal
Reserve Act place restrictions on loans by a bank to executive officers,
directors, and principal shareholders. Regulation O of the Federal Reserve
Board implements these provisions. Under Section 22(h) and
Regulation O, loans to a director, an executive officer and a
greater-than-10% shareholder of a bank and certain of their related interests
(collectively “insiders”), and insiders of its affiliates, may not exceed,
together with all other outstanding loans to such person and its related
interests, the bank’s single borrower limit (generally equal to 15% of the
institution’s unimpaired capital and surplus). Section 22(h) and
Regulation O also require that loans to insiders and insiders of
affiliates be made on terms substantially the same as offered in comparable
transactions to other persons, unless the loans are made pursuant to a benefit
or compensation program that (i) is widely available to employees of the
bank and (ii) does not give preference to insiders over other employees of
the bank. Section 22(h) and Regulation O also require prior board of
directors’ approval for certain loans, and the aggregate amount of extensions
of credit by a bank to all insiders cannot exceed the institution’s unimpaired
capital and surplus. Furthermore, Section 22(g) and Regulation O
place additional restrictions on loans to executive officers.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), a
financial institution has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution’s discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires federal examiners, in connection with
the examination of a financial institution, to assess the institution’s record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. The CRA
also requires all institutions to make public disclosure of their CRA ratings.
USA Patriot Act
Under Title III of the USA Patriot Act, also
known as the International Money Laundering Abatement and Anti-Terrorism
Financing Act of 2001, all financial institutions, including Oriental, Oriental
Financial Services, and the Bank, are required in general to identify their
customers, adopt formal and comprehensive anti-money laundering programs,
scrutinize or prohibit altogether certain transactions of special concern, and
be prepared to respond to inquiries from U.S. law enforcement agencies
concerning their customers and their transactions.
The U.S. Treasury
Department (the “US Treasury”) has issued a number of regulations implementing
the USA Patriot Act that apply certain of its requirements to financial
institutions. The regulations impose obligations on financial institutions to
maintain appropriate policies, procedures and controls to detect, prevent and
report money laundering and terrorist financing.
Failure of a financial institution to comply with the
USA Patriot Act’s requirements could have serious legal consequences for the
institution. Oriental and its subsidiaries, including the Bank, have adopted
policies, procedures and controls to address compliance with the USA Patriot
Act under existing regulations, and will continue to revise and update their
policies, procedures and controls to reflect changes required by the USA
Patriot Act and the US Treasury’s regulations.
Privacy Policies
Under the Gramm-Leach-Bliley Act, all financial
institutions are required to adopt privacy policies, restrict the sharing of
nonpublic customer data with nonaffiliated parties at the customer’s request,
and establish procedures and practices to protect customer data from unauthorized
access. Oriental and its subsidiaries have established policies and procedures
to assure Oriental’s compliance with all privacy provisions of the
Gramm-Leach-Bliley Act.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (“SOX”) implemented a range
of corporate governance and accounting measures to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of disclosures under federal securities
laws. In addition, SOX established membership requirements and responsibilities
for the audit committee, imposed restrictions on the relationship between
Oriental and external auditors, imposed additional responsibilities for the
external financial statements on the chief executive officer and the chief
financial officer, expanded the disclosure requirements for corporate insiders,
required management to evaluate its disclosure controls and procedures and its
internal control over financial reporting, and required the auditors to issue a
report on the internal control over financial reporting.
Oriental has included in this annual report on
Form 10-K management’s assessment regarding the effectiveness of Oriental’s
internal control over financial reporting. The internal control report includes
a statement of management’s responsibility for establishing and maintaining
adequate internal control over financial reporting for Oriental; management’s
assessment as to the effectiveness of Oriental’s internal control over
financial reporting based on management’s evaluation as of year-end; and the
framework used by management as criteria for evaluating the effectiveness of
Oriental’s internal control over financial reporting. As of December 31, 2019
Oriental’s management concluded that its internal control over financial
reporting was effective.
As allowed by SEC guidance, management excluded from
its assessment of the effectiveness of Oriental’s internal control over
financial reporting as of December 31, 2019, the Scotiabank PR & USVI Acquisition,
which included total assets of $3.562 billion, total liabilities of $3.513
billion in Oriental’s consolidated financial statements as of December 31,
2019.
Puerto Rico Banking Act
As a Puerto Rico-chartered commercial bank, the Bank
is subject to regulation and supervision by the OCFI under the Banking Act,
which contains provisions governing the organization of the Bank, rights and
responsibilities of directors, officers and stockholders, as well as the
corporate powers, savings, lending, capital and investment requirements and
other aspects of the Bank and its affairs. In addition, the OCFI is given
extensive rulemaking power and administrative discretion under the Banking Act.
The OCFI generally examines the Bank at least once every year.
The Banking Act requires that a minimum of 10% of the
Bank’s net income for the year be transferred to a reserve fund until such fund
(legal surplus) equals the total paid-in capital on common and preferred stock.
At December 31, 2019 and 2018, legal surplus amounted to $95.8 million and $90.2
million, respectively. The amount transferred to the legal surplus account is
not available for the payment of dividends to shareholders.
The Banking Act also provides that when the
expenditures of a bank are greater than the receipts, the excess of the former
over the latter must be charged against the undistributed profits of the bank,
and the balance, if any, must be charged against the reserve fund. If there is
no reserve fund sufficient to cover such balance in whole or in part, the
outstanding amount must be charged against the capital account and no dividend
may be declared until said capital has been restored to its original amount and
the reserve fund to 20% of the original capital.
The Banking Act further requires every bank to
maintain a legal reserve which cannot be less than 20% of its demand
liabilities, except government deposits (federal, commonwealth and municipal),
which are secured by actual collateral.
The Banking Act also requires change of control
filings. When any person or entity will own, directly or indirectly, upon
consummation of a transfer, 5% or more of the outstanding voting capital stock
of a bank, the acquiring parties must inform the OCFI of the details not less
than 60 days prior to the date said transfer is to be consummated. The
transfer will require the approval of the OCFI if it results in a change of
control of the bank. Under the Banking Act, a change of control is presumed if
an acquirer who did not own more than 5% of the voting capital stock before the
transfer exceeds such percentage after the transfer.
The Banking Act permits Puerto Rico commercial banks
to make loans to any one person, firm, partnership or corporation, up to an
aggregate amount of 15% of the sum of: (i) the bank’s paid-in capital;
(ii) the bank’s reserve fund; (iii) 50% of the bank’s retained
earnings, subject to certain limitations; and (iv) any other components
that the OCFI may determine from time to time. If such loans are secured by
collateral worth at least 25% more than the amount of the loan, the aggregate
maximum amount will include 33.33% of 50% of the bank’s retained earnings. Such
restrictions under the Banking Act on the amount of loans to a single borrower
do not apply to loans: (i) to the government of the United States or the
government of the Commonwealth of Puerto Rico, or any of their respective
agencies, instrumentalities or municipalities, or (ii) that are wholly secured
by bonds, securities and other evidence of indebtedness of the government of
the United States or of the Commonwealth of Puerto Rico or by bonds, not in
default, of municipalities or instrumentalities of the Commonwealth of Puerto
Rico.
The Puerto Rico Finance Board is composed of the
Commissioner of Financial Institutions of Puerto Rico; the Executive Director
of the Puerto Rico Fiscal Agency and Finance Advisory Authority: the Presidents
of the Economic Development Bank for Puerto Rico and the Puerto Rico Planning
Board; the Secretaries of Commerce and Economic Development, Treasury and
Consumer Affairs of Puerto Rico; the Commissioner of Insurance of Puerto Rico;
and the President of the Public Corporation for Insurance and Supervision of
Puerto Rico Cooperatives. It has the authority to regulate the maximum interest
rates and finance charges that may be charged on loans to individuals and businesses
in the Commonwealth. The current regulations of the Puerto Rico Finance Board
provide that the applicable interest rate on loans to individuals and
businesses is to be determined by free competition. The Puerto Rico Finance
Board also has the authority to regulate maximum finance charges on retail
installment sales contracts and for credit card purchases. There is presently
no maximum rate for retail installment sales contracts and for credit card
purchases.
Puerto Rico Internal
Revenue Code
Under the Puerto Rico Internal Revenue
Code of 2011, as amended (the "PR Code”), a corporation pays taxes at a
fixed rate of 18.5% (the regular corporate tax) plus a surtax that ranges from
5% for net income subject to surtax not greater than $75,000 to 19% for net
income subject to surtax in excess of $275,000. Net income subject to surtax
is net income less $25,000. The maximum regular corporate tax decreased to
18.5% for tax years beginning after December 31, 2018. The result is a maximum
combined rate of 37.5% under the PR Code for years beginning after December 31,
2018 (previously the maximum combined tax rate was 39%). The Bank and other
subsidiaries of Oriental are treated as separate taxable corporations and are
not entitled to file consolidated returns. Corporate income tax returns of
“large taxpayers” are required to be certified as prepared or reviewed by a
Puerto Rico licensed certified public accountant. The PR Code also provides a
dividends-received deduction of 100% on dividends received from "controlled
subsidiaries" subject to taxation in Puerto Rico and 85% on dividends
received from other taxable domestic corporations. Net operating losses
(“NOLs”) are allowed as a deduction in computing the net income of the
taxpayer. The carryover period for NOLs is currently 10 years. Moreover, the
amount to be carried over to a particular year is limited to the excess of the
NOL over 90% of the net income for the year (for taxable years beginning after
December 31, 2018).
On July 1, 2019, the Governor of Puerto Rico signed into law the
Puerto Rico Incentives Code as Act 60-2019 (the “Incentives Code”). In general,
the Incentives Code compiled into a single code many of the Puerto Rico tax
incentives laws used to promote the island’s economic development, with some
modifications. The Incentives Code also amended various provisions of the PR
Code, mostly effective July 1, 2019. For example, the Incentives Code amended
the PR Code: (i) to incorporate a new provision exempting the payments for
services between members of a controlled group of corporations or group of
related entities doing business in Puerto Rico from the 10% income tax
withholding generally applicable on payments for services rendered, and (ii) to
eliminate for taxable years commencing after December 31, 2018 the limitation
on NOL carryforwards following a change of ownership.
International
Banking Center Regulatory Act of Puerto Rico
The business and operations of the Bank’s IBE Units
and IBE Subsidiary are subject to supervision and regulation by the OCFI. Under
the IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of
shares, interest or participation in the capital of an IBE may be initiated
without the prior approval of the OCFI if by such transaction a person would
acquire, directly or indirectly, control of 10% or more of any class of stock,
interest or participation in the capital of the IBE. The IBE Act and the
regulations issued thereunder by the OCFI (the “IBE Regulations”) limit the
business activities that may be carried out by an IBE. Such activities are
generally limited to persons and assets/liabilities located outside of Puerto
Rico. The IBE Act provides further that every IBE must have not less than $300
thousand of unencumbered assets or acceptable financial guarantees in Puerto
Rico.
Pursuant to the IBE Act and the IBE Regulations, the
Bank’s IBE Units and IBE Subsidiary have to maintain in Puerto Rico the books
and records of all their transactions in the ordinary course of business. They
are also required to submit quarterly and annual reports of their financial
condition and results of operations to the OCFI, including annual audited
financial statements.
The IBE Act empowers the OCFI to revoke or suspend,
after notice and hearing, a license issued thereunder if, among other things,
the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of
its license, or if the OCFI finds that the business or affairs of the IBE are
conducted in a manner that is not consistent with the public interest.
In 2012, the IBE Act was superseded by a new law that,
among other things, prohibits new license applications to organize and operate
an IBE. Any such newly organized entity (now called an “international
financial entity”) must be licensed under the new law, and such entity (as
opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE
Units and IBE Subsidiary, which are “grandfathered”) will generally be subject
to a 4% Puerto Rico income tax rate.
Volcker
Rule
The so-called “Volcker Rule” adopted by the federal
banking regulatory agencies under Section 619 of the Dodd-Frank Act generally
prohibits bank holding companies, insured depository institutions and their
affiliates from (i) engaging in short-term proprietary trading of securities,
derivatives, commodities futures and options on these instruments for their own
account; and (ii) owning, sponsoring or having certain relationships with hedge
funds or private equity funds. However, it exempts certain activities,
including market making, underwriting, hedging, trading in government and
municipal obligations, and organizing and offering a hedge fund or private
equity fund, among others. A banking entity that engages in any such covered
activity (i.e., proprietary trading or investment activities in hedge funds or
private equity funds) is generally required to establish an internal compliance
program reasonably designed to ensure and monitor compliance with the Volcker
Rule.
The Economic Growth, Regulatory Relief, and Consumer
Protection Act of 2018 amended the BHC Act to exempt from the Volcker Rule
those bank holding companies, insured depository institutions and their
affiliates with total assets that do not exceed $10 billion and trading assets
and liabilities comprising not more than 5% of their total assets. Therefore,
banking entities that meet such threshold may generally engage in proprietary
trading and invest in private equity and hedge funds. On December 21, 2018, the
federal banking agencies proposed rules to implement such exemption.
Employees
At December 31, 2019, Oriental had 2,431 employees.
None of its employees is represented by a collective bargaining group. Oriental
considers its employee relations to be good.
Internet Access to Reports
Oriental’s annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any and all
amendments to such reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, are available free of charge
on or through the “SEC filings” link of Oriental’s internet website at www.ofgbancorp.com,
as soon as reasonably practicable after Oriental electronically files such
material with, or furnishes it to, the SEC.
Oriental’s
corporate governance principles and guidelines, code of business conduct and
ethics, and the charters of its audit committee, compensation committee, risk
and compliance committee, and corporate governance and nominating committee are
available free of charge on Oriental’s website at www.ofgbancorp.com under the
corporate governance link. Oriental’s code of business conduct and ethics
applies to its directors, officers, employees and agents, including its
principal executive, financial and accounting officers.
ITEM
1A. RISK FACTORS
In addition to other information set
forth in this report, you should carefully consider the following risk factors,
as updated by other filings Oriental makes with the SEC under the Securities Exchange
Act of 1934. Additional risks and uncertainties not presently known to us at
this time or that Oriental currently deems immaterial may also adversely affect
Oriental’s business, financial condition or results of operations.
ECONOMIC AND MARKET CONDITIONS RISK
Most of our business is conducted
in Puerto Rico, which economic and government fiscal and liquidity challenges,
as well as the impact of two major hurricanes during 2017 and recent
earthquakes, have adversely impacted and may continue to adversely impact us.
Our business is directly affected by
economic conditions within Puerto Rico. A significant portion of our credit
risk exposure on our loan portfolio is concentrated in Puerto Rico. Such, our
profitability and financial condition may be adversely affected by an extended
economic recession, adverse political, fiscal or economic developments in
Puerto Rico, or the effects of natural disasters, all of which could result in
a reduction in loan originations, an increase in credit losses and a reduction
in the value of our loans and loan servicing portfolio.
In the past decades, Puerto Rico has
experienced a significant economic contraction that began in 2007; a government
fiscal crisis that led to the appointment of a federal oversight board in 2016
and a bankruptcy type restructuring process of the government’s finances; and
various significant natural disasters, hurricanes Irma and Maria in September
2017 and a series of earthquakes primarily affecting the southwest region of
the island in January 2020. Although federal assistance for recovering from
the natural disasters and insurance recoveries are expected to drive economic
growth in the short term, there is no guarantee that funds set aside for these
purposes will not be repurposed by the federal government or that their
disbursement will not be unreasonably conditioned or delayed. In addition,
there is no assurance that the government will be able to satisfy its
obligations as they may be restructured. Puerto Rico also continues to be
vulnerable to hurricanes and earthquakes and may be impacted by future natural
disasters and other disasters such as a pandemic. Furthermore, the government
fiscal crisis may limit the ability of the Puerto Rico government to respond effectively
to future disasters.
Deterioration in local economic
conditions or in the financial condition of an industry on which the local
market depends could adversely affect factors such as unemployment rates and
real estate vacancy and values. This could result in, among other things, a
reduction of creditworthy borrowers seeking loans, an increase in loan
delinquencies, defaults and foreclosures, an increase in classified and
non-accrual loans, a decrease in the value of collateral for loans, and a decrease
in core deposits. Any of these factors could materially impact our business.
For a discussion of the impact of the
economy on our loan portfolios, see “—A continuing decline in the real estate
market would likely result in an increase in delinquencies, defaults and
foreclosures and in a reduction in loan origination activity, which would
adversely affect our financial results.”
Puerto Rico and
the USVI are susceptible to earthquakes, hurricanes and major storms, which
could further deteriorate their economy and infrastructure.
Our branch network
and business is concentrated in Puerto Rico and the USVI, which are susceptible
to earthquakes, hurricanes and major storms that affect the local economy and
the demand for our loans and financial services, as well as the ability of our
customers to repay their loans. Any such natural disasters may further
adversely affect Puerto Rico’s and the USVI’s critical infrastructure, which are
generally weak. This makes us vulnerable to downturns in Puerto Rico’s and the
USVI’s economy as a result of natural disasters, such as recent earthquakes in
2020 and hurricanes Irma and Maria. Any subsequent earthquakes, hurricanes,
major storms or other disasters, such as pandemics, could further deteriorate
Puerto Rico’s and USVI’s economy and infrastructure and negatively affect or
disrupt our operations and customer base.
Changes in interest
rates could reduce Oriental’s net interest income
Market risk refers to the
probability of variations in the net interest income or the fair value of
assets and liabilities due to changes in interest rates, currency exchange
rates or equity prices.
Changes in
interest rates are one of the principal market risks affecting us. Our earnings
are dependent to a large degree on net interest income, which is the difference
between the interest rates earned on interest-earning assets, such as loans and
investment securities, and the interest rates paid on interest-bearing
liabilities, such as deposits and borrowings. Depending on the duration and
repricing characteristics of the assets, liabilities and off-balance sheet
items, changes in interest rates could either increase or decrease the level of
net interest income. For any given period, the pricing structure of the assets
and liabilities is matched when an equal amount of such assets and liabilities
mature or reprice in that period. Like all financial institutions, our
financial position is affected by fluctuations in interest rates. Volatility in
interest rates can also result in the flow of funds away from financial
institutions. We may suffer losses or experience lower spreads than anticipated
if we are not effective in managing our interest rate risk.
CREDIT RISK
We are exposed to credit risk in
connection with our loans to certain government agencies and municipalities of
Puerto Rico, and the restructuring of the government could adversely affect the
value of such loans.
At December 31, 2019, we had
approximately $134.0 million of direct credit exposure to four municipalities
and a Puerto Rico public corporation. Mainly, the credit exposure consists of
collateralized loans or obligations that have special additional property tax
revenues pledged for their repayment.
The Puerto Rico government faces a
number of severe economic and fiscal challenges that are expected to require a
significant government restructuring, as well as severe austerity measures to
close its significant budget deficit.
If the government restructuring affects
the ability of the municipalities to pay their obligations to us as they become
due, or under certain other circumstances, we may be required to adversely
classify such loans and increase the provision for loan losses in connection
therewith. Such provision may significantly impact our earnings.
Heightened credit risk could
require us to increase our provision for credit losses, which could have a
material adverse effect on our results of operations and financial condition.
Making loans is an essential element of our business,
and there is a risk that the loans will not be repaid. This default risk is
affected by a number of factors, including:
·
the duration of the loan;
·
credit risks of a particular
borrower;
·
changes in economic or industry
conditions; and
·
in the case of a collateralized
loan, risks resulting from uncertainties about the future value of the
collateral.
Our customers might
not repay their loans according to the original terms, and the collateral
securing the payment of those loans might be insufficient to pay any remaining
loan balance. Hence, we may experience significant loan losses, which could
have a materially adverse effect on our operating results. We make various
assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real
estate and other assets serving as collateral for the repayment of loans. In
determining the amount of the allowance for loan losses, we rely on loan
quality reviews, past loss experience, and an evaluation of economic
conditions, among other factors. If our assumptions prove to be incorrect, our
allowance for loan losses may not be enough to cover losses inherent in our
loan portfolio, resulting in additions to the allowance. Material additions to
the allowance would materially decrease our net income.
Our emphasis on the
origination of business and retail loans is one of the more significant factors
in evaluating our allowance for loan losses. As we continue to increase the
amount of these loans, additional or increased provisions for credit losses may
be necessary and as a result would decrease our earnings.
We strive to maintain an appropriate allowance for
loan and lease losses to provide for probable losses inherent in the loan
portfolio. We periodically determine the amount of the allowance based on
consideration of several factors such as default frequency, internal loan
grades, expected future cash collections, loss recovery rates and general
economic factors, among others. Our methodology for measuring the adequacy of
the allowance relies on several key elements, which include a specific
allowance for identified problem loans and a general systematic allowance.
We believe our allowance
for loan and lease losses is currently sufficient given the constant monitoring
of the risk inherent in the loan portfolio. However, there is no precise method
of predicting loan losses and therefore we always face the risk that
charge-offs in future periods will exceed the allowance for loan and lease
losses and that additional increases in the allowance for loan and lease losses
will be required. In addition, the FDIC as well as the OCFI may require us to
establish additional reserves. Additions to the allowance for loan and lease
losses would result in a decrease of net earnings and capital and could hinder
our ability to pay dividends.
Given the economic conditions in Puerto
Rico, we may continue to experience increased credit costs or need to take
greater than anticipated markdowns and make greater than anticipated provisions
to increase the allowances for loan losses that could adversely affect our financial
condition and results of operations in the future.
Bank regulators
periodically review our allowance for loan losses and may require us to
increase our provision for credit losses or loan charge-offs. Any increase in
our allowance for loan losses or loan charge-offs as required by these
regulatory authorities could have a materially adverse effect on our results of
operations and/or financial condition.
We are subject to default and other risks in
connection with mortgage loan originations.
From the time that we fund the mortgage loans
originated to the time that they are sold, we are generally at risk for any
mortgage loan defaults. Once we sell the mortgage loans, the risk of loss from
mortgage loan defaults and foreclosures passes to the purchaser or insurer of
the mortgage loans. However, in the ordinary course of business, we make
representations and warranties to the purchasers and insurers of mortgage loans
relating to the validity of such loans. If there is a breach of any of these representations
or warranties, we may be required to repurchase the mortgage loan and bear any
subsequent loss on the mortgage loan. We also may be required to repurchase
mortgage loans in the event that there was improper underwriting or fraud or in
the event that the loans become delinquent shortly after they are originated.
Any such repurchases in the future may negatively impact our liquidity and
operating results. Termination of our ability to sell mortgage products to U.S
government-sponsored entities would have a material adverse effect on our
results of operations and financial condition. In addition, we may be required
to indemnify certain purchasers and others against losses they incur in the
event of breaches of our representations and warranties and in various other
circumstances, including securities fraud claims, and the amount of such losses
could exceed the purchase amount of the related loans. Consequently, we may be
exposed to credit risk associated with sold loans. In addition, we incur higher
liquidity risk with respect to mortgage loans not eligible to be purchased or
insured by FNMA, GNMA or FHLMC, due to a lack of secondary market in which to
sell these loans. For the year ended December 31, 2019, we repurchased $12.0
million of loans from GNMA and FNMA
We have established reserves in our consolidated
financial statements for potential losses that are considered to be both
probable and reasonably estimable related to the mortgage loans sold by us. The
adequacy of the reserve and the ultimate amount of losses incurred will depend
on, among other things, the actual future mortgage loan performance, the actual
level of future repurchase and indemnification requests, the actual success
rate of claimants, developments in litigation related to us and the industry,
actual recoveries on the collateral and macroeconomic conditions (including
unemployment levels and housing prices). Due to uncertainties relating to these
factors, there can be no assurance that our reserves will be adequate or that
the total amount of losses incurred will not have a material adverse effect
upon our financial condition or results of operations. For additional
information related to our allowance for loan and lease losses, see “Note
7—Allowance for Loan and Lease Losses” to our consolidated financial statements
included in this annual report on Form 10-K.
A continuing decline in the real estate market would
likely result in an increase in delinquencies, defaults and foreclosures and in
a reduction in loan origination activity, which would adversely affect our
financial results.
The residential mortgage loan origination business has
historically been cyclical, enjoying periods of strong growth and profitability
followed by periods of lower volumes and industry-wide losses. The market for
residential mortgage loan originations in Puerto Rico is currently in decline,
and this trend could also reduce the level of mortgage loans that we may
originate in the future and may adversely impact our business. During periods
of rising interest rates, refinancing originations for many mortgage products
tend to decrease as the economic incentives for borrowers to refinance their
existing mortgage loans are reduced. In addition, the residential mortgage loan
origination business is impacted by home values. A significant trend of
decreasing values in several housing segments in Puerto Rico continues to be
experienced. There is a risk that a reduction in housing values could
negatively impact our loss levels on the mortgage loan portfolio because the
value of the homes underlying the loans is a primary source of repayment in the
event of foreclosure.
The decline in
Puerto Rico’s economy has had an adverse effect in the credit quality of our
loan portfolios. Among other things, during the ongoing recession, we have
experienced an increase in the level of non-performing assets and loan loss
provision, which adversely affected our profitability. Although the delinquency
rates and non-performing assets have decreased recently, they may increase if
the recession continues or worsens. If there is another decline in economic
activity, additional increases in the allowance for loan and lease losses could
be necessary with further adverse effects on our profitability.
Any sustained period of increased delinquencies,
foreclosures or losses could harm our ability to sell loans, the price received
on the sale of such loans, and the value of the mortgage loan portfolio, all of
which could have a negative impact on our results of operations and financial
condition. In addition, any material decline in real estate values would weaken
our collateral loan-to-value ratios and increase the possibility of loss if a
borrower default. For a discussion of the impact of the Puerto Rico economy on our
business operations, see “Most of our business is conducted in Puerto Rico,
which is experiencing a deep economic recession, a downturn in the real estate
market, and a government fiscal and liquidity crisis.”
We may not be able to realize the anticipated benefits
of the Scotiabank Transaction.
Our future growth and profitability depend, in part,
on the ability to successfully manage the combined operations. The success of
the Scotiabank PR & USVI Acquisition will depend on, among other things,
our ability to assess the quality of assets acquired, to realize anticipated
cost savings and to integrate the acquired companies in a manner that permits
growth opportunities and does not materially disrupt our or the acquired
business’s existing customer relationships or result in decreased revenue
resulting from any loss of customers. If we are not able to successfully
achieve these objectives, the anticipated benefits of the Scotiabank PR &
USVI Acquisition may not be realized fully or at all or may take longer to
realize than expected.
Loans that we acquired in the Scotiabank
Transaction may be subject to greater than anticipated impairment.
We have made fair value estimates of
certain assets and liabilities in recording the Scotiabank PR & USVI
Acquisition. Actual values of these assets and liabilities could differ from
our estimates, which could result in us not achieving the anticipated benefits
of the Scotiabank PR & USVI Acquisition. In addition, Scotiabank’s loan
scoring system was different than ours, and as we continue to evaluate their
loan portfolio using our systems, we may have to make additional adjustments.
Given the economic conditions in Puerto
Rico, we may continue to experience increased credit costs or need to take
greater than anticipated markdowns and make greater than anticipated provisions
to increase the allowances for loan losses on the loans acquired that could
adversely affect our financial condition and results of operations in the
future.
We may not be able to integrate Scotiabank’s
PR & USVI business into our operations.
The successful integration of Scotiabank’s
PR & USVI banking operations and our future growth and profitability depend
in part on our ability to successfully manage the combined operations.
Integration of an acquired business can be complex and costly, sometimes
including combining relevant accounting and data processing systems and
management controls and policies, as well as managing relevant relationships
with employees, clients, suppliers and other business partners. Integration
efforts could divert management attention and resources, which could adversely
affect our operations or results. The loss of key employees in connection with
this acquisition could adversely affect our ability to successfully conduct the
combined operations. There can be no assurance that any of these executives
will choose to continue working with us, or if they do, that we will be able to
successfully integrate these executives as part of our management team in the
combined business.
The Scotiabank PR & USVI Acquisition
may also result in business disruptions that cause us to lose customers or
cause customers to move their accounts or business to competing financial
institutions. It is possible that the integration process related to the
acquisition could disrupt our ongoing business or result in inconsistencies in
customer service that could adversely affect our ability to maintain
relationships with clients, customers, depositors and employees. Our inability
to overcome these risks could have a material adverse effect on our business or
financial condition, results of operations and future prospects. There is no
assurance that our integration efforts will not result in other unanticipated
costs.
We will incur in significant costs related to the Scotiabank PR &
USVI Acquisition.
We expect to incur certain one-time restructuring
charges in connection with the Scotiabank PR & USVI Acquisition. The
substantial majority of non-recurring expenses resulting from the Scotiabank PR
& USVI Acquisition will be comprised of transaction costs related to the
acquisition, financing arrangements and employment-related costs. We also will
incur transaction fees and costs related to formulating and implementing
integration plans. We continue to assess the magnitude of these costs, and
additional unanticipated costs may be incurred in the business integration of
the two groups of companies. Although we expect that the elimination of
duplicative costs, as well as the realization of other efficiencies or
synergies related to the integration of the businesses should allow us to
offset incremental transaction and acquisition-related costs over time, this
net benefit may not be achieved in the near term, or at all.
OPERATIONS AND BUSINESS RISK
Non-Compliance with USA Patriot Act, Bank Secrecy Act,
or other laws and regulations could result in fines and other sanctions.
Financial institutions are generally required under
the USA Patriot Act and the Bank Secrecy Act to develop programs to prevent
such financial institutions from being used for money-laundering and terrorist
financing activities. Financial institutions are generally also required to
file suspicious activity reports with the Financial Crimes Enforcement Network
of the U.S. Treasury Department if such activities are detected. These rules also
require financial institutions to establish procedures for identifying and
verifying the identity of customers seeking to open new financial accounts. We
have developed a compliance program reasonably designed to ensure compliance
with such laws and regulations. Our failure or the inability to comply with
these regulations could result in enforcement actions, fines or penalties,
curtailment of expansion opportunities, intervention or sanctions by
regulators, costly litigation, or expensive additional internal controls and
systems.
We are subject to security and
operational risks related to our use of technology, including the risk of
cyber-attack or cyber theft.
Our operations rely on the secure
processing, transmission and storage of confidential information in our
computer systems and networks regarding our customers and their accounts. To
provide these products and services, we use information systems and
infrastructure that we and third-party service providers operate. As a
financial institution, we also are subject to and examined for compliance with
an array of data protection laws, regulations and guidance, as well as to our
own internal privacy and information security policies and programs.
Such incidents may include unauthorized
access to our digital systems for purposes of misappropriation of assets,
gaining access to sensitive information, corrupting data, or causing
operational disruption. Although our information technology structure
continues to be subject to cyber attacks, we have not, to our knowledge,
experience a breach of cyber-security. Such an event could compromise our
confidential information, as well as that of our customers and third parties
with whom we interact with and may result in negative consequences.
While we have policies and procedures designated to
prevent or limit the effects of a possible security breach of our information
systems, if unauthorized persons were somehow to get access to confidential
information in our possession or to our proprietary information, it could
result in significant legal and financial exposure, damage to our reputation or
a loss of confidence in the security of our systems that could adversely affect
our business. Though we have insurance against some cyber-risks and attacks, it
may not be sufficient to offset the impact of a material loss event.
We rely on third parties to
provide services and systems essential to the operation of our business, and
any failure, interruption or termination of such services or systems could have
a material adverse affect on our financial condition and results of operations.
Our business relies on the secure,
successful and uninterrupted functioning of our core banking platform,
information technology, telecommunications, and loan servicing. We outsource
some of our major systems, such as customer data and deposit processing, part
of our mortgage loan servicing, internet and mobile banking, and electronic
fund transfer systems. We also rely upon a transition services agreement with
The Bank of Nova Scotia to operate the acquired business. The failure or
interruption of such systems, or the termination of a third-party software
license or any service agreement on which any of these systems or services is
based, could interrupt our operations. Because our information technology and
telecommunications systems interface with and depend on third-party systems, we
could experience service denials if demand for such services exceeds capacity
or such systems fail or experience interruptions. In addition, replacing third
party service providers could also entail significant delay and expense.
If sustained or
repeated, a failure, denial or termination of such systems or services could
result in a deterioration of our ability to process new loans, service existing
loans, gather deposits and/or provide customer service. It could also
compromise our ability to operate effectively, damage our reputation, result in
a loss of customer business and/or subject us to additional regulatory scrutiny
and possible financial liability. Any of the foregoing could have a material
adverse effect on our financial condition and results of operations.
Our risk management
policies, procedures and systems may be inadequate to mitigate all risks
inherent in our various businesses.
A comprehensive risk management
function is essential to the financial and operational success of our business.
The types of risk we monitor and seek to manage include, but are not limited
to, operational, technological, organizational, market, fiduciary, legal,
compliance, liquidity and credit risks. We have adopted various policies,
procedures and systems to monitor and manage these risks. There can be no
assurance that those policies, procedures and systems are adequate to identify
and mitigate all risks inherent in our various businesses. Our businesses and
the markets in which we operate are also continuously evolving. If we fail to
fully understand the implications of changes in our business or the financial
markets and to adequately or timely enhance the risk framework to address those
changes, we could incur losses. In addition, in a difficult or less liquid
market environment, our risk management strategies may not be effective because
other market participants may be attempting to use the same or similar
strategies to deal with the challenging market conditions. In such
circumstances, it may be difficult for us to reduce our risk positions due to
the activity of such other market participants.
LIQUIDITY RISK
Our business could
be adversely affected if we cannot maintain access to stable funding sources.
Our business requires continuous access to various
funding sources. We are able to fund our operations through deposits as well as
through advances from the FHLB-NY and FRB-NY; however, our business may need to
access other wholesale funding sources, such as repurchase agreements and
brokered deposits, which consisted of approximately 4% of our total
interest-bearing liabilities as of December 31, 2019.
Brokered deposits are typically sold through an
intermediary to small retail investors. Our ability to continue to attract
brokered deposits is subject to variability based upon a number of factors,
including volume and volatility in the global securities markets, our credit
rating and the relative interest rates that we are prepared to pay for these
liabilities. Brokered deposits are generally considered a less stable source of
funding than core deposits obtained through retail bank branches. Investors in
brokered deposits are generally more sensitive to interest rates and will
generally move funds from one depository institution to another based on small
differences in interest rates offered on deposits.
We expect to have continued access to credit from the
foregoing sources of funds. However, there can be no assurance that such
financing sources will continue to be available or will be available on
favorable terms. In a period of financial disruption, or if negative
developments occur with respect to us, the availability and cost of funding
sources could be adversely affected. In that event, our cost of funds may
increase, thereby reducing the net interest income, or we may need to dispose
of a portion of the investment portfolio, which, depending upon market conditions,
could result in realizing a loss or experiencing other adverse accounting
consequences upon such dispositions. The interest rates that we pay on our
securities are also influenced by, among other things, applicable credit
ratings from recognized rating agencies. A downgrade to any of these credit
ratings could affect our ability to access the capital markets, increase our
borrowing costs and have a negative impact on our results of operations. Our
efforts to monitor and manage liquidity risk may not be successful to deal with
dramatic or unanticipated changes in the global securities markets or other
reductions in liquidity driven by us or market-related events. In the event
that such sources of funds are reduced or eliminated, and we are not able to
replace them on a cost-effective basis, we may be forced to curtail or cease
our loan origination business and treasury activities, which would have a
material adverse effect on our operations and financial condition.
Our ability to receive dividends from our subsidiaries
could affect our liquidity and ability to pay dividends.
We are a separate and distinct legal entity from our
subsidiaries. Dividends to us from our subsidiaries have represented a major
source of funds for us to pay dividends on our common and preferred stock, make
payments on corporate debt securities and meet other obligations. There are
various U.S. federal and Puerto Rico law limitations on the extent to which
Oriental Bank, our main subsidiary, can finance or otherwise supply funds to us
through dividends and loans. These limitations include minimum regulatory
capital requirements, U.S. federal and Puerto Rico banking law requirements
concerning the payment of dividends out of net profits or surplus, Sections 23A
and 23B of the Federal Reserve Act and Regulation W of the Federal Reserve
Board governing transactions between an insured depository institution and its
affiliates, as well as general federal regulatory oversight to prevent unsafe
or unsound practices. Further, under the Basel III
capital rules adopted by the federal banking regulatory agencies, a banking
organization will need to hold a capital conservation buffer (composed of
common equity tier 1 capital) greater than 2.5% of total risk-weighted assets to
avoid limitations on capital distributions and discretionary bonus payments.
Compliance with the capital conservation buffer is determined as of the end of
the calendar quarter prior to any such capital distribution or discretionary
bonus payment.
If our subsidiaries’ earnings are not sufficient to
make dividend payments while maintaining adequate capital levels, our liquidity
may be affected, and we may not be able to make dividend payments to our
holders of common and preferred stock or payments on outstanding corporate debt
securities or meet other obligations, each of which could have a material
adverse impact on our results of operations, financial position or perception
of financial health.
In addition, our right to participate in a distribution
of assets upon a subsidiary’s liquidation or reorganization is subject to the
prior claims of the subsidiary’s creditors.
COMPETITIVE AND STRATEGIC
RISK
Competition with other
financial institutions could adversely affect our profitability.
We face substantial competition
in originating loans and in attracting deposits and assets to manage. The
competition in originating loans and attracting assets comes principally from
other U.S., Puerto Rico and foreign banks, investment advisors, securities
broker-dealers, mortgage banking companies, consumer finance companies, credit
unions, insurance companies, and other institutional lenders and purchasers of
loans. We will encounter greater competition as we expand our operations.
Increased competition may require us to increase the rates paid on deposits or
lower the rates charged on loans which could adversely affect our
profitability.
We operate in a highly regulated environment and may
be adversely affected by changes in federal and local laws and regulations.
Our operations are subject to extensive regulation by
federal and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on
all or part of our operations. Because our business is highly regulated, the
laws, rules and regulations applicable to us are subject to regular
modification and change. For example, the Dodd-Frank Act has a broad impact on
the financial services industry, including significant regulatory and compliance
changes, as discussed under the subheading “Dodd-Frank Wall Street Reform and
Consumer Protection Act” in Item 1of this annual report. The changes resulting
from the Dodd-Frank Act may impact the profitability of our business
activities, require changes to certain of our business practices, impose upon
us more stringent capital, liquidity and leverage ratio requirements or
otherwise adversely affect our business.
We may be required to invest significant management
attention and resources to evaluate and make necessary changes in order to
comply with new statutory and regulatory requirements. Failure to comply with
the new requirements may negatively impact our results of operations and
financial condition. While we cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their
interpretations would have on us, these changes could be materially adverse to
our investors.
Competition in attracting talented people could
adversely affect our operations.
We depend on our ability to attract and retain key
personnel and we rely heavily on our management team. The inability to recruit
and retain key personnel or the unexpected loss of key managers may adversely
affect our operations. Our success to date has been influenced strongly by the
ability to attract and retain senior management experienced in banking and
financial services. Retention of senior managers and appropriate succession
planning will continue to be critical to the successful implementation of our
strategies. For a discussion of retention risk with respect to former
Scotiabank’s employees, see “—We may not be able to integrate Scotiabank’s PR
& USVI assets into our operations.”
Reputational risk and social factors may impact our
results.
Our ability to originate loans and to attract deposits
and assets is highly dependent upon the perceptions of consumer, commercial and
funding markets of our business practices and our financial health. Negative
public opinion could result from actual or alleged conduct in any number of
activities or circumstances, including lending practices, regulatory
compliance, inadequate protection of customer information, or sales and
marketing, and from actions taken by regulators in response to such conduct.
Adverse perceptions regarding us could lead to difficulties in originating
loans and generating and maintaining accounts as well as in financing them.
In addition, a variety of social factors may cause
changes in borrowing activity, including credit card use, payment patterns and
the rate of defaults by account holders and borrowers. If consumers develop or
maintain negative attitudes about incurring debt, or if consumption trends
decline, our business and financial results will be negatively affected.
ACCOUNTING AND
TAX RISK
Changes in accounting standards issued by the
Financial Accounting Standards Board (“FASB”) or other standard-setting bodies
may adversely affect our financial statements.
Our financial statements are subject to the
application of GAAP, which are periodically revised and/or expanded.
Accordingly, from time to time we are required to adopt new or revised
accounting standards issued by FASB. Market conditions have prompted accounting
standard setters to promulgate new guidance which further interprets or seeks
to revise accounting pronouncements related to financial instruments,
structures or transactions as well as to issue new standards expanding
disclosures. See “Note 1—Summary of Significant Accounting Policies” to our
consolidated financial statements included herein for a discussion of any
accounting developments that have been issued but not yet implemented. An
assessment of proposed standards is not provided as such proposals are subject
to change through the exposure process and, therefore, the effects on our
consolidated financial statements cannot be meaningfully assessed. It is
possible that future accounting standards that we are required to adopt could
change the current accounting treatment that applies to the consolidated
financial statements and that such changes could have a material effect on our
financial condition and results of operations.
Our goodwill
and other intangible assets could be determined to be impaired in the future
and could decrease Oriental’s earnings.
We are required to test
our goodwill, core deposit intangible, customer relationship intangible and
other intangible assets for impairment on a periodic basis. The impairment
testing process considers a variety of factors, including the current market
price of our common shares, the estimated net present value of our assets and
liabilities, and information concerning the terminal valuation of similarly
situated insured depository institutions. If an impairment determination is
made in a future reporting period, our earnings and the book value of these
intangible assets will be reduced by the amount of the impairment. If an
impairment loss is recorded, it will have little or no impact on the tangible
book value of our common shares or our regulatory capital levels, but such an
impairment loss could significantly restrict Oriental’s ability to make
dividend payments without prior regulatory approval.
Based on our annual
goodwill impairment test, we determined that no impairment charges were
necessary. As of December 31, 2019, we had on our consolidated balance sheet
$86.1 million of goodwill in connection with the BBVAPR Acquisition and
the FDIC-assisted Eurobank acquisition, $43.2 million of core deposit
intangible in connection with the Scotiabank PR & USVI Acquisition and the FDIC-assisted
Eurobank acquisition and the BBVAPR Acquisition, a $13.2 million of customer
relationship intangible in connection with the Scotiabank PR & USVI
Acquisition and the BBVAPR Acquisition, and a $0.5 million of other intangibles
in connection with the Scotiabank PR & USVI Acquisition. There can be no
assurance that future evaluations of such goodwill or intangibles will not
result in any impairment charges. Among other factors, further declines in our
common stock as a result of macroeconomic conditions and the general weakness
of the Puerto Rico economy, could lead to an impairment of such assets. If
such assets become impaired, it could have a negative impact on our results of
operations.
Legislative and other measures that may be taken by
Puerto Rico governmental authorities could materially increase our tax burden
or otherwise adversely affect our financial condition, results of operations or
cash flows.
Legislative
changes, particularly changes in tax laws, could adversely impact our results
of operations. In an effort to address the Commonwealth’s ongoing fiscal
problems, the Puerto Rico government has enacted tax reforms in the past and is
expected to do so in the future. In 2014, the government of Puerto Rico
approved an amendment to the PR Code, which, among other things, changed the
income tax rate for capital gains from 15% to 20%. In May 2015, the government
approved an increase in the Puerto Rico sales and use tax, effective July 1,
2015, from 7% to 11.5%, included a new 4% business to business tax and expanded
the sales and use tax to certain business services that were previously exempt.
In addition, in December 2018, the Puerto Rico government enacted Act 257-2018,
which reduced the maximum corporate income tax rate from 39% to 37.5% included
a restriction on the use of partnership gains to offset current and accumulated
operating losses generated by a corporate partner and amended the formula to
compute the AMT, among other changes, as described above under “Puerto Rico Internal
Revenue Code,” Item 1. The recent change in tax rate resulted in a reduction of
our deferred tax assets, with a corresponding non-cash increase to income tax
expense.
We operate two IBE Units and IBE Subsidiary pursuant
to the IBE Act which provides significant tax advantages. The IBEs have an
exemption from Puerto Rico income taxes on interest earned on, or gain realized
from the sale of, non-Puerto Rico assets, including U.S. government
obligations and certain mortgage-backed securities. This exemption has allowed
us to have an effective tax rate below the maximum statutory tax rate. In the
past, the Legislature of Puerto Rico has considered proposals to curb the tax
benefits afforded to IBEs. In 2012, a new Puerto Rico law was enacted in this area,
although it did not repeal the IBE Act, the new law does not allow new license
applications under the IBE Act. Any newly organized “international financial
entity” must be licensed under a new law and such entity (as opposed to
existing IBEs organized under the IBE Act, including the Bank’s IBE Unit and
IBE Subsidiary, which are “grandfathered”) are generally subject to a 4% Puerto
Rico income tax rate. In the event other legislation is enacted by the Puerto
Rico government to eliminate or modify the tax exemption provided to IBEs, the
consequences could have a materially adverse impact on our financial results,
including an increase in income tax expense and consequently our effective tax
rate, adversely affecting our financial condition, results of operations and
cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Oriental
owns a fifteen-story office building located at 254 Muñoz Rivera Avenue, San
Juan Puerto Rico, known as Oriental Center, where its executive offices are
located. Oriental operates a full-service branch at the plaza level and our
centralized units and subsidiaries occupy approximately 86% of the office floor
space. Approximately 4% of the office space is leased to outside tenants and 10%
is available for lease. Oriental also leases offices at 290 Jesus T. Piñero
Avenue, San Juan, Puerto Rico, where the recently acquired operations of
Scotiabank are located.
The Bank
owns five branch premises and leases fifty branch commercial offices throughout
Puerto Rico. As part of the Scotiabank PR & USVI Acquisition on December 31,
2019, Oriental acquired two branch premises in the US Virgin Islands.
The
Bank’s management believes that each of its facilities is well maintained and
suitable for its purpose and can readily obtain appropriate additional space as
may be required at competitive rates by extending expiring leases or finding
alternative space.
At
December 31, 2019, the aggregate future rental commitments under the terms of
the leases, exclusive of taxes, insurance and maintenance expenses payable by
Oriental, was approximately $50.1 million.
Oriental’s
investment in premises and equipment, exclusive of leasehold improvements at
December 31, 2019, was $125.1 million, gross of accumulated depreciation.
ITEM 3. LEGAL PROCEEDINGS
Oriental and its
subsidiaries are defendants in a number of legal proceedings incidental to
their business. Oriental is vigorously contesting such claims. Based upon a
review by legal counsel and the development of these matters to date,
management is of the opinion that the ultimate aggregate liability, if any,
resulting from these claims will not have a material adverse effect on
Oriental’s financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Oriental’s
common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol
“OFG”. Information concerning the range of high and low sales prices for
Oriental’s common stock for each quarter in the years ended December 31, 2019
and 2018, as well as cash dividends declared for such periods is set forth
under the sub-heading “Stockholders’ Equity” in the “Analysis of Financial
Condition” caption in the Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”).
Information
concerning legal or regulatory restrictions on the payment of dividends by
Oriental and the Bank is contained under the sub-heading “Dividend
Restrictions” in Item 1 of this annual report.
As of
December 31, 2019, Oriental had approximately 5,154 holders of record of its
common stock, including all directors and officers of Oriental, and beneficial
owners whose shares are held in “street” name by securities broker-dealers or
other nominees.
Stock
Performance Graph
The
graph below compares the percentage change in Oriental’s cumulative total
stockholder return during the measurement period with the cumulative total
return, assuming reinvestment of dividends, of the Russell 2000 Index and the
SNL Bank Index.
The
cumulative total stockholder return was obtained by dividing (a) the sum of
(i) the cumulative amount of dividends per share, assuming dividend
reinvestment, for the measurement period beginning December 31, 2014, and
(ii) the difference between the share price at the beginning and the end
of the measurement period, by (b) the share price at the beginning of the
measurement period.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
Index
|
12/31/2014
|
12/31/2015
|
12/31/2016
|
12/31/2017
|
12/31/2018
|
12/31/2019
|
OFG
Bancorp
|
100.00
|
45.39
|
83.40
|
61.33
|
109.33
|
158.81
|
Russell
2000
|
100.00
|
95.59
|
115.95
|
132.94
|
118.30
|
148.49
|
SNL
Bank
|
100.00
|
101.71
|
128.51
|
151.75
|
126.12
|
170.79
|
ITEM 6. SELECTED
FINANCIAL DATA
The following
selected financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” under
Item 7 and “Financial Statements and Supplementary Data” under Item 8 of this annual
report.
OFG Bancorp
|
SELECTED FINANCIAL DATA
|
YEARS ENDED DECEMBER 31, 2019,
2018, 2017, 2016, AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
EARNINGS
DATA:
|
(In thousands, except per
share data)
|
Interest
income
|
$
|
373,795
|
|
$
|
360,419
|
|
$
|
345,647
|
|
$
|
356,592
|
|
$
|
406,568
|
Interest
expense
|
|
51,002
|
|
|
44,525
|
|
|
41,475
|
|
|
57,165
|
|
|
69,196
|
Net interest income
|
|
322,793
|
|
|
315,894
|
|
|
304,172
|
|
|
299,427
|
|
|
337,372
|
Provision
for loan and lease losses
|
|
96,792
|
|
|
56,108
|
|
|
113,139
|
|
|
65,076
|
|
|
161,501
|
Net interest income after provision for loan and leases losses
|
|
226,001
|
|
|
259,786
|
|
|
191,033
|
|
|
234,351
|
|
|
175,871
|
Non-interest
income
|
|
82,493
|
|
|
80,095
|
|
|
78,687
|
|
|
66,819
|
|
|
52,472
|
Non-interest
expenses
|
|
233,244
|
|
|
207,081
|
|
|
201,631
|
|
|
215,990
|
|
|
248,401
|
Income (loss) before taxes
|
|
75,250
|
|
|
132,800
|
|
|
68,089
|
|
|
85,180
|
|
|
(20,058)
|
Income
tax (benefit) expense
|
|
21,409
|
|
|
48,390
|
|
|
15,443
|
|
|
25,994
|
|
|
(17,554)
|
Net income (loss)
|
|
53,841
|
|
|
84,410
|
|
|
52,646
|
|
|
59,186
|
|
|
(2,504)
|
Less:
dividends on preferred stock
|
|
(6,512)
|
|
|
(12,024)
|
|
|
(13,862)
|
|
|
(13,862)
|
|
|
(13,862)
|
Income (loss) available to common shareholders
|
$
|
47,329
|
|
$
|
72,386
|
|
$
|
38,784
|
|
$
|
45,324
|
|
$
|
(16,366)
|
PER
SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.92
|
|
$
|
1.59
|
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
Diluted
|
$
|
0.92
|
|
$
|
1.52
|
|
$
|
0.88
|
|
$
|
1.03
|
|
$
|
(0.37)
|
Average
common shares outstanding
|
|
51,335
|
|
|
45,400
|
|
|
43,939
|
|
|
43,913
|
|
|
51,455
|
Average
common shares outstanding and equivalents
|
|
51,719
|
|
|
51,349
|
|
|
51,096
|
|
|
51,088
|
|
|
44,231
|
Cash
dividends declared per common share
|
$
|
0.28
|
|
|
0.25
|
|
|
0.24
|
|
|
0.24
|
|
|
0.36
|
Cash
dividends declared on common shares
|
$
|
14,367
|
|
|
11,512
|
|
|
10,553
|
|
|
10,544
|
|
|
15,932
|
PERFORMANCE
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets (ROA)
|
|
0.83%
|
|
|
1.31%
|
|
|
0.84%
|
|
|
0.88%
|
|
|
-0.03%
|
Return
on average tangible common stockholders' equity
|
|
5.42%
|
|
|
9.95%
|
|
|
5.64%
|
|
|
6.94%
|
|
|
-2.47%
|
Return
on average common equity (ROE)
|
|
4.91%
|
|
|
8.85%
|
|
|
4.98%
|
|
|
6.08%
|
|
|
-2.16%
|
Equity-to-assets
ratio
|
|
11.24%
|
|
|
15.19%
|
|
|
15.27%
|
|
|
14.16%
|
|
|
12.64%
|
Efficiency
ratio
|
|
58.88%
|
|
|
53.07%
|
|
|
53.99%
|
|
|
57.82%
|
|
|
60.00%
|
Interest
rate spread
|
|
5.26%
|
|
|
5.19%
|
|
|
5.15%
|
|
|
4.74%
|
|
|
4.95%
|
Interest
rate margin
|
|
5.37%
|
|
|
5.28%
|
|
|
5.23%
|
|
|
4.82%
|
|
|
5.03%
|
|
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
PERIOD
END BALANCES AND CAPITAL RATIOS:
|
(In thousands, except per
share data)
|
Investments
and loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
$
|
1,087,814
|
|
$
|
1,279,604
|
|
$
|
1,166,050
|
|
$
|
1,362,511
|
|
$
|
1,615,872
|
Loans and leases, net
|
|
6,641,847
|
|
|
4,431,594
|
|
|
4,056,329
|
|
|
4,147,692
|
|
|
4,434,213
|
Total investments and loans
|
$
|
7,729,661
|
|
$
|
5,711,198
|
|
$
|
5,222,379
|
|
$
|
5,510,203
|
|
$
|
6,050,085
|
Deposits
and borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
7,698,610
|
|
$
|
4,908,115
|
|
$
|
4,799,482
|
|
$
|
4,664,487
|
|
$
|
4,717,751
|
Securities sold under agreements to repurchase
|
|
190,274
|
|
|
455,508
|
|
|
192,869
|
|
|
653,756
|
|
|
934,691
|
Other borrowings
|
|
115,287
|
|
|
114,917
|
|
|
135,879
|
|
|
141,598
|
|
|
436,843
|
Total deposits and borrowings
|
$
|
8,004,171
|
|
$
|
5,478,540
|
|
$
|
5,128,230
|
|
$
|
5,459,841
|
|
$
|
6,089,285
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
$
|
92,000
|
|
$
|
92,000
|
|
$
|
176,000
|
|
$
|
176,000
|
|
$
|
176,000
|
Common stock
|
|
59,885
|
|
|
59,885
|
|
|
52,626
|
|
|
52,626
|
|
|
52,626
|
Additional paid-in capital
|
|
621,515
|
|
|
619,381
|
|
|
541,600
|
|
|
540,948
|
|
|
540,512
|
Legal surplus
|
|
95,779
|
|
|
90,167
|
|
|
81,454
|
|
|
76,293
|
|
|
70,435
|
Retained earnings
|
|
279,646
|
|
|
253,040
|
|
|
200,878
|
|
|
177,808
|
|
|
148,886
|
Treasury stock, at cost
|
|
(102,339)
|
|
|
(103,633)
|
|
|
(104,502)
|
|
|
(104,860)
|
|
|
(105,379)
|
Accumulated other comprehensive (loss) income
|
|
(1,008)
|
|
|
(10,963)
|
|
|
(2,949)
|
|
|
1,596
|
|
|
13,997
|
Total stockholders' equity
|
$
|
1,045,478
|
|
$
|
999,877
|
|
$
|
945,107
|
|
$
|
920,411
|
|
$
|
897,077
|
Per
share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
$
|
18.75
|
|
$
|
17.90
|
|
$
|
17.73
|
|
$
|
17.18
|
|
$
|
16.67
|
Tangible book value per common share
|
$
|
15.96
|
|
$
|
16.15
|
|
$
|
15.67
|
|
$
|
15.08
|
|
$
|
14.53
|
Market price at end of period
|
$
|
23.61
|
|
$
|
16.46
|
|
$
|
9.40
|
|
$
|
13.10
|
|
$
|
7.32
|
Capital
ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital
|
|
9.24%
|
|
|
14.22%
|
|
|
13.92%
|
|
|
12.99%
|
|
|
11.18%
|
Common equity Tier 1 capital
|
|
10.78%
|
|
|
16.78%
|
|
|
14.59%
|
|
|
14.05%
|
|
|
12.14%
|
Tier 1 risk-based capital
|
|
12.49%
|
|
|
19.20%
|
|
|
19.05%
|
|
|
18.35%
|
|
|
15.99%
|
Total risk-based capital
|
|
13.76%
|
|
|
20.48%
|
|
|
20.34%
|
|
|
19.62%
|
|
|
17.29%
|
Financial
assets managed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets managed
|
$
|
3,136,884
|
|
$
|
2,771,462
|
|
$
|
3,039,998
|
|
$
|
2,850,494
|
|
$
|
2,691,423
|
Broker-dealer assets gathered
|
|
2,375,871
|
|
|
2,116,035
|
|
|
2,250,460
|
|
|
2,350,718
|
|
|
2,374,709
|
Total
assets managed
|
$
|
5,512,755
|
|
$
|
4,887,497
|
|
$
|
5,290,458
|
|
$
|
5,201,212
|
|
$
|
5,066,132
|
The ratios shown below demonstrate Oriental’s
ability to generate sufficient earnings to pay the fixed charges or expenses of
its debt and preferred stock dividends. Oriental’s consolidated ratios of
earnings to combined fixed charges and preferred stock dividends were computed
by dividing earnings by combined fixed charges and preferred stock dividends,
as specified below, using two different assumptions, one excluding interest on
deposits and the second including interest on deposits:
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
Consolidated
Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends
|
|
Excluding interests on deposits
|
|
4.65x
|
|
|
5.54x
|
|
|
2.91x
|
|
|
2.60x
|
|
|
(A)
|
Including interests on deposits
|
|
2.18x
|
|
|
3.03x
|
|
|
1.92x
|
|
|
1.97x
|
|
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
In 2015, earnings were not sufficient to cover preferred stock dividends, and
the ratio was less than 1:1. The Company would have had to generate
additional earnings of $34 million to achieve a ratio of 1:1 in 2015.
|
For purposes of
computing these consolidated ratios, earnings represent income before income
taxes plus fixed charges and amortization of capitalized interest, less
interest capitalized. Fixed charges consist of interest expensed and
capitalized, amortization of debt issuance costs, and Oriental’s estimate of
the interest component of rental expense. The term “preferred stock dividends”
is the amount of pre-tax earnings that is required to pay dividends on
Oriental’s outstanding preferred stock. As of December 31, 2019 and 2018,
Oriental had noncumulative perpetual preferred stock issued and outstanding
amounting to $92.0 million, as follows: (i) Series A amounting
to $33.5 million or 1,340,000 shares at a $25 liquidation value;
(ii) Series B amounting to $34.5 million or
1,380,000 shares at a $25 liquidation value; and (iii) Series D
amounting to $24.0 million or 960,000 shares at a $25 liquidation
value. As of December 31, 2017, 2016 and 2015, Oriental had non-cumulative
perpetual preferred stock issued and outstanding amounting to $176.0 million,
which included $84.0 million or 84,000 shares of Series C at $1,000 liquidation
value, which was converted on October 22, 2018 by Oriental into common shares
at a conversion rate of 86.4225.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 2019
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by Oriental conform with
GAAP and general practices within the financial services industry. Oriental’s
significant accounting policies are described in detail in Note 1 to the
consolidated financial statements and should be read in conjunction with this
section.
Critical accounting policies require management to make estimates and
assumptions, which involve significant judgment about the effect of matters
that are inherently uncertain and that involve a high degree of subjectivity.
These estimates are made under facts and circumstances at a point in time and
changes in those facts and circumstances could produce actual results that
differ from those estimates. The following MD&A section is a summary of
what management considers Oriental’s critical accounting policies and
estimates.
Business Combinations
Oriental accounted for the Scotiabank PR & USVI Acquisition, the
BBVAPR Acquisition and the FDIC-assisted acquisition of Eurobank under the
accounting guidance of ASC Topic No. 805, Business Combinations, which requires
the use of the acquisition method of accounting. All identifiable assets and
liabilities acquired were initially recorded at fair value. No allowance for loan
losses related to the acquired loans was recorded on the acquisition date.
Loans acquired were recorded at fair value in accordance with the fair value
methodology prescribed in ASC Topic 820.
The fair values initially assigned to assets acquired
and liabilities assumed are preliminary and subject to refinement for up to one
year after the closing date of the acquisition as new information relative to
closing date fair values becomes available.
Acquisition
Accounting for Loans
Oriental has
acquired loans in three separate acquisitions, the Scotiabank PR & USVI Acquisition in December 2019,
the BBVAPR Acquisition in December 2012 and the FDIC-assisted Eurobank
acquisition in April 2010. Oriental accounted for all acquisitions under the
accounting guidance of ASC Topic 805, Business Combinations, which requires the
use of the acquisition method of accounting.
The initial valuation of these loans required
management to make subjective judgments concerning estimates about how the
acquired loans would perform in the future using valuation methods, including
discounted cash flow analyses and independent third-party appraisals. Factors
that may significantly affect the initial valuation included, among others,
market-based and industry data related to expected changes in interest rates,
assumptions related to probability and severity of credit losses, discount
rates, estimated timing of credit losses including the timing of foreclosure
and liquidation of collateral, expected prepayment rates, required or
anticipated loan modifications, unfunded loan commitments, and specific
industry and market conditions that may impact discount rates and independent
third-party appraisals.
For the Scotiabank
PR & USVI, BBVAPR and Eurobank acquisitions, Oriental considered the
following factors as indicators that an acquired loan had evidence of
deterioration in credit quality and was therefore in the scope of ASC 310-30:
·
Loans that were 90 days or more
past due;
·
Loans that had an internal loan
grade of substandard or worse - substandard loans have a well-defined weakness
that jeopardizes collection of the loan;
·
Loans that were classified as
nonaccrual by the acquired bank at the time of acquisition; and
·
Loans that had been previously
modified in a troubled debt restructuring.
Any acquired loans that were
not individually in the scope of ASC 310-30 because they did not meet the
criteria above were either (i) pooled into groups of similar loans based on the
borrower type, loan purpose, and collateral type and accounted for under ASC
310-30 by analogy or (ii) accounted for under ASC 310-20 (Non-refundable fees
and other costs).
Acquired Loans Accounted for under ASC 310-20 (loans with revolving
feature and/or acquired at a premium)
Revolving credit facilities such as credit cards,
retail and commercial lines of credit and floor plans which are specifically
scoped out of ASC 310-30 are accounted for under the provisions of ASC 310-20. Performing
loans acquired at a premium and several performing loans that were acquired
with credit discount in the Scotiabank PR & USVI Acquisition are accounted
for under this guidance. Loans acquired with credit discount and that showed
specific credit risk indicators are accounted for under the provisions of ASC
310-30. Also, performing auto loans with FICO scores over 660 acquired at a
premium in the BBVAPR Acquisition are accounted for under this guidance. Auto
loans with FICO scores below 660 were acquired at a discount and are accounted
for under the provisions of ASC 310-30. The provisions of ASC 310-20 require
that any differences between the contractually required loan payments in excess
of Oriental’s initial investment in the loans be accreted into interest income
on a level-yield basis over the life of the loan. Acquired loans that were
accounted for under the provisions of ASC 310-20, which had fully amortized
their premium or discount recorded at the date of acquisition, are removed from
the acquired loan category. Loans accounted for under ASC 310-20 are placed on
non-accrual status when past due in accordance with Oriental’s non-accrual
policy and any accretion of discount is discontinued. These assets were
recorded at estimated fair value on their acquisition date, incorporating an
estimate of future expected cash flows. Such fair value includes a credit
discount which accounts for expected loan losses over the estimated life of
these loans. Management takes into consideration this credit discount when
determining the necessary allowance for acquired loans that are accounted for
under the provisions of ASC 310-20.
The allowance for loan and lease losses model for
acquired loans accounted for under ASC 310-20 is the same as for the originated
loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including
those accounted for under ASC 310-30 by analogy)
Oriental performed a fair
market valuation of each of the loan pools, and each pool was recorded at a discount.
Oriental determined that at least part of the discount on the acquired
individual or pools of loans was attributable to credit quality by reference to
the valuation model used to estimate the fair value of these pools of loans.
The valuation model incorporated lifetime expected credit losses into the
loans’ fair valuation in consideration of factors such as evidence of credit
deterioration since origination and the amounts of contractually required
principal and interest that Oriental did not expect to collect as of the
acquisition date. Based on the guidance included in the December 18, 2009
letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply
ASC 310-30 by analogy to all of these acquired pools of loans as they all (i)
were acquired in a business combination or asset purchase, (ii) resulted in
recognition of a discount attributable, at least in part, to credit quality,
and (iii) were not subsequently accounted for at fair value.
The excess of expected cash
flows from acquired loans over the estimated fair value of acquired loans at
acquisition is referred to as the accretable discount and is recognized into
interest income over the remaining life of the acquired loans using the
interest method. The difference between contractually required payments at
acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount represents
estimated future credit losses expected to be incurred over the life of the
acquired loans. Subsequent decreases to the expected cash flows require
Oriental to evaluate the need for an addition to the allowance for loan losses.
Subsequent improvements in expected cash flows result in the reversal of the
associated allowance for loan losses, if any, and the reversal of a
corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income
over the remaining life of the loan using the interest method. Oriental’s
evaluation of the amount of future cash flows that it expects to collect takes
into account actual credit performance of the acquired loans to date and
Oriental’s best estimates for the expected lifetime credit performance of the
loans using currently available information. Charge-offs of the principal
amount on acquired loans would be first applied to the nonaccretable discount
portion of the fair value adjustment.
In accordance with ASC 310-30,
recognition of income is dependent on having a reasonable expectation about the
timing and amount of cash flows expected to be collected. Oriental performs
such an evaluation on a quarterly basis on both its acquired loans individually
accounted for under ASC 310-30 and those in pools accounted for under ASC
310-30 by analogy.
Cash
flows for acquired loans individually accounted for under ASC 310-30 are
estimated on a quarterly basis. Based on this evaluation, a determination is
made as to whether or not Oriental has a reasonable expectation about the
timing and amount of cash flows. Such an expectation includes cash flows from
normal customer repayment, collateral value, foreclosure or other collection
efforts. Cash flows for acquired loans accounted for on a pooled basis under
ASC 310-30 by analogy are also estimated on a quarterly basis. For mortgage and
other consumer loans, cash flow loss estimates are calculated based on a model
that incorporates probability of default, loss severity and prepayment rates.
For commercial loans cash flow loss estimates consider loss severity, and probability
of default is assigned, through loan grades, to each pool with consideration
given for pool make-up. Probability of default is developed from internally
generated historical loss data and are applied to each pool.
To
the extent that Oriental cannot reasonably estimate cash flows, interest income
recognition is discontinued. The unit of account for loans in pools accounted
for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as
Oriental can reasonably estimate cash flows for the pool as a whole, accretable
yield on the pool is recognized and all individual loans within the pool - even
those more than 90 days past due - would be considered to be accruing interest
in Oriental’s financial statement disclosures, regardless of whether or not
Oriental expects any principal or interest cash flows on an individual loan 90
days or more past due.
Oriental writes-off the loan’s recorded investment and
derecognizes the associated allowance for loan and lease losses for loans that
exit the acquired pools.
Allowance
for Loan and Lease Losses
One of the most critical
and complex accounting estimates is associated with the determination of the
allowance for loan and lease losses. The provision for loan losses charged to
current operations is based on this determination. Oriental’s assessment of the
allowance for loan and lease losses is determined in accordance with accounting
guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20
and loan impairment guidance in ASC Section 310-10-35.
For a detailed description
of the principal factors used to determine the general reserves of the
allowance for loan and lease losses and for the principal enhancement’s
management made to its methodology, refer to Notes 1 and 7 to the consolidated
financial statements.
According to the loan
impairment accounting guidance in ASC Section 310-10-35, a loan is impaired
when, based on current information and events, it is probable that the
principal and/or interest are not going to be collected according to the
original contractual terms of the loan agreement. Current information and
events include “environmental” factors, such as existing industry,
geographical, economic and political factors. Probable means the future event
or events which will confirm the loss or impairment of the loan is likely to
occur. The collateral dependent method is generally used for the impairment
determination on commercial loans since the expected realizable value of the
loan is based upon the proceeds received from the liquidation of the collateral
property. For commercial properties, the “as is” value or the “income approach”
value is used depending on the financial condition of the subject borrower
and/or the nature of the subject collateral. In most cases, impaired commercial
loans do not have reliable or sustainable cash flow to use the discounted cash
flow valuation method. Appraisals may be adjusted due to their age, property
conditions, geographical area or general market conditions. The adjustments
applied are based upon internal information, like other appraisals and/or loss
severity information that can provide historical trends in the real estate
market. Discount rates used may change from time to time based on management’s
estimates.
For additional information
on Oriental’s policy of its impaired loans, refer to Note 1 to the consolidated
financial statements.
Oriental’s management
evaluates the adequacy of the allowance for loan and lease losses on a
quarterly basis following a systematic methodology in order to provide for
known and inherent risks in the loan portfolio. In developing its assessment of
the adequacy of the allowance for loan and lease losses, Oriental must rely on
estimates and exercise judgment regarding matters where the ultimate outcome is
unknown, such as economic developments affecting specific customers, industries
or markets. Other factors that can affect management’s estimates are the years
of historical data to include when estimating losses, the level of volatility
of losses in a specific portfolio, changes in underwriting standards, financial
accounting standards and loan impairment measurement, among others. Changes in
the financial condition of individual borrowers, in economic conditions, in
historical loss experience and in the condition of the various markets in which
collateral may be sold may all affect the required level of the allowance for
loan losses. Consequently, the business, financial condition, liquidity,
capital and results of operations could also be affected.
A restructuring constitutes
a "troubled-debt restructuring" ("TDR") when Oriental
separately concludes that the restructuring constitutes a concession and the
debtor is experiencing financial difficulties. For information on Oriental’s
TDR policy, refer to Note 1
to the financial
consolidated statements.
FINANCIAL
HIGHLIGHTS
Fourth quarter of 2019:
• Net loss to shareholders of $2.6
million, or ($0.05) per share, which included $21.5 million in acquisition
related merger and restructuring charges and $6.6 million in additional
provision for non-performing loans the Company decided to sell in the third
quarter of 2019. Compares with third quarter of 2019 net income available to
shareholders of $5.8 million, or $0.11 per share fully diluted, and fourth
quarter of 2018 net income of $23.1 million, or $0.45 per share.
• The fourth quarter of 2019 core
operations were strong, with net interest margin of 5.35% and loan production
of $404.9 million. Most credit quality metrics improved.
• During the quarter, Oriental obtained
all regulatory approvals, developed an integration plan, and closed on the
$560.0 million cash acquisition (excluding settlement amounts), adding $2.2
billion in net loans and $3.0 billion in low cost core deposits.
• Acquisition related merger and
restructuring charges of $21.5 million, core deposit intangible of $41.5
million, customer relationship intangible of $12.7 million and no goodwill.
Year ended 2019:
• Net income available to shareholders of
$47.3 million, or $0.92 per share fully diluted, which included acquisition
related merger and restructuring charges and increased provision from the sale
of non-performing loans (NPLs).
• On a non-GAAP basis, adjusted net
income available to shareholders was $83.4 million or $1.61 per share, which
compares favorably to 2018 net income of $72.4 million, or $1.52 per share.
• Oriental ended the year with book value
of $18.75 per common share, up 4.8% from a year ago; tangible book value of
$15.96 per common share, down 1.2% as a result of the acquisition; total
stockholders’ equity of $1.05 billion, up 4.6%; and record total assets of $9.3
billion, up 41.2%.
Oriental prepared its
consolidated financial statement using accounting principles generally accepted
in the U.S. (“U.S. GAAP” or the ‘reported basis”). In addition to analyzing
Oriental’s results on the reported basis, management monitors the “Adjusted net
income” of Oriental and excludes the impact of certain transactions on the
results of its operations. Management believes that “Adjusted net income”
provides meaningful information to investors about the underlying performance
of Oriental’s ongoing operations. “Adjusted net income” is a non-GAAP
financial measure.
The table below describes adjustments
to net income for the year ended December 31, 2019:
|
|
|
|
Income Tax
|
|
Impact on
|
|
(Dollars
in thousands) (unaudited)
|
|
Pre-tax
|
|
Effect
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP net income
|
|
|
|
|
|
|
|
$
|
53,841
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
Sale of mortgage-backed securities available-for-sale
|
|
$
|
(8,267)
|
|
$
|
1,984
|
|
|
(6,283)
|
(a)
|
Non-performing loans sold
|
|
|
54,319
|
|
|
(20,370)
|
|
|
33,949
|
(b)
|
Sale of fully charged-off loans
|
|
|
(2,382)
|
|
|
893
|
|
|
(1,489)
|
(c)
|
Merger and restructuring expenses
|
|
|
24,054
|
|
|
(9,020)
|
|
|
15,034
|
(d)
|
FDIC insurance assessment credit
|
|
|
(1,534)
|
|
|
575
|
|
|
(959)
|
(e)
|
Hacienda credit for hurricane Maria
|
|
|
(1,010)
|
|
|
-
|
|
|
(1,010)
|
(f)
|
Qualitative factors adjustment
|
|
|
(4,541)
|
|
|
1,703
|
|
|
(2,838)
|
(g)
|
Bargain purchase from Scotiabank PR & USVI
|
|
|
(315)
|
|
|
-
|
|
|
(315)
|
(h)
|
Adjusted
net income (Non-GAAP)
|
|
|
|
|
|
|
|
$
|
89,931
|
|
Less:
dividends on preferred stock
|
|
|
|
|
|
|
|
|
(6,512)
|
|
Adjusted
net income available to common shareholders (Non-GAAP)
|
|
|
|
|
|
|
|
$
|
83,419
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
earnings per common share - diluted (Non-GAAP)
|
|
|
|
|
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
Performance Metrics - Reconciliation to GAAP Financial Measures:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
53,841
|
|
Non-GAAP adjustments
|
|
|
|
|
|
|
|
|
36,090
|
|
Adjusted
net income (Non-GAAP)
|
|
|
|
|
|
|
|
|
89,931
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets
|
|
|
|
|
|
|
|
|
6,464,329
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
|
|
|
|
|
|
0.83%
|
|
Adjusted
return on average assets (Non-GAAP)
|
|
|
|
|
|
|
|
|
1.39%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
|
|
|
|
|
|
$
|
47,329
|
|
Non-GAAP adjustments
|
|
|
|
|
|
|
|
|
36,090
|
|
Adjusted
net income available to common shareholders (Non-GAAP)
|
|
|
|
|
|
|
|
|
83,419
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
tangible common equity
|
|
|
|
|
|
|
|
|
874,015
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average tangible common stockholders' equity
|
|
|
|
|
|
|
|
|
5.45%
|
|
Adjusted
return on average tangible common stockholders' equity (Non-GAAP)
|
|
|
|
|
|
|
|
|
9.54%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
|
|
|
|
|
|
$
|
233,244
|
|
Non-GAAP adjustments, pre-tax
|
|
|
|
|
|
|
|
|
(21,510)
|
|
Adjusted
total non-interest expense (Non-GAAP)
|
|
|
|
|
|
|
|
|
211,734
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
|
|
|
|
|
|
322,793
|
|
Total
banking and financial service revenues
|
|
|
|
|
|
|
|
|
73,365
|
|
|
|
|
|
|
|
|
|
|
396,158
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio
|
|
|
|
|
|
|
|
|
58.88%
|
|
Adjusted
efficiency ratio (Non-GAAP)
|
|
|
|
|
|
|
|
|
53.45%
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
During 2019, the Company sold $672 million available-for-sale mortgage-backed
securities and recognized a gain in the sale of $8.3 million.
|
(b)
During 2019, the Company sold mostly non-performing loans, increasing the
provision by $54.3 million.
|
(c)
During 2019, the Company received $2.4 million proceeds from the sale of
fully charged-off originated auto and consumer loans.
|
(d)
During 2019, the Company entered into an agreement with Scotiabank to acquire
its Puerto Rico and US Virgin Islands operations, subject to customary
closing conditions. On December 31, 2019, the Company completed the
acquisition. As a result, $24.1 million were incurred in related merger and
restructuring charges.
|
(e)
During 2019, the Company recognized an FDIC insurance assessment credit
received amounting to $1.5 million.
|
(f)
During 2019, the Company received an additional $1 million credit from Puerto
Rico Treasury on employee retention during hurricane Maria.
|
(g)
During 2019, the Company had a reduction in provision for loan losses of $4.5
million as a result of the adjustment to the qualitative factor related to
sustained favorable macroeconomic conditions in Puerto Rico.
|
(h)
On December 31, 2019, the Company acquired Scotiabank's Puerto Rico and USVI
operations for $430.4 million, which approximated the fair value of net
assets acquired, and recorded a bargain purchase gain of $315 thousand. The
determination of fair value may necessitate the use of one year measurement
period to adequately analyze all the factors used as of the acquisition date.
|
ANALYSIS OF RESULTS OF OPERATIONS
The following tables show major categories
of interest-earning assets and interest-bearing liabilities, their respective
interest income, expenses, yields and costs, and their impact on net interest
income due to changes in volume and rates for the years ended December 31, 2019,
2018 and 2017:
TABLE 1 - ANALYSIS OF NET INTEREST
INCOME AND CHANGES DUE TO VOLUME/RATE
|
FOR THE YEARS ENDED DECEMBER 31, 2019
AND 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Average rate
|
|
Average
balance
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
2019
|
|
2018
|
|
2019
|
2018
|
|
2019
|
|
2018
|
|
(Dollars in
thousands)
|
A - TAX EQUIVALENT SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
$
|
373,795
|
|
$
|
360,419
|
|
6.22%
|
|
6.02%
|
|
$
|
6,009,494
|
|
$
|
5,985,523
|
Tax equivalent adjustment
|
|
10,262
|
|
|
8,003
|
|
0.17%
|
|
0.13%
|
|
|
-
|
|
|
-
|
Interest-earning assets - tax equivalent
|
|
384,057
|
|
|
368,422
|
|
6.39%
|
|
6.15%
|
|
|
6,009,494
|
|
|
5,985,523
|
Interest-bearing liabilities
|
|
51,002
|
|
|
44,525
|
|
0.96%
|
|
0.83%
|
|
|
5,297,318
|
|
|
5,353,398
|
Tax equivalent net interest income /
spread
|
|
333,055
|
|
|
323,897
|
|
5.43%
|
|
5.32%
|
|
|
712,176
|
|
|
632,125
|
Tax equivalent interest rate margin
|
|
|
|
|
|
|
5.60%
|
|
5.45%
|
|
|
|
|
|
|
B - NORMAL SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
20,879
|
|
|
32,340
|
|
2.37%
|
|
2.50%
|
|
|
879,885
|
|
|
1,293,407
|
Interest bearing cash and money market
investments
|
|
13,041
|
|
|
6,698
|
|
2.11%
|
|
1.95%
|
|
|
618,446
|
|
|
343,982
|
Total investments
|
|
33,920
|
|
|
39,038
|
|
2.26%
|
|
2.38%
|
|
|
1,498,331
|
|
|
1,637,389
|
Originated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
34,434
|
|
|
35,499
|
|
5.50%
|
|
5.20%
|
|
|
626,538
|
|
|
683,228
|
Commercial
|
|
101,166
|
|
|
86,734
|
|
6.35%
|
|
5.97%
|
|
|
1,593,828
|
|
|
1,452,314
|
Consumer
|
|
44,861
|
|
|
42,112
|
|
11.94%
|
|
11.94%
|
|
|
375,685
|
|
|
352,760
|
Auto and leasing
|
|
111,718
|
|
|
95,805
|
|
9.11%
|
|
9.31%
|
|
|
1,226,520
|
|
|
1,029,039
|
Total originated loans
|
|
292,179
|
|
|
260,150
|
|
7.64%
|
|
7.40%
|
|
|
3,822,571
|
|
|
3,517,341
|
Acquired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
23,872
|
|
|
27,248
|
|
5.34%
|
|
5.45%
|
|
|
446,716
|
|
|
499,874
|
Commercial
|
|
10,331
|
|
|
14,408
|
|
7.21%
|
|
7.54%
|
|
|
143,258
|
|
|
191,176
|
Consumer
|
|
2,877
|
|
|
2,880
|
|
22.41%
|
|
21.04%
|
|
|
12,838
|
|
|
13,691
|
Auto
|
|
829
|
|
|
3,861
|
|
16.24%
|
|
11.61%
|
|
|
5,104
|
|
|
33,251
|
Total acquired BBVAPR loans
|
|
37,909
|
|
|
48,397
|
|
6.24%
|
|
6.56%
|
|
|
607,916
|
|
|
737,992
|
Acquired Eurobank
|
|
9,787
|
|
|
12,834
|
|
12.13%
|
|
13.83%
|
|
|
80,676
|
|
|
92,801
|
Total loans
|
|
339,875
|
|
|
321,381
|
|
7.53%
|
|
7.39%
|
|
|
4,511,163
|
|
|
4,348,134
|
Total interest-earning
assets
|
|
373,795
|
|
|
360,419
|
|
6.22%
|
|
6.02%
|
|
|
6,009,494
|
|
|
5,985,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Average rate
|
|
Average
balance
|
|
December
|
|
December
|
|
|
December
|
December
|
December
|
|
December
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Dollars in
thousands)
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW Accounts
|
|
6,271
|
|
|
4,496
|
|
|
0.56%
|
|
0.42%
|
|
|
1,118,243
|
|
|
1,079,538
|
Savings and money market
|
|
7,351
|
|
|
6,364
|
|
|
0.62%
|
|
0.52%
|
|
|
1,187,278
|
|
|
1,216,635
|
Time deposits
|
|
15,468
|
|
|
11,483
|
|
|
1.42%
|
|
1.13%
|
|
|
1,092,002
|
|
|
1,019,062
|
Total core deposits
|
|
29,090
|
|
|
22,343
|
|
|
0.86%
|
|
0.67%
|
|
|
3,397,523
|
|
|
3,315,235
|
Brokered deposits
|
|
9,463
|
|
|
9,751
|
|
|
2.47%
|
|
1.97%
|
|
|
383,483
|
|
|
496,171
|
|
|
38,553
|
|
|
32,094
|
|
|
1.02%
|
|
0.84%
|
|
|
3,781,006
|
|
|
3,811,406
|
Non-interest bearing deposits
|
|
-
|
|
|
-
|
|
|
0.00%
|
|
0.00%
|
|
|
1,100,599
|
|
|
1,075,681
|
Core deposit intangible amortization
|
|
802
|
|
|
859
|
|
|
0.00%
|
|
0.00%
|
|
|
-
|
|
|
-
|
Total deposits
|
|
39,355
|
|
|
32,953
|
|
|
0.81%
|
|
0.67%
|
|
|
4,881,605
|
|
|
4,887,087
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
7,423
|
|
|
7,794
|
|
|
2.48%
|
|
2.18%
|
|
|
299,842
|
|
|
357,086
|
Advances from FHLB and other borrowings
|
|
2,212
|
|
|
1,875
|
|
|
2.77%
|
|
2.57%
|
|
|
79,787
|
|
|
72,882
|
Subordinated capital notes
|
|
2,012
|
|
|
1,903
|
|
|
5.58%
|
|
5.28%
|
|
|
36,083
|
|
|
36,083
|
Total borrowings
|
|
11,647
|
|
|
11,572
|
|
|
2.80%
|
|
2.48%
|
|
|
415,712
|
|
|
466,051
|
Total interest bearing
liabilities
|
|
51,002
|
|
|
44,525
|
|
|
0.96%
|
|
0.83%
|
|
|
5,297,317
|
|
|
5,353,138
|
Net interest income / spread
|
$
|
322,793
|
|
$
|
315,894
|
|
|
5.26%
|
|
5.19%
|
|
|
|
|
|
|
Interest rate margin
|
|
|
|
|
|
|
|
5.37%
|
|
5.28%
|
|
|
|
|
|
|
Excess of average interest-earning
assets
over average interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
$
|
712,177
|
|
$
|
632,385
|
Average interest-earning assets to
average
interest-bearing liabilities ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
113.44%
|
|
|
111.81%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C - CHANGES IN NET INTEREST INCOME DUE
TO:
|
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
$
|
(3,315)
|
|
$
|
(1,803)
|
|
$
|
(5,118)
|
|
|
|
|
|
|
|
|
Loans
|
|
11,023
|
|
|
7,471
|
|
|
18,494
|
|
|
|
|
|
|
|
|
Total interest income
|
|
7,708
|
|
|
5,668
|
|
|
13,376
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
(37)
|
|
|
6,439
|
|
|
6,402
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
(1,249)
|
|
|
878
|
|
|
(371)
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
239
|
|
|
207
|
|
|
446
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
(1,047)
|
|
|
7,524
|
|
|
6,477
|
|
|
|
|
|
|
|
|
Net Interest Income
|
$
|
8,755
|
|
$
|
(1,856)
|
|
$
|
6,899
|
|
|
|
|
|
|
|
|
TABLE 1A - ANALYSIS OF NET INTEREST
INCOME AND CHANGES DUE TO VOLUME/RATE
|
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Average rate
|
|
Average
balance
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
December
|
|
2018
|
|
2017
|
|
2018
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in
thousands)
|
A - TAX EQUIVALENT SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
$
|
360,419
|
|
$
|
345,647
|
|
6.02%
|
|
5.94%
|
|
$
|
5,985,523
|
|
$
|
5,818,597
|
Tax equivalent adjustment
|
|
8,003
|
|
|
4,791
|
|
0.13%
|
|
0.08%
|
|
|
-
|
|
|
-
|
Interest-earning assets - tax equivalent
|
|
368,422
|
|
|
350,438
|
|
6.15%
|
|
6.02%
|
|
|
5,985,523
|
|
|
5,818,597
|
Interest-bearing liabilities
|
|
44,525
|
|
|
41,476
|
|
0.83%
|
|
0.79%
|
|
|
5,353,138
|
|
|
5,226,654
|
Tax equivalent net interest income /
spread
|
|
323,897
|
|
|
308,962
|
|
5.32%
|
|
5.23%
|
|
|
632,385
|
|
|
591,943
|
Tax equivalent interest rate margin
|
|
|
|
|
|
|
5.45%
|
|
5.31%
|
|
|
|
|
|
|
B - NORMAL SPREAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
32,340
|
|
|
28,607
|
|
2.50%
|
|
2.28%
|
|
|
1,293,407
|
|
|
1,255,881
|
Interest bearing cash and money market
investments
|
|
6,698
|
|
|
4,619
|
|
1.95%
|
|
1.06%
|
|
|
343,982
|
|
|
436,913
|
Total investments
|
|
39,038
|
|
|
33,226
|
|
2.38%
|
|
1.96%
|
|
|
1,637,389
|
|
|
1,692,794
|
Originated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
35,499
|
|
|
37,465
|
|
5.20%
|
|
5.37%
|
|
|
683,228
|
|
|
697,873
|
Commercial
|
|
86,734
|
|
|
71,685
|
|
5.97%
|
|
5.73%
|
|
|
1,452,314
|
|
|
1,251,051
|
Consumer
|
|
42,112
|
|
|
39,133
|
|
11.94%
|
|
11.99%
|
|
|
352,760
|
|
|
326,482
|
Auto and leasing
|
|
95,805
|
|
|
78,626
|
|
9.31%
|
|
9.61%
|
|
|
1,029,039
|
|
|
818,155
|
Total originated loans
|
|
260,150
|
|
|
226,909
|
|
7.40%
|
|
7.33%
|
|
|
3,517,341
|
|
|
3,093,561
|
Acquired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
27,248
|
|
|
30,205
|
|
5.45%
|
|
5.63%
|
|
|
499,874
|
|
|
536,247
|
Commercial
|
|
14,408
|
|
|
20,488
|
|
7.54%
|
|
8.53%
|
|
|
191,176
|
|
|
240,267
|
Consumer
|
|
2,880
|
|
|
4,534
|
|
21.04%
|
|
15.98%
|
|
|
13,691
|
|
|
28,375
|
Auto
|
|
3,861
|
|
|
9,726
|
|
11.61%
|
|
10.72%
|
|
|
33,251
|
|
|
90,698
|
Total acquired BBVAPR loans
|
|
48,397
|
|
|
64,953
|
|
6.58%
|
|
7.25%
|
|
|
737,992
|
|
|
895,587
|
Acquired Eurobank
|
|
12,834
|
|
|
20,559
|
|
13.83%
|
|
15.04%
|
|
|
92,801
|
|
|
136,655
|
Total loans
|
|
321,381
|
|
|
312,421
|
|
7.39%
|
|
7.57%
|
|
|
4,348,134
|
|
|
4,125,803
|
Total interest-earning
assets
|
|
360,419
|
|
|
345,647
|
|
6.02%
|
|
5.94%
|
|
|
5,985,523
|
|
|
5,818,597
|
|
Interest
|
|
|
Average rate
|
|
Average
balance
|
|
December
|
|
December
|
|
|
December
|
|
December
|
|
December
|
|
December
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in
thousands)
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW Accounts
|
|
4,496
|
|
|
3,893
|
|
|
0.42%
|
|
0.37%
|
|
|
1,079,538
|
|
|
1,059,051
|
Savings and money market
|
|
6,364
|
|
|
5,922
|
|
|
0.52%
|
|
0.51%
|
|
|
1,216,635
|
|
|
1,170,800
|
Time deposits
|
|
11,483
|
|
|
11,352
|
|
|
1.51%
|
|
1.46%
|
|
|
1,019,062
|
|
|
1,039,034
|
Total core deposits
|
|
22,343
|
|
|
21,167
|
|
|
0.34%
|
|
0.32%
|
|
|
3,315,235
|
|
|
3,268,885
|
Brokered deposits
|
|
9,751
|
|
|
8,211
|
|
|
1.97%
|
|
1.47%
|
|
|
496,171
|
|
|
557,115
|
|
|
32,094
|
|
|
29,378
|
|
|
0.84%
|
|
0.77%
|
|
|
3,811,406
|
|
|
3,826,000
|
Non-interest bearing deposits
|
|
-
|
|
|
-
|
|
|
0.00%
|
|
0.00%
|
|
|
1,075,681
|
|
|
860,287
|
Core deposit intangible amortization
|
|
859
|
|
|
920
|
|
|
0.00%
|
|
0.00%
|
|
|
-
|
|
|
-
|
Total deposits
|
|
32,953
|
|
|
30,298
|
|
|
0.67%
|
|
0.65%
|
|
|
4,887,087
|
|
|
4,686,287
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
7,794
|
|
|
7,223
|
|
|
2.18%
|
|
1.80%
|
|
|
357,086
|
|
|
401,070
|
Advances from FHLB and other borrowings
|
|
1,875
|
|
|
2,398
|
|
|
2.57%
|
|
2.32%
|
|
|
72,882
|
|
|
103,214
|
Subordinated capital notes
|
|
1,903
|
|
|
1,556
|
|
|
5.28%
|
|
4.31%
|
|
|
36,083
|
|
|
36,083
|
Total borrowings
|
|
11,572
|
|
|
11,177
|
|
|
2.48%
|
|
2.07%
|
|
|
466,051
|
|
|
540,367
|
Total interest-bearing
liabilities
|
|
44,525
|
|
|
41,475
|
|
|
0.83%
|
|
0.79%
|
|
|
5,353,138
|
|
|
5,226,654
|
Net interest income / spread
|
$
|
315,894
|
|
$
|
304,172
|
|
|
5.19%
|
|
5.15%
|
|
|
|
|
|
|
Interest rate margin
|
|
|
|
|
|
|
|
5.28%
|
|
5.23%
|
|
|
|
|
|
|
Excess of average interest-earning
assets over
average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
$
|
632,385
|
|
$
|
591,943
|
Average interest-earning assets to
average
interest-bearing liabilities ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
111.81%
|
|
$
|
111.33%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C - CHANGES IN NET INTEREST INCOME DUE
TO:
|
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
$
|
(1,087)
|
|
$
|
6,900
|
|
$
|
5,813
|
|
|
|
|
|
|
|
|
Loans
|
|
12,878
|
|
|
(3,919)
|
|
|
8,959
|
|
|
|
|
|
|
|
|
Total interest income
|
|
11,791
|
|
|
2,981
|
|
|
14,772
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,298
|
|
|
1,357
|
|
|
2,655
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
(791)
|
|
|
1,362
|
|
|
571
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
(863)
|
|
|
687
|
|
|
(176)
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
(356)
|
|
|
3,406
|
|
|
3,050
|
|
|
|
|
|
|
|
|
Net Interest Income
|
$
|
12,147
|
|
$
|
(425)
|
|
$
|
11,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 of the years ended December 31, 2019 and 2018
Net interest income of $322.8 million increased $13.4 million from
$315.9 million. Interest rate spread increased 7 basis points to 5.26% from 5.19%
and net interest margin increased 9 basis points to 5.37% from 5.28%. These
increases are mainly due to the net effect of an increase of 20 basis points in
the average yield of total interest-earning assets and 13 basis points in the
total average cost of interest-bearing liabilities.
Net interest income was positively impacted by:
- Increase in interest income from originated loans by $32.0
million and an increase in yield of 24 basis points, reflecting higher
volume balances by $27.1 million in commercial, consumer and auto loan
portfolios and higher prices by $4.8 million; and
- Higher interest income from cash and money market of $6.3
million and an increase in yield of 16 basis points, due to increase in
price and volume of $597 thousand and $5.7 million, respectively.
Net interest income was adversely impacted by:
·
Decrease in the interest income from acquired loans of $13.5
million as such loans continue to be repaid and acquired non-performing loans
sold in 2019;
- Increase in interest expense from deposits of $6.4 million,
mainly from an increase in core deposits costs and volume of $5.7 million
and $1.1 million, respectively; and
- Decrease in interest income from investment of $11.5 million
reflecting mortgage-backed securities sale in 2019.
Comparison of the years ended December 31, 2018 and 2017
Net interest income of $315.9 million increased $11.7 million from
$304.2 million. Interest rate spread increased 4 basis points to 5.19% from
5.15% and net interest margin increased 5 basis points to 5.28% from 5.23%.
These increases are mainly due to the net effect of an increase of 8 basis
points in the average yield of total interest-earning assets and an increase of
4 basis point in average cost of interest-bearing liabilities.
Net interest income increased as a result of:
·
Higher interest income from investment of $5.8 million, reflecting
an increase in interest rates of $6.8 million, partially offset by a decrease
in volume of $944 thousand. Cash and money market investments increased 87
basis points and investments securities increased 22 basis points, both mainly
due to higher rates; and
·
Higher interest income from originated loans of $33.5 million,
reflecting higher balances in the auto, commercial and consumer portfolios.
This increase also reflects higher interest rates in the originated loan
portfolio by 7 basis points.
Such increases in net interest income were adversely impacted:
·
A decrease of $24.5 million in the interest income from acquired
loans as such loans continue to be repaid, and a decrease of $2.6 million in
cost recoveries.
TABLE 2 - NON-INTEREST INCOME SUMMARY
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
Variance
|
|
(Dollars in
thousands)
|
Banking service revenue
|
$
|
42,866
|
|
$
|
43,638
|
|
-1.8%
|
Wealth management revenue
|
|
26,224
|
|
|
25,934
|
|
1.1%
|
Mortgage banking activities
|
|
4,275
|
|
|
4,767
|
|
-10.3%
|
Total banking and financial service
revenue
|
|
73,365
|
|
|
74,339
|
|
-1.3%
|
Net gain (loss) on:
|
|
|
|
|
|
|
|
Sale of securities available for
sale
|
|
8,274
|
|
|
-
|
|
100.0%
|
Bargain purchase from Scotiabank PR
& USVI acquisition
|
|
315
|
|
|
-
|
|
100.0%
|
Early extinguishment of debt
|
|
(7)
|
|
|
-
|
|
-100.0%
|
Other non-interest income
|
|
546
|
|
|
5,757
|
|
-90.5%
|
Total non-interest income, net
|
$
|
82,493
|
|
$
|
80,096
|
|
3.0%
|
Non-Interest Income
Non-interest income is affected by the amount of the trust
department 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, fees generated from
loans and deposit accounts, and gains on sales of assets.
Comparison of years ended December 31, 2019 and 2018
Oriental recorded non-interest income, net, in the amount of $82.5
million, compared to $80.1 million, an increase of 3.0%, or $2.4 million. The
net increase in non-interest income was mainly due to a gain on the sale of
$8.3 million mortgage-backed securities during the year, offset by a decrease
of $5.2 million in other income from last year $5.0 million insurance recovery
from hurricane Maria.
Comparison of years ended December 31, 2018 and 2017
Oriental recorded non-interest income, net, in the amount of $80.1
million, compared to $78.7 million, an increase of 1.8%, or $1.4 million. The
net increase in non-interest income was mainly due to:
·
An increase of $4.2 million in banking service revenue, mainly due
to higher electronic banking fees from higher transaction volume and sales.
Merchant business fees increased $2.1 million and debit card interchange fees
increased $2.0 million.
·
An increase of $717 thousand in mortgage banking activities,
mainly from higher net servicing fees by $1.1 million due to higher valuation
of servicing asset by $931 thousand, related to an increase in price, partially
offset by lower gains on loans sold due to lower volume by $364 thousand; and
·
A $5.0 million cash payment received from the Company’s insurance
carrier covering hurricane Marias’s impact on Oriental’s operations included in
other non-interest income, offset by the sale of $166.0 million mortgage-backed
securities at a gain of $6.9 million and the FDIC shared-loss benefit of $1.4
million in 2017.
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
2019
|
|
2018
|
|
Variance %
|
|
|
|
Compensation and employee benefits
|
|
$
|
82,533
|
|
$
|
76,524
|
|
7.9%
|
Occupancy, equipment and infrastructure
costs
|
|
|
30,052
|
|
|
33,084
|
|
-9.2%
|
Merger and restructuring charges
|
|
|
24,054
|
|
|
-
|
|
100.0%
|
Electronic banking charges
|
|
|
21,244
|
|
|
21,234
|
|
0.0%
|
Professional and service fees
|
|
|
14,629
|
|
|
12,442
|
|
17.6%
|
Loss on sale of foreclosed real estate,
other repossessed assets and credit related expenses
|
|
|
11,498
|
|
|
13,552
|
|
-15.2%
|
Information technology expenses
|
|
|
9,865
|
|
|
8,227
|
|
19.9%
|
Taxes, other than payroll and income
taxes
|
|
|
8,749
|
|
|
9,017
|
|
-3.0%
|
Advertising, business promotion, and
strategic initiatives
|
|
|
5,208
|
|
|
5,084
|
|
2.4%
|
Loan servicing and clearing expenses
|
|
|
4,853
|
|
|
4,810
|
|
0.9%
|
Communication
|
|
|
3,315
|
|
|
3,447
|
|
-3.8%
|
Insurance
|
|
|
3,309
|
|
|
6,249
|
|
-47.0%
|
Printing, postage, stationery and
supplies
|
|
|
2,468
|
|
|
2,217
|
|
11.3%
|
Director and investor relations
|
|
|
1,216
|
|
|
1,089
|
|
11.7%
|
Other
|
|
|
10,251
|
|
|
10,105
|
|
1.4%
|
Total non-interest expenses
|
|
$
|
233,244
|
|
$
|
207,081
|
|
12.6%
|
Relevant ratios and data:
|
|
|
|
|
|
|
|
|
Efficiency ratio
|
|
|
58.88%
|
|
|
53.07%
|
|
|
Compensation and benefits to
non-interest expense
|
|
|
35.38%
|
|
|
36.95%
|
|
|
Compensation to average total assets
owned
|
|
|
1.28%
|
|
|
1.19%
|
|
|
Average number of employees
|
|
|
1,433
|
|
|
1,392
|
|
|
Average compensation per employee
|
|
$
|
57.59
|
|
$
|
54.97
|
|
|
Average loans per average employee
|
|
$
|
3,148
|
|
$
|
3,124
|
|
|
Non-Interest
Expenses
Comparison of years ended December 31, 2019 and 2018
Non-interest expense was $233.2 million, representing
an increase of 12.6%, or $26.1 million, compared to $207.1 million, when
compared with year ended 2018.
The increase in non-interest expenses was driven by:
- Merger and restructuring charges incurred in 2019
amounting to $24.1 million related to the Scotiabank PR & USVI
acquisition; and
- Higher compensation and employee benefits by $6.0
million, mainly from increase in average employees, medical insurance
costs, and stock compensation.
The decreases in the foregoing non-interest expenses
were offset by:
- Lower occupancy, equipment and infrastructure
costs by $3.0 million, mainly attributed to
lower rent expenses due to the termination of several lease contracts and
the closure of branches in 2018; and
- Lower insurance expenses by $2.9 million, mainly
driven by a $1.5 million insurance assessment credit from the savings
association insurance fund (SAIF) and lower SAIF expenses in 2019.
The efficiency ratio
including acquisition related expenses of $24.1 million was 58.88%, up from
53.07%. 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, 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 the efficiency ratio computation for
the years ended December 31, 2019 and 2018 amounted to $8.8 million and $5.8
million, respectively.
Comparison of years ended December 31, 2018 and 2017
Non-interest expense was $207.1 million, representing
an increase of 2.7% compared to $201.6 million.
The increase in non-interest expenses was driven by:
·
Higher other operating expenses by
$4.8 million, mainly attributed to an increase in the
reasonable estimate accrual of claims and settlements in the broker-dealer
subsidiary and to minor repairs to physical assets related to the impact of
hurricanes;
·
Higher electronic banking charges
by $1.9 million from increased transaction volume;
·
Higher insurance expenses by $1.0
million related to an increase in insurance premiums renewal as a consequence
of hurricanes; and
·
Higher credit-related expenses by
$898 thousand related to higher legal fees on foreclosed properties and other
real estate owned expenses.
The increases in the foregoing non-interest expenses
were offset by:
·
Lower compensation and employee
benefits by $3.2 million, mainly due to a decrease in the average number of
employees.
The efficiency ratio improved from 53.99% to 53.07%. 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, 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 years ended December 31,
2018 and 2017 amounted to $5.8 million and $9.4 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 mitigation, and
emergency communication with customers regarding the status of its banking
operations. Estimated losses at December 31, 2017 amounted to $6.6 million. No
additional losses have been incurred at December 31, 2018.
Oriental maintains
insurance for casualty losses as well as for disaster response costs and
certain revenue lost through business interruption. Oriental received a $1.0
million partial payment from its insurance carrier in December 2017 and a $5.7
million payment during 2018.
Provision for
Loan and Lease Losses
Comparison of years ended December 31, 2019
and 2018
Based on an
analysis of the credit quality and the composition of Oriental’s loan
portfolio, management determined that the provision for the years 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, net increased $40.7 million from $56.1 million to $96.8
million, resulting from:
- Increase
of $54.3 million primarily from the sale of $95.0 million unpaid principal
balance of non-performing commercial and mortgage loans, both acquired and
originated;
- Increase of $3.6 million from
for the remaining balance of an originated commercial loan, pending to
receive insurance recovery on a property destroyed in a fire;
- Decrease of $2.4 million from the proceeds in the
sale of $26.0 million of previously fully charged-off auto and consumer
loans; and
- Decrease
of $4.5 million from the adjustment to qualitative factors of the allowance
for loan and lease losses, reflecting sustained favorable macroeconomic
conditions in Puerto Rico.
Please
refer to the "Allowance for Loan and Lease Losses" in the
"Credit Risk Management" section of this MD&A for a more detailed
analysis of the allowance for loan and lease losses.
Comparison of years ended December 31, 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 year was adequate
to maintain the allowance for loan and lease losses at an appropriate level to
provide for probable losses based upon an evaluation of known and inherent
risks.
Provision
for loan and lease losses decreased 50.4%, or $57.0 million, to $56.1 million. The decrease in the provision was mostly due to:
·
The hurricanes provision of $32.4
million in 2017;
·
A $4.3 million provision in the
second quarter of 2017 to charge-off the loss on sale of a loan to a Puerto
Rico government municipality and a $5.9 million provision to increase the
general allowance on the remaining municipal loan portfolio; and
·
The decrease in acquired loan
portfolio provision of $9.2 million, mainly from lower portfolio balances.
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.
Income Taxes
Comparison of years ended December 31, 2019
and 2018
Effective Tax Rate
was 28.5% in 2019 compared to 36.4% in 2018. The decline was primarily due a
higher proportion of exempt income and capital gains from the mortgage-backed
securities sales at lower rates in 2019.
Comparison of years ended December 31, 2018
and 2017
Income tax expense was $48.4 million, compared to
$15.4 million, reflecting the effective income tax rate of 33.6% and the net
income before income taxes of $132.8 million for 2018. The income tax expense
included a non-cash expenses of $4.1 million reflecting the impact of changes
required as a result of new Puerto Rico tax reform legislation, which will
reduce the corporate income tax rate by 1.5% in 2019 and, therefore, caused
Oriental to take a deferred tax asset write-down.
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 its services
were also considered in the determination of the reportable segments. Oriental measures
the performance of these reportable segments based on pre-established goals of
different financial parameters such as net income, net interest income, loan
production, and fees generated. Oriental’s methodology for allocating
non-interest expenses among segments is based on several factors such as
revenue, employee headcount, occupied space, dedicated services or time, among
others. Following are the results of operations and the selected financial
information by operating segment for the years ended December 31, 2019, 2018 and 2017.
|
Year Ended
December 31, 2019
|
|
|
|
|
Wealth
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
Banking
|
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
(In
thousands)
|
Interest income
|
$
|
337,448
|
|
$
|
69
|
|
$
|
36,278
|
|
$
|
373,795
|
|
$
|
-
|
|
$
|
373,795
|
Interest expense
|
|
(36,023)
|
|
|
-
|
|
|
(14,979)
|
|
|
(51,002)
|
|
|
-
|
|
|
(51,002)
|
Net interest income
|
|
301,425
|
|
|
69
|
|
|
21,299
|
|
|
322,793
|
|
|
-
|
|
|
322,793
|
Provision for loan and lease losses
|
|
(96,504)
|
|
|
-
|
|
|
(288)
|
|
|
(96,792)
|
|
|
-
|
|
|
(96,792)
|
Non-interest income
|
|
47,517
|
|
|
26,649
|
|
|
8,327
|
|
|
82,493
|
|
|
-
|
|
|
82,493
|
Non-interest expenses
|
|
(211,755)
|
|
|
(17,163)
|
|
|
(4,326)
|
|
|
(233,244)
|
|
|
-
|
|
|
(233,244)
|
Intersegment revenue
|
|
2,207
|
|
|
-
|
|
|
-
|
|
|
2,207
|
|
|
(2,207)
|
|
|
-
|
Intersegment expenses
|
|
-
|
|
|
(652)
|
|
|
(1,555)
|
|
|
(2,207)
|
|
|
2,207
|
|
|
-
|
Income before income taxes
|
$
|
42,890
|
|
$
|
8,903
|
|
|
23,457
|
|
$
|
75,250
|
|
$
|
-
|
|
$
|
75,250
|
Income tax expense
|
|
16,084
|
|
|
3,339
|
|
|
1,986
|
|
|
21,409
|
|
|
-
|
|
|
21,409
|
Net income
|
$
|
26,806
|
|
$
|
5,564
|
|
$
|
21,471
|
|
$
|
53,841
|
|
$
|
-
|
|
$
|
53,841
|
Total assets
|
$
|
7,486,314
|
|
$
|
33,369
|
|
$
|
2,865,186
|
|
$
|
10,384,869
|
|
$
|
(1,087,208)
|
|
$
|
9,297,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2018
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
(In
thousands)
|
Interest income
|
$
|
320,084
|
|
$
|
46
|
|
$
|
40,289
|
|
$
|
360,419
|
|
$
|
-
|
|
$
|
360,419
|
Interest expense
|
|
(29,746)
|
|
|
-
|
|
|
(14,779)
|
|
|
(44,525)
|
|
|
-
|
|
|
(44,525)
|
Net interest income
|
|
290,338
|
|
|
46
|
|
|
25,510
|
|
|
315,894
|
|
|
-
|
|
|
315,894
|
Provision for
loan and lease losses
|
|
(55,885)
|
|
|
-
|
|
|
(223)
|
|
|
(56,108)
|
|
|
-
|
|
|
(56,108)
|
Non-interest income
|
|
53,592
|
|
|
26,457
|
|
|
46
|
|
|
80,095
|
|
|
-
|
|
|
80,095
|
Non-interest expenses
|
|
(186,460)
|
|
|
(16,440)
|
|
|
(4,181)
|
|
|
(207,081)
|
|
|
-
|
|
|
(207,081)
|
Intersegment revenue
|
|
2,126
|
|
|
-
|
|
|
-
|
|
|
2,126
|
|
|
(2,126)
|
|
|
-
|
Intersegment expenses
|
|
-
|
|
|
(788)
|
|
|
(1,338)
|
|
|
(2,126)
|
|
|
2,126
|
|
|
-
|
Income before income taxes
|
$
|
103,711
|
|
$
|
9,275
|
|
$
|
19,814
|
|
$
|
132,800
|
|
$
|
-
|
|
$
|
132,800
|
Income tax expense
|
|
40,447
|
|
|
3,617
|
|
|
4,325
|
|
|
48,389
|
|
|
-
|
|
|
48,389
|
Net income
|
$
|
63,264
|
|
$
|
5,658
|
|
$
|
15,489
|
|
$
|
84,411
|
|
$
|
-
|
|
$
|
84,411
|
Total assets
|
$
|
5,863,067
|
|
$
|
25,757
|
|
$
|
1,708,455
|
|
$
|
7,597,279
|
|
$
|
(1,013,927)
|
|
$
|
6,583,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
(In
thousands)
|
Interest income
|
$
|
311,503
|
|
$
|
53
|
|
$
|
34,091
|
|
$
|
345,647
|
|
$
|
-
|
|
$
|
345,647
|
Interest expense
|
|
(26,308)
|
|
|
-
|
|
|
(15,167)
|
|
|
(41,475)
|
|
|
-
|
|
|
(41,475)
|
Net interest income
|
|
285,195
|
|
|
53
|
|
|
18,924
|
|
|
304,172
|
|
|
-
|
|
|
304,172
|
Provision for loan and lease losses
|
|
(113,108)
|
|
|
-
|
|
|
(31)
|
|
|
(113,139)
|
|
|
-
|
|
|
(113,139)
|
Non-interest income (loss)
|
|
45,102
|
|
|
26,069
|
|
|
7,516
|
|
|
78,687
|
|
|
-
|
|
|
78,687
|
Non-interest expenses
|
|
(184,567)
|
|
|
(13,486)
|
|
|
(3,578)
|
|
|
(201,631)
|
|
|
-
|
|
|
(201,631)
|
Intersegment revenue
|
|
1,604
|
|
|
-
|
|
|
748
|
|
|
2,352
|
|
|
(2,352)
|
|
|
-
|
Intersegment expenses
|
|
(748)
|
|
|
(1,137)
|
|
|
(467)
|
|
|
(2,352)
|
|
|
2,352
|
|
|
-
|
Income before income taxes
|
$
|
33,478
|
|
$
|
11,499
|
|
$
|
23,112
|
|
$
|
68,089
|
|
$
|
-
|
|
$
|
68,089
|
Income tax expense (benefit)
|
|
13,057
|
|
|
4,485
|
|
|
(2,099)
|
|
|
15,443
|
|
|
-
|
|
|
15,443
|
Net income
|
$
|
20,421
|
|
$
|
7,014
|
|
$
|
25,211
|
|
$
|
52,646
|
|
$
|
-
|
|
$
|
52,646
|
Total assets
|
$
|
5,597,077
|
|
$
|
25,980
|
|
$
|
1,536,417
|
|
$
|
7,159,474
|
|
$
|
(970,421)
|
|
$
|
6,189,053
|
Comparison of years ended December 31, 2019
and 2018
Banking
Oriental's banking
segment net income before taxes decreased $60.8 million from $103.7 million to
$42.9 million, mainly reflecting:
·
Higher provision for
loan and lease losses of $40.7 million, mainly from $54.1 million increase as a
result of the sale of non-performing loans and $3.6 million increase from a
commercial loan on a property destroyed in a fire pending the insurance
recovery, partially offset by $2.4 million
decrease from the sale of fully charged-off auto and consumer loans, and $4.5
million decrease from the adjustment to qualitative factors of the allowance
for loan and lease losses;
·
Increase in interest
expense from deposits of $6.3 million, mainly from an increase in core deposits
costs and volume of $5.7 million and $1.1 million, respectively; and
·
Increase in
non-interest expense from merger and restructuring charges of $24.1 million
related to the Scotiabank PR & USVI Acquisition.
Wealth Management
Wealth management segment revenue consists of commissions and fees from
fiduciary activities, and securities brokerage and insurance activities. Net
income from this segment remained leveled to prior year.
Treasury
Treasury
segment net income before taxes increased $3.6 million from $19.8 million to $23.5
million, reflecting:
- An increase of $8.3 million from a gain on the sale of $672.5
million mortgage-backed securities during the year; and
- Decrease in interest income from investment of $11.5 million
reflecting mortgage-backed securities sale in 2019, partially offset by $5.7
million increase in cash volume.
Comparison of years ended December 31, 2018 and 2017
Banking
Oriental's banking
segment net income before taxes increased $64.2 million from $39.5 million to
$103.7 million, mainly reflecting:
·
The special provision for loan and lease losses of $32.4 million
related to hurricanes Irma and Maria in 2017;
·
A $4.3 million provision in the second quarter of 2017 to
charge-off the loss on sale of a loan to a Puerto Rico government municipality
and a $5.9 million provision to increase the general allowance on the remaining
municipal loan portfolio;
·
A decrease in acquired loan portfolio provision of $9.2 million,
mainly from lower portfolio balances; and
·
A $5.0 million cash payment received from the Company’s insurance
carrier covering hurricane Maria’s impact on Oriental’s operations included in
other non-interest income.
Wealth Management
Wealth management segment revenue, which consists of commissions and fees from
fiduciary activities, and securities brokerage and insurance activities,
decreased $1.4 million to $5.7 million due to higher non-interest expenses by
$3.0 million, mainly driven from the increase in the reasonable estimate
accrual of claims and settlements in the broker-dealer subsidiary by $4.2
million.
Treasury
Treasury segment net income before taxes
decreased $1.6 million from $21.4 million to $19.8 million, reflecting:
·
The sale of $166.0
million in mortgage-backed securities during the second quarter of 2017, which
generated a gain of $6.9 million.
Such
decrease was partially offset by:
- Higher interest income from investment by $5.8 million,
reflecting an increase in interest rates of $6.8 million, partially offset
by a decrease in volume of $944 thousand.
ANALYSIS OF FINANCIAL CONDITION
Assets
Owned
At December 31, 2019,
Oriental’s total assets amounted to $9.298 billion representing an increase of
41.2%, attributable to the Scotiabank PR & USVI Acquisition, when compared
to $6.583 billion at December 31, 2018. Loans portfolio increased $2.2 billion
and cash increased $404.3 million, while investments decreased $191.8 million.
On January 1, 2019, Oriental
reclassified $424.7 million of its held-to-maturity securities into
available-for-sale securities as a result of the adoption of ASU 2017-12. During
the year ended December 31, 2019 Oriental sold $672.2 million of its available
for sale mortgage-backed securities at a gain of $8.3 million in order to fund
Oriental’s growth plans, including the Scotiabank transaction. As a result of
these sales, cash increased 90.4% to $851.3 million.
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 December 31, 2019, Oriental’s loan portfolio increased
49.9%, mainly due to the Scotiabank PR & USVI Acquisition. Loan production
during 2019 reached $1.299 billion compared to $1.411 billion in the year ago period,
an 8.0% decrease, mainly from lower originations in the commercial and the US
loan program portfolios. The non-acquired loan portfolio increased $139.2
million from December 31, 2018 to $3.884 billion at December 31, 2019. From
December 31, 2018, the BBVAPR acquired loan portfolio decreased $141.0 million
to $535.5 million and the Eurobank acquired loan portfolio decreased $23.2
million to $63.9 million at December 31, 2019. During the year ended December
31, 2019, Oriental sold $168.8 million unpaid principal balance in
non-performing mortgage and commercial loans, both acquired and originated, and
recognized them at their fair value.
In addition, assets reflect
the adoption of the Accounting Standard Update (“ASU”) No. 2016-02,
under the effective date method, which requires lessees to recognize a
right-of-use asset and related lease liability for lease classified as
operating leases, prospectively. At December 31, 2019, the right of use assets
amounted to $39.1 million, including $19.5 million from the Scotiabank PR &
USVI Acquisition.
On December 31, 2019, Oriental
received $492.1 million cash and cash equivalents, $576.3 million investments
and $2.2 billion loans through the Scotiabank PR & USVI Acquisition. As
part of this acquisition, Oriental recorded $41.5 million core deposit
intangible, $12.7 million core relationship intangible, and $567 thousand other
intangible assets. Net cash settlement paid was $430.4 million.
Financial Assets Managed
Oriental’s
financial assets include those managed by Oriental’s trust division, retirement
plan administration subsidiary, and assets gathered by its broker-dealer and
insurance subsidiaries. Oriental’s trust division offers various types of
individual retirement accounts ("IRAs") and manages 401(k) and Keogh
retirement plans and custodian and corporate trust accounts, while the
retirement plan administration subsidiary, OPC, manages private retirement
plans. At December 31, 2019, total assets managed by Oriental’s trust division
and OPC amounted to $3.137 billion, compared to $2.771 billion at December 31,
2018. Oriental Financial Services offers a wide array of investment
alternatives to its client base, such as tax-advantaged fixed income
securities, mutual funds, stocks, bonds and money management wrap-fee programs.
At December 31, 2019, total assets gathered by Oriental Financial Services and
Oriental Insurance from its customer investment accounts amounted to $2.376
billion, compared to $2.116 billion at December 31, 2018. Changes in trust and
broker-dealer related assets primarily reflect the addition of $49.7 million
assets managed from the Scotiabank PR & USVI Acquisition, changes in
portfolio balances and differences in market values.
Goodwill
Goodwill
recorded in connection with the BBVAPR Acquisition and the FDIC-assisted
Eurobank Acquisition is not amortized to expense but is tested at least
annually for impairment. No goodwill was recorded in connection with the recent
Scotiabank PR & USVI Acquisition. A quantitative annual impairment test is
not required if, based on a qualitative analysis, Oriental determines that the
existence of events and circumstances indicate that it is more likely than not
that goodwill is not impaired. Oriental completes its annual goodwill
impairment test as of October 31 of each year. Oriental tests for impairment
by first allocating its goodwill and other assets and liabilities, as
necessary, to defined reporting units. A fair value is then determined for each
reporting unit. If the fair values of the reporting units exceed their book
values, no write-down of the recorded goodwill is necessary. If the fair values
are less than the book values, an additional valuation procedure is necessary
to assess the proper carrying value of the goodwill.
Reporting
unit valuation is inherently subjective, with a number of factors based on
assumptions and management judgments or estimates. Actual values may differ
significantly from such estimates. Among these are future growth rates for the
reporting units, selection of comparable market transactions, discount rates
and earnings capitalization rates. Changes in assumptions and results due to
economic conditions, industry factors, and reporting unit performance and cash
flow projections could result in different assessments of the fair values of
reporting units and could result in impairment charges. If an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount, an interim impairment test is
required.
Relevant
events and circumstances for evaluating whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount may include
macroeconomic conditions (such as a further deterioration of the Puerto Rico
economy or the liquidity for Puerto Rico securities or loans secured by assets
in Puerto Rico), adverse changes in legal factors or in the business climate,
adverse actions by a regulator, unanticipated competition, the loss of key
employees, or similar events. Oriental’s loan portfolio, which is the largest
component of its interest-earning assets, is concentrated in Puerto Rico and is
directly affected by adverse local economic and fiscal conditions. Such conditions
have generally affected the market demand for non-conforming loans secured by
assets in Puerto Rico and, therefore, affect the valuation of Oriental’s
assets.
As of December 31, 2019, 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 2019, based
on its annual goodwill impairment test, Oriental determined that both units
passed step one of the two-step impairment test. As a result of step one, the fair
value of both
units exceeded its adjusted net book value. Accordingly, Oriental determined
that the carrying value of the goodwill allocated to the Banking unit and
Wealth Management was not impaired as of the valuation date.
TABLE 4 - ASSETS SUMMARY AND
COMPOSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
Variance
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Investments:
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
402,656
|
|
$
|
978,071
|
|
-58.8%
|
Obligations of US
government-sponsored agencies
|
|
1,961
|
|
|
2,265
|
|
-13.4%
|
US Treasury securities
|
|
397,184
|
|
|
10,805
|
|
3575.9%
|
CMOs issued by US
government-sponsored agencies
|
|
54,760
|
|
|
64,064
|
|
-14.5%
|
GNMA certificates
|
|
216,470
|
|
|
210,169
|
|
3.0%
|
FHLB stock
|
|
13,048
|
|
|
12,644
|
|
3.2%
|
Other debt securities
|
|
1,138
|
|
|
1,222
|
|
-6.9%
|
Other investments
|
|
597
|
|
|
364
|
|
64.0%
|
Total investments
|
|
1,087,814
|
|
|
1,279,604
|
|
-15.0%
|
Securities sold but not yet delivered
|
|
339
|
|
|
-
|
|
100.0%
|
Loans
|
|
6,641,847
|
|
|
4,431,594
|
|
49.9%
|
Total investments and loans
|
|
7,730,000
|
|
|
5,711,198
|
|
35.3%
|
Other assets:
|
|
|
|
|
|
|
|
Cash and due from banks (including
restricted cash)
|
|
845,982
|
|
|
445,133
|
|
90.1%
|
Money market investments
|
|
6,775
|
|
|
4,930
|
|
37.4%
|
Foreclosed real estate
|
|
29,909
|
|
|
33,768
|
|
-11.4%
|
Accrued interest receivable
|
|
36,781
|
|
|
34,254
|
|
7.4%
|
Deferred tax asset, net
|
|
176,740
|
|
|
113,763
|
|
55.4%
|
Premises and equipment, net
|
|
81,105
|
|
|
68,892
|
|
17.7%
|
Servicing assets
|
|
50,779
|
|
|
10,716
|
|
373.9%
|
Derivative assets
|
|
6
|
|
|
347
|
|
-98.3%
|
Goodwill
|
|
86,069
|
|
|
86,069
|
|
0.0%
|
Right of use assets
|
|
39,112
|
|
|
-
|
|
100.0%
|
Core deposit, customer relationship
and other intangibles
|
|
56,965
|
|
|
3,369
|
|
1590.9%
|
Other assets and customers'
liability on acceptances
|
|
157,438
|
|
|
70,913
|
|
122.0%
|
Total other assets
|
|
1,567,661
|
|
|
872,154
|
|
79.7%
|
Total assets
|
$
|
9,297,661
|
|
$
|
6,583,352
|
|
41.2%
|
Investment portfolio composition:
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
|
37.0%
|
|
|
76.5%
|
|
|
Obligations of US
government-sponsored agencies
|
|
0.2%
|
|
|
0.2%
|
|
|
US Treasury securities
|
|
36.5%
|
|
|
0.8%
|
|
|
CMOs issued by US
government-sponsored agencies
|
|
5.0%
|
|
|
5.0%
|
|
|
GNMA certificates
|
|
19.9%
|
|
|
16.4%
|
|
|
FHLB stock
|
|
1.2%
|
|
|
1.0%
|
|
|
Other debt securities and other
investments
|
|
0.2%
|
|
|
0.1%
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
TABLE 5 — LOANS RECEIVABLE
COMPOSITION
|
|
December 31,
|
|
Variance
|
|
2019
|
|
2018
|
|
%
|
|
(In
thousands)
|
|
|
Originated and other loans and leases
held for investment:
|
|
|
|
|
|
|
|
Mortgage
|
$
|
577,416
|
|
$
|
668,809
|
|
-13.7%
|
Commercial
|
|
1,667,494
|
|
|
1,597,588
|
|
4.4%
|
Consumer
|
|
361,638
|
|
|
348,980
|
|
3.6%
|
Auto and leasing
|
|
1,277,732
|
|
|
1,129,695
|
|
13.1%
|
|
|
3,884,280
|
|
|
3,745,072
|
|
3.7%
|
Allowance for loan and lease
losses on originated and other loans and leases
|
|
(83,471)
|
|
|
(95,188)
|
|
-12.3%
|
|
|
3,800,809
|
|
|
3,649,884
|
|
4.1%
|
Deferred loan costs, net
|
|
8,965
|
|
|
7,740
|
|
15.8%
|
Total originated and other loans
held for investment, net
|
|
3,809,774
|
|
|
3,657,624
|
|
4.2%
|
Acquired loans:
|
|
|
|
|
|
|
|
Acquired Scotiabank PR & USVI
loans
|
|
|
|
|
|
|
|
Accounted for under ASC 310-20
(Loans with revolving feature and/or
|
|
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
|
|
Mortgage
|
|
322,179
|
|
|
-
|
|
100.0%
|
Commercial
|
|
193,192
|
|
|
-
|
|
100.0%
|
Consumer
|
|
112,757
|
|
|
-
|
|
100.0%
|
Auto
|
|
191,015
|
|
|
-
|
|
100.0%
|
|
|
819,143
|
|
|
-
|
|
100.0%
|
|
|
|
|
|
|
|
|
Accounted for under ASC 310-30
(Loans acquired with deteriorated
|
|
|
|
|
|
|
|
credit quality, including those
by analogy)
|
|
|
|
|
|
|
|
Mortgage
|
|
1,130,964
|
|
|
-
|
|
100.0%
|
Commercial
|
|
212,866
|
|
|
-
|
|
100.0%
|
Consumer
|
|
8,539
|
|
|
-
|
|
100.0%
|
Auto
|
|
41,571
|
|
|
-
|
|
100.0%
|
|
|
1,393,940
|
|
|
-
|
|
100.0%
|
Total acquired Scotiabank loans, net
|
|
2,213,083
|
|
|
-
|
|
100.0%
|
Acquired BBVAPR loans:
|
|
|
|
|
|
|
|
Accounted for under ASC 310-20
(Loans with revolving feature and/or
|
|
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
|
|
Commercial
|
|
2,141
|
|
|
2,546
|
|
-15.9%
|
Consumer
|
|
20,794
|
|
|
23,988
|
|
-13.3%
|
Auto
|
|
135
|
|
|
4,435
|
|
-97.0%
|
|
|
23,070
|
|
|
30,969
|
|
-25.5%
|
Allowance for loan and lease
losses on acquired BBVAPR loans accounted for under ASC 310-20
|
|
(1,573)
|
|
|
(2,062)
|
|
-23.7%
|
|
|
21,497
|
|
|
28,907
|
|
-25.6%
|
Accounted for under ASC 310-30
(Loans acquired with deteriorated
|
|
|
|
|
|
|
|
credit quality, including those
by analogy)
|
|
|
|
|
|
|
|
Mortgage
|
|
411,531
|
|
|
492,890
|
|
-16.5%
|
Commercial
|
|
117,694
|
|
|
182,319
|
|
-35.4%
|
Auto
|
|
1,790
|
|
|
14,403
|
|
-87.6%
|
|
|
531,015
|
|
|
689,612
|
|
-23.0%
|
Allowance for loan and lease
losses on acquired BBVAPR loans accounted for under ASC 310-30
|
|
(17,036)
|
|
|
(42,010)
|
|
-59.4%
|
|
|
513,979
|
|
|
647,602
|
|
-20.6%
|
Total acquired BBVAPR loans, net
|
|
535,476
|
|
|
676,509
|
|
-20.8%
|
Acquired Eurobank loans:
|
|
|
|
|
|
|
|
Mortgage
|
|
48,617
|
|
|
63,392
|
|
-23.3%
|
Commercial
|
|
29,041
|
|
|
47,826
|
|
-39.3%
|
Consumer
|
|
724
|
|
|
846
|
|
-14.4%
|
|
|
78,382
|
|
|
112,064
|
|
-30.1%
|
Allowance for loan and lease
losses on Eurobank loans
|
|
(14,459)
|
|
|
(24,971)
|
|
-42.1%
|
Total acquired Eurobank loans, net
|
|
63,923
|
|
|
87,093
|
|
-26.6%
|
Total acquired loans, net
|
|
2,812,482
|
|
|
763,602
|
|
268.3%
|
Total held for investment, net
|
|
6,622,256
|
|
|
4,421,226
|
|
49.8%
|
Mortgage loans held for sale
|
|
19,591
|
|
|
10,368
|
|
89.0%
|
Total loans, net
|
$
|
6,641,847
|
|
$
|
4,431,594
|
|
49.9%
|
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 among acquired Scotiabank PR & USVI loans, acquired
BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were
purchased subject to loss-sharing agreements with the FDIC, which were
terminated by the first quarter of 2017.
As shown in Table 5 above, total loans, net, amounted
to $6.642 billion at December 31, 2019 and $4.432 billion at December 31, 2018.
The loan portfolio increase was mainly attributable to the $2.2 billion in
loans acquired in the Scotiabank PR & USVI Acquisition. Oriental’s
originated and other loans held-for-investment portfolio composition and trends
were as follows:
·
Mortgage loan portfolio amounted
to $577.4 million (14.9% of the gross originated loan portfolio) compared to
$668.8 million (17.9% of the gross originated loan portfolio) at December 31,
2018. Mortgage loan production totaled $92.8 million for 2019, which represents
a decrease of 22.5% from $119.7 million for 2018. Mortgage loans included
delinquent loans in the GNMA buy-back option program amounting to $10.8 million
and $19.7 million at December 31, 2019 and December 31, 2018, 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 $1.667 billion (42.9% of the gross originated loan portfolio) compared to
$1.598 billion (42.7% of the gross originated loan portfolio) at December 31,
2018. Commercial loan production, including the U.S. loan program production of
$112.8 million decreased 13.9% to $519.6 million for 2019, from $603.5 million for
2018.
·
Consumer loan portfolio amounted
to $361.6 million (9.3% of the gross originated loan portfolio) compared to
$349.0 million (9.3% of the gross originated loan portfolio) at December 31,
2018. Consumer loan production increased 8.4% to $178.7 million for 2019 from $164.9
million for 2018.
·
Auto and leasing portfolio
amounted to $1.278 billion (32.9% of the gross originated loan portfolio)
compared to $1.130 million (30.1% of the gross originated loan portfolio) at
December 31, 2018. Auto production continued strong at $508.2 million for 2019,
compared to $523.4 million for 2018.
The following table summarizes the remaining
contractual maturities of Oriental’s total gross loans, excluding loans
accounted for under ASC 310-30, segmented to reflect cash flows as of December
31, 2019. Contractual maturities do not necessarily reflect the period of
resolution of a loan, considering prepayments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
|
|
|
One Year or
Less
|
From One to
|
|
|
|
|
|
|
|
|
|
|
|
Five Years
|
|
After Five
Years
|
|
|
Balance
Outstanding at December 31, 2019
|
|
|
|
|
Fixed
Interest Rates
|
|
|
Variable
Interest Rates
|
|
|
Fixed
Interest Rates
|
|
|
Variable
Interest Rates
|
|
(In
thousands)
|
Originated and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
577,416
|
|
$
|
1,577
|
|
$
|
9,150
|
|
$
|
-
|
|
$
|
566,689
|
|
$
|
-
|
Commercial
|
|
1,667,494
|
|
|
1,155,416
|
|
|
434,726
|
|
|
-
|
|
|
77,352
|
|
|
-
|
Consumer
|
|
361,638
|
|
|
40,854
|
|
|
231,041
|
|
|
-
|
|
|
89,743
|
|
|
-
|
Auto and leasing
|
|
1,277,732
|
|
|
22,969
|
|
|
598,568
|
|
|
-
|
|
|
656,195
|
|
|
-
|
Total
|
$
|
3,884,280
|
|
$
|
1,220,816
|
|
$
|
1,273,485
|
|
$
|
-
|
|
$
|
1,389,979
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Scotiabank loans accounted
under ASC 310-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
322,179
|
|
$
|
940
|
|
$
|
1,604
|
|
$
|
-
|
|
$
|
319,635
|
|
$
|
-
|
Commercial
|
|
193,192
|
|
|
177,024
|
|
|
14,041
|
|
|
-
|
|
|
2,127
|
|
|
-
|
Consumer
|
|
112,757
|
|
|
80,758
|
|
|
27,394
|
|
|
-
|
|
|
4,605
|
|
|
-
|
Auto and leasing
|
|
191,015
|
|
|
6,324
|
|
|
130,505
|
|
|
-
|
|
|
54,186
|
|
|
-
|
Total
|
$
|
819,143
|
|
$
|
265,046
|
|
$
|
173,544
|
|
$
|
-
|
|
$
|
380,553
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR loans accounted under
ASC 310-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
2,141
|
|
$
|
2,141
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Consumer
|
|
20,794
|
|
|
20,794
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Auto
|
|
135
|
|
|
135
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
$
|
23,070
|
|
$
|
23,070
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
TABLE 6 — HIGHER RISK
RESIDENTIAL MORTGAGE LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
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
|
$
|
7,673
|
|
$
|
201
|
|
2.62%
|
|
$
|
7,378
|
|
$
|
155
|
|
2.10%
|
|
$
|
66,542
|
|
$
|
1,568
|
|
2.36%
|
90 - 119 days
|
|
53
|
|
|
4
|
|
7.55%
|
|
|
-
|
|
|
-
|
|
0.00%
|
|
|
1,666
|
|
|
300
|
|
18.01%
|
120 - 179 days
|
|
-
|
|
|
-
|
|
0.00%
|
|
|
-
|
|
|
-
|
|
0.00%
|
|
|
684
|
|
|
97
|
|
14.18%
|
180 - 364 days
|
|
65
|
|
|
8
|
|
12.31%
|
|
|
-
|
|
|
-
|
|
0.00%
|
|
|
1,214
|
|
|
151
|
|
12.44%
|
365+ days
|
|
24
|
|
|
3
|
|
12.50%
|
|
|
280
|
|
|
26
|
|
9.29%
|
|
|
5,410
|
|
|
446
|
|
8.24%
|
Total
|
$
|
7,815
|
|
$
|
216
|
|
2.76%
|
|
$
|
7,658
|
|
$
|
181
|
|
2.36%
|
|
$
|
75,516
|
|
$
|
2,562
|
|
3.39%
|
Percentage of total loans excluding
acquired loans accounted for under
ASC 310-30
|
|
0.20%
|
|
|
|
|
|
|
|
0.20%
|
|
|
|
|
|
|
|
1.93%
|
|
|
|
|
|
Refinanced or Modified Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
$
|
2,113
|
|
$
|
185
|
|
8.76%
|
|
$
|
567
|
|
$
|
44
|
|
7.76%
|
|
$
|
26,523
|
|
$
|
2,108
|
|
7.95%
|
Percentage of Higher-Risk Loan
Category
|
|
27.04%
|
|
|
|
|
|
|
|
7.40%
|
|
|
|
|
|
|
|
35.12%
|
|
|
|
|
|
Loan-to-Value Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 70%
|
$
|
5,180
|
|
$
|
122
|
|
2.36%
|
|
$
|
1,508
|
|
$
|
25
|
|
1.66%
|
|
$
|
-
|
|
$
|
-
|
|
-
|
70% - 79%
|
|
598
|
|
|
28
|
|
4.68%
|
|
|
1,434
|
|
|
23
|
|
1.60%
|
|
|
-
|
|
|
-
|
|
-
|
80% - 89%
|
|
1,747
|
|
|
37
|
|
2.12%
|
|
|
3,347
|
|
|
55
|
|
1.64%
|
|
|
-
|
|
|
-
|
|
-
|
90% and over
|
|
290
|
|
|
29
|
|
10.00%
|
|
|
1,369
|
|
|
78
|
|
5.70%
|
|
|
75,516
|
|
|
2,562
|
|
3.39%
|
|
$
|
7,815
|
|
$
|
216
|
|
2.76%
|
|
$
|
7,658
|
|
$
|
181
|
|
2.36%
|
|
$
|
75,516
|
|
$
|
2,562
|
|
3.39%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Loans may be included in more than one
higher-risk loan category and excludes acquired residential mortgage loans.
Only originated loans.
|
Deposits from the Puerto Rico
government totaled $278.7 million at December 31, 2019. The following table
includes the maturities of Oriental's lending and investment exposure to the
Puerto Rico government, which is limited solely to loans to 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 7 - PUERTO RICO GOVERNMENT RELATED
LOANS AND SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
Loans and Securities:
|
|
|
Carrying
Value
|
|
|
Less than 1
Year
|
|
|
1 to 3 Years
|
|
|
More than 3
Years
|
|
|
(In
thousands)
|
Public corporations
|
|
$
|
4,167
|
|
$
|
4,167
|
|
$
|
-
|
|
$
|
-
|
Municipalities
|
|
|
129,871
|
|
|
64,970
|
|
|
115
|
|
|
64,786
|
Total
|
|
$
|
134,038
|
|
$
|
69,137
|
|
$
|
115
|
|
$
|
64,786
|
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.
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 the 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.
At December 31, 2019, Oriental’s allowance for loan
and lease losses amounted to $116.5 million, a $47.7 million decrease from
$164.2 million at December 31, 2018. Decrease was mainly related to the sale of
non-performing loans during 2019.
Tables 8 through
10 set forth an analysis of activity in the allowance for loan and lease losses
and present selected loan loss statistics. In addition, Table 5 sets forth the
composition of the loan portfolio.
Please refer to
the “Provision for Loan and Lease Losses” section in this MD&A for a more
detailed analysis of provisions for loan and lease losses.
Non-performing Assets
Oriental’s non-performing assets include
non-performing loans and foreclosed real estate (see Tables 11 and 12). At
December 31, 2019 and 2018, Oriental had $80.9 million and $119.7 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 December 31, 2019 and 2018, loans whose terms have
been extended and which are classified as troubled-debt restructurings that are
not included in non-performing assets amounted to $103.7 million and $112.9
million, respectively.
At December 31, 2019 and 2018, loans
that are current in their monthly payments, but placed in non-accrual amounted
to $17.6 million and $21.2 million, respectively.
Delinquent residential mortgage loans insured or guaranteed
under applicable FHA and VA programs are classified as non-performing loans
when they become 90 days or more past due, but are not placed in non-accrual
status until they become 12 months or more past due, since they are insured
loans. Therefore, these loans are included as non-performing loans but excluded
from non-accrual loans.
Acquired loans
with credit deterioration are considered to be performing due to the
application of the accretion method under ASC 310-30, in which these loans will
accrete interest income over their remaining life using estimated cash flow
analyses. Credit related decreases in expected cash flows, compared to those
previously forecasted are recognized by recording a provision for credit losses
on these loans when it is probable that all cash flows expected at acquisition
will not be collected.
At December 31,
2019, Oriental’s non-performing assets decreased by 26.8% to $118.1 million (1.85%
of total assets, excluding acquired loans with deteriorated credit quality)
from $161.3 million (2.76% of total assets, excluding acquired loans with
deteriorated credit quality) at December 31, 2018, reflecting the sale of $95.1
million of non-performing loans in 2019. Foreclosed real estate and other
repossessed assets amounting to $29.9 million and $3.3 million, respectively,
at December 31, 2019, and $33.8 million and $3.0 million, respectively, at
December 31, 2018, were recorded at fair value. Oriental does not expect
non-performing loans to result in significantly higher losses. At December 31,
2019, the allowance coverage ratio for originated loan and lease losses to
non-performing loans was 103.59% (77.38% at December 31, 2018).
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 originated and other loans held for investment non-performing
assets:
Residential mortgage loans — are placed on non-accrual status when they become
90 days or more past due and are written-down, if necessary, based on the
specific evaluation of the collateral underlying the loan, except for FHA and
VA insured mortgage loans which are placed in non-accrual when they become 12
months or more past due. At December 31, 2019, Oriental’s originated
non-performing mortgage loans totaled $22.6 million (26.6% of Oriental’s
non-performing loans), a 66.6% decrease from $63.7 million (51.1% of Oriental’s
non-performing loans) at December 31, 2018.
Commercial loans — are placed on non-accrual status when they become 90 days or more
past due and are written-down, if necessary, based on the specific evaluation
of the underlying collateral, if any. At December 31, 2019,
Oriental’s originated non-performing commercial loans amounted to $39.1 million
(46.1% of Oriental’s non-performing loans), a 7.9% decrease from $42.5 million
at December 31, 2018 (34.1% of Oriental’s non-performing loans).
Consumer loans — are placed on non-accrual status when they become
90 days past due and written-off when payments are delinquent 120 days in
personal loans and 180 days in credit cards and personal lines of credit. At
December 31, 2019, Oriental’s originated non-performing consumer loans amounted
to $4.7 million (5.5% of Oriental’s non-performing loans), a 40.2% increase
from $3.4 million at December 31, 2018 (2.7% of Oriental’s non-performing
loans).
Auto loans and leases — are placed on non-accrual status when they become
90 days past due, partially written-off to collateral value when payments are
delinquent 120 days, and fully written-off when payments are delinquent 180
days. At December 31, 2019, Oriental’s originated non-performing auto loans and
leases amounted to $14.2 million (16.8% of Oriental’s total non-performing
loans), an increase of 5.5% from $13.5 million at December 31, 2018 (10.8% 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 Deed In Lieu.
The Non-traditional Mortgage Loan
Program is for non-traditional mortgages, including balloon payment, interest
only/interest first, variable interest rate, adjustable interest rate and other
qualified loans. Non-traditional mortgage loan portfolios are segregated into
the following categories: performing loans that meet secondary market requirement
and are refinanced under the credit underwriting guidelines of FHA/VA/FNMA/
FHLMC, and performing loans not meeting secondary market guidelines processed
pursuant Oriental’s current credit and underwriting guidelines. Oriental
achieved an affordable and sustainable monthly payment by taking specific,
sequential, and necessary steps such as reducing the interest rate, extending
the loan term, capitalizing arrearages, deferring the payment of principal or,
if the borrower qualifies, refinancing the loan.
In order to apply for any of the loan
modification programs, if the borrower is active in Chapter 13 bankruptcy, it
must request an authorization from the bankruptcy trustee to allow for the loan
modification. Borrowers with discharged Chapter 7 bankruptcies may also
apply. Loans in these programs are evaluated by designated underwriters for
troubled-debt restructuring classification if Oriental grants a concession for
legal or economic reasons due to the debtor’s financial difficulties.
TABLE 8 — ALLOWANCE FOR LOAN
AND LEASE LOSSES BREAKDOWN
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Originated and other loans held for
investment
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
Mortgage
|
$
|
8,727
|
|
$
|
19,783
|
|
-55.9%
|
Commercial
|
|
25,989
|
|
|
30,326
|
|
-14.3%
|
Consumer
|
|
16,882
|
|
|
15,571
|
|
8.4%
|
Auto and leasing
|
|
31,873
|
|
|
29,508
|
|
8.0%
|
Total allowance
balance
|
$
|
83,471
|
|
$
|
95,188
|
|
-12.3%
|
Allowance composition:
|
|
|
|
|
|
|
|
Mortgage
|
|
10.5%
|
|
|
20.8%
|
|
|
Commercial
|
|
31.2%
|
|
|
31.9%
|
|
|
Consumer
|
|
20.2%
|
|
|
16.4%
|
|
|
Auto and leasing
|
|
38.2%
|
|
|
31.0%
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
Allowance coverage ratio at end of
period applicable to:
|
|
|
|
|
|
|
|
Mortgage
|
|
1.51%
|
|
|
2.96%
|
|
-49.0%
|
Commercial
|
|
1.56%
|
|
|
1.90%
|
|
-17.9%
|
Consumer
|
|
4.67%
|
|
|
4.46%
|
|
4.7%
|
Auto and leasing
|
|
2.49%
|
|
|
2.61%
|
|
-4.6%
|
Total allowance to total
originated loans
|
|
2.15%
|
|
|
2.54%
|
|
-15.4%
|
Allowance coverage ratio to
non-performing loans:
|
|
|
|
|
|
|
|
Mortgage
|
|
38.70%
|
|
|
31.05%
|
|
24.6%
|
Commercial
|
|
66.49%
|
|
|
71.43%
|
|
-6.9%
|
Consumer
|
|
359.12%
|
|
|
464.25%
|
|
-22.6%
|
Auto and leasing
|
|
223.84%
|
|
|
218.67%
|
|
2.4%
|
Total
|
|
103.59%
|
|
|
77.38%
|
|
33.9%
|
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE
LOSSES BREAKDOWN (CONTINUED)
|
|
|
|
|
|
|
|
|
|
December 31,
|
Variance
|
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Acquired BBVAPR loans accounted for
under ASC 310-20
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
Commercial
|
$
|
4
|
|
$
|
22
|
|
-81.8%
|
Consumer
|
|
1,564
|
|
|
1,905
|
|
-17.9%
|
Auto
|
|
5
|
|
|
135
|
|
-96.3%
|
Total allowance
balance
|
$
|
1,573
|
|
$
|
2,062
|
|
-23.7%
|
Allowance composition:
|
|
|
|
|
|
|
|
Commercial
|
|
0.3%
|
|
|
1.1%
|
|
|
Consumer
|
|
99.4%
|
|
|
92.4%
|
|
|
Auto
|
|
0.3%
|
|
|
6.6%
|
|
|
|
|
100.0%
|
|
|
100.00%
|
|
|
Allowance coverage ratio at end of
period applicable to:
|
|
|
|
|
|
|
|
Commercial
|
|
0.19%
|
|
|
0.86%
|
|
-77.9%
|
Consumer
|
|
7.52%
|
|
|
7.94%
|
|
-5.3%
|
Auto
|
|
3.70%
|
|
|
3.04%
|
|
21.7%
|
Total allowance to total
acquired loans
|
|
6.82%
|
|
|
6.66%
|
|
2.4%
|
Allowance coverage ratio to
non-performing loans:
|
|
|
|
|
|
|
|
Commercial
|
|
0.51%
|
|
|
2.32%
|
|
-78.0%
|
Consumer
|
|
420.43%
|
|
|
478.64%
|
|
-12.2%
|
Auto
|
|
16.67%
|
|
|
67.50%
|
|
-75.3%
|
Total
|
|
131.96%
|
|
|
133.20%
|
|
-0.9%
|
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE
LOSSES BREAKDOWN (CONTINUED)
|
|
December 31,
|
Variance
|
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Acquired BBVAPR loans accounted for
under ASC 310-30
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
Mortgage
|
$
|
9,376
|
|
$
|
15,225
|
|
-38.4%
|
Commercial
|
|
6,713
|
|
|
20,641
|
|
-67.5%
|
Auto
|
|
947
|
|
|
6,144
|
|
-84.6%
|
Total allowance
balance
|
$
|
17,036
|
|
$
|
42,010
|
|
-59.4%
|
Allowance composition:
|
|
|
|
|
|
|
|
Mortgage
|
|
55.0%
|
|
|
36.2%
|
|
|
Commercial
|
|
39.4%
|
|
|
49.1%
|
|
|
Auto
|
|
5.6%
|
|
|
14.6%
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
Acquired Eurobank loans accounted for
under ASC 310-30
|
|
|
|
|
|
|
|
Allowance balance:
|
|
|
|
|
|
|
|
Mortgage
|
$
|
12,279
|
|
$
|
15,382
|
|
-20.2%
|
Commercial
|
|
2,180
|
|
|
9,585
|
|
-77.3%
|
Consumer
|
|
-
|
|
|
4
|
|
-100.0%
|
Total allowance
balance
|
$
|
14,459
|
|
$
|
24,971
|
|
-42.1%
|
Allowance composition:
|
|
|
|
|
|
|
|
Mortgage
|
|
84.9%
|
|
|
61.6%
|
|
|
Commercial
|
|
15.1%
|
|
|
38.4%
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
TABLE 9 — ALLOWANCE FOR LOAN
AND LEASE LOSSES SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
Variance
|
|
|
|
2019
|
|
2018
|
|
%
|
|
2017
|
|
(Dollars in
thousands)
|
Originated and other loans:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
95,188
|
|
$
|
92,718
|
|
2.7%
|
|
$
|
59,300
|
Charge-offs
|
|
(96,825)
|
|
|
(72,393)
|
|
33.7%
|
|
|
(61,856)
|
Recoveries
|
|
23,345
|
|
|
22,802
|
|
2.4%
|
|
|
15,390
|
Provision for loan and lease
losses
|
|
61,763
|
|
|
52,061
|
|
18.6%
|
|
|
79,884
|
Balance at end of year
|
$
|
83,471
|
|
$
|
95,188
|
|
-12.3%
|
|
$
|
92,718
|
Acquired loans:
|
|
|
|
|
|
|
|
|
|
|
BBVAPR loans
|
|
|
|
|
|
|
|
|
|
|
Acquired loans accounted for
under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2,062
|
|
$
|
3,862
|
|
-46.6%
|
|
$
|
4,300
|
Charge-offs
|
|
(1,868)
|
|
|
(2,837)
|
|
-34.2%
|
|
|
(4,156)
|
Recoveries
|
|
609
|
|
|
1,334
|
|
-54.3%
|
|
|
1,871
|
Provision (recapture) for loan and
lease losses
|
|
770
|
|
|
(297)
|
|
-359.3%
|
|
|
1,847
|
Balance at end of year
|
$
|
1,573
|
|
$
|
2,062
|
|
-23.7%
|
|
$
|
3,862
|
Acquired loans accounted for
under ASC 310-30:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
42,010
|
|
$
|
45,755
|
|
-8.2%
|
|
$
|
31,056
|
Provision for loan and lease
losses
|
|
31,906
|
|
|
1,786
|
|
1686.5%
|
|
|
24,681
|
Allowance de-recognition
|
|
(56,880)
|
|
|
(5,531)
|
|
928.4%
|
|
|
(9,982)
|
Balance at end of year
|
$
|
17,036
|
|
$
|
42,010
|
|
-59.4%
|
|
$
|
45,755
|
|
|
|
|
|
|
|
|
|
|
|
Eurobank loans
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
24,971
|
|
$
|
25,174
|
|
-0.8%
|
|
$
|
21,281
|
Provision for loan and lease
losses
|
|
2,353
|
|
|
2,567
|
|
-8.3%
|
|
|
6,725
|
Allowance de-recognition
|
|
(12,865)
|
|
|
(2,770)
|
|
364.4%
|
|
|
(2,832)
|
Balance at end of year
|
$
|
14,459
|
|
$
|
24,971
|
|
-42.1%
|
|
$
|
25,174
|
Loans acquired
in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-20
(loans with revolving feature and/or acquired at a premium) were recorded on
acquisition date at their fair value. Such fair value includes a credit
discount which accounts for expected loan losses over the estimated life of
these loans. Management will take into consideration this credit discount
when determining the necessary allowance for acquired loans that are accounted
for under the provisions of ASC 310-20. Considering the short period elapsed
from acquisition date, at December 31, 2019 there was no allowance for loan and
lease losses recorded for these loans.
Loans acquired
in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 were
recognized at fair value as of December 31, 2019, which included the impact of
expected credit losses, and therefore, no allowance for credit losses was
recorded at acquisition date. To the extent credit deterioration occurs after
the date of acquisition, Oriental would record an allowance for loan and lease
losses. Management determined that there was no need to record an allowance for
loan and lease losses on loans acquired in the Scotiabank PR & USVI
Acquisition accounted for under ASC 310-30 as of December 31, 2019. Considering
the short period elapsed from the acquisition date, Oriental does not believe
that the difference between cash flows expected to be collected on the loans
acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC
310-30 and those anticipated at December 31, 2019 need further assessment.
TABLE 10 — NET CREDIT LOSSES STATISTICS
ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
Variance
|
|
|
|
2019
|
|
2018
|
|
%
|
|
2017
|
|
(Dollars in
thousands)
|
Originated and other loans
and leases:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
$
|
(18,564)
|
|
$
|
(5,297)
|
|
250.5%
|
|
$
|
(6,623)
|
Recoveries
|
|
1,533
|
|
|
1,047
|
|
46.4%
|
|
|
586
|
Total
|
|
(17,031)
|
|
|
(4,250)
|
|
300.7%
|
|
|
(6,037)
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(12,073)
|
|
|
(6,782)
|
|
78.0%
|
|
|
(7,684)
|
Recoveries
|
|
1,104
|
|
|
654
|
|
68.8%
|
|
|
1,281
|
Total
|
|
(10,969)
|
|
|
(6,128)
|
|
79.0%
|
|
|
(6,403)
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(18,910)
|
|
|
(17,629)
|
|
7.3%
|
|
|
(13,641)
|
Recoveries
|
|
2,014
|
|
|
1,757
|
|
14.6%
|
|
|
1,209
|
Total
|
|
(16,896)
|
|
|
(15,872)
|
|
6.5%
|
|
|
(12,432)
|
Auto
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(47,278)
|
|
|
(42,685)
|
|
10.8%
|
|
|
(33,908)
|
Recoveries
|
|
18,694
|
|
|
19,344
|
|
-3.4%
|
|
|
12,314
|
Total
|
|
(28,584)
|
|
|
(23,341)
|
|
22.5%
|
|
|
(21,594)
|
Net credit losses
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
(96,825)
|
|
|
(72,393)
|
|
33.7%
|
|
|
(61,856)
|
Total recoveries
|
|
23,345
|
|
|
22,802
|
|
2.4%
|
|
|
15,390
|
Total
|
$
|
(73,480)
|
|
$
|
(49,591)
|
|
48.2%
|
|
$
|
(46,466)
|
Net credit losses to average
loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
2.72%
|
|
|
0.63%
|
|
331.7%
|
|
|
0.85%
|
Commercial
|
|
0.69%
|
|
|
0.42%
|
|
64.3%
|
|
|
0.51%
|
Consumer
|
|
4.50%
|
|
|
4.38%
|
|
2.7%
|
|
|
3.81%
|
Auto
|
|
2.33%
|
|
|
2.27%
|
|
2.6%
|
|
|
2.63%
|
Total
|
|
1.92%
|
|
|
1.41%
|
|
36.2%
|
|
|
1.37%
|
Recoveries to charge-offs
|
|
24.11%
|
|
|
31.50%
|
|
-23.5%
|
|
|
24.88%
|
Average originated loans:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
626,538
|
|
|
671,068
|
|
-6.6%
|
|
$
|
709,933
|
Commercial
|
|
1,593,828
|
|
|
1,445,379
|
|
10.3%
|
|
|
1,255,645
|
Consumer
|
|
375,685
|
|
|
362,231
|
|
3.7%
|
|
|
326,482
|
Auto
|
|
1,226,520
|
|
|
1,028,061
|
|
19.3%
|
|
|
819,863
|
Total
|
$
|
3,822,571
|
|
$
|
3,506,739
|
|
9.0%
|
|
$
|
3,111,923
|
TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES,
EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
Variance
|
|
|
|
2019
|
|
2018
|
|
|
%
|
|
2017
|
|
(Dollars in
thousands)
|
Acquired loans accounted for
under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
$
|
(123)
|
|
$
|
(6)
|
|
|
1950.0%
|
|
$
|
(132)
|
Recoveries
|
|
6
|
|
|
23
|
|
|
-73.9%
|
|
|
5
|
Total
|
|
(117)
|
|
|
17
|
|
|
-788.2%
|
|
|
(127)
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(1,525)
|
|
|
(2,459)
|
|
|
-38.0%
|
|
|
(3,048)
|
Recoveries
|
|
353
|
|
|
480
|
|
|
-26.5%
|
|
|
446
|
Total
|
|
(1,172)
|
|
|
(1,979)
|
|
|
-40.8%
|
|
|
(2,602)
|
Auto
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
(220)
|
|
|
(372)
|
|
|
-40.9%
|
|
|
(976)
|
Recoveries
|
|
250
|
|
|
831
|
|
|
-69.9%
|
|
|
1,420
|
Total
|
|
30
|
|
|
459
|
|
|
-93.5%
|
|
|
444
|
Net credit losses
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
(1,868)
|
|
|
(2,837)
|
|
|
-34.2%
|
|
|
(4,156)
|
Total recoveries
|
|
609
|
|
|
1,334
|
|
|
-54.3%
|
|
|
1,871
|
Total
|
$
|
(1,259)
|
|
$
|
(1,503)
|
|
|
-16.2%
|
|
$
|
(2,285)
|
Net credit losses to average
loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
11.85%
|
|
|
-1.23%
|
|
|
-1063.4%
|
|
|
32.82%
|
Consumer
|
|
9.10%
|
|
|
15.02%
|
|
|
-39.4%
|
|
|
4.49%
|
Auto
|
|
-1.85%
|
|
|
-3.78%
|
|
|
-50.9%
|
|
|
-1.15%
|
Total
|
|
8.13%
|
|
|
5.63%
|
|
|
44.5%
|
|
|
2.36%
|
Recoveries to charge-offs
|
|
32.60%
|
|
|
47.02%
|
|
|
-30.7%
|
|
|
45.02%
|
Average loans accounted for under ASC
310-20:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
987
|
|
|
1,379
|
|
|
-28.4%
|
|
$
|
387
|
Consumer
|
|
12,877
|
|
|
13,174
|
|
|
-2.3%
|
|
|
57,971
|
Auto
|
|
1,618
|
|
|
12,153
|
|
|
-86.7%
|
|
|
38,587
|
Total
|
$
|
15,482
|
|
$
|
26,706
|
|
|
-42.0%
|
|
$
|
96,945
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 11 — NON-PERFORMING
ASSETS
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
2019
|
|
2018
|
|
(%)
|
|
(Dollars in
thousands)
|
|
|
Non-performing assets:
|
|
|
|
|
|
|
|
Non-accruing loans
|
|
|
|
|
|
|
|
Troubled-Debt Restructuring
loans
|
$
|
23,587
|
|
$
|
41,679
|
|
-43.4%
|
Other loans
|
|
57,336
|
|
|
78,047
|
|
-26.5%
|
Accruing loans
|
|
|
|
|
|
|
|
Troubled-Debt Restructuring
loans
|
|
3,317
|
|
|
4,302
|
|
-22.9%
|
Other loans
|
|
500
|
|
|
541
|
|
-7.6%
|
Total non-performing loans
|
$
|
84,740
|
|
$
|
124,569
|
|
-32.0%
|
Foreclosed real estate
|
|
29,909
|
|
|
33,768
|
|
-11.4%
|
Other repossessed assets
|
|
3,327
|
|
|
2,986
|
|
11.4%
|
|
$
|
117,976
|
|
$
|
161,323
|
|
-26.9%
|
Non-performing assets to total assets,
excluding acquired loans with deteriorated credit quality (including those by
analogy)
|
|
1.85%
|
|
|
2.76%
|
|
-33.0%
|
Non-performing assets to total capital
|
|
11.30%
|
|
|
16.13%
|
|
-29.9%
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In
thousands)
|
Interest that would have been recorded
in the period if the
loans had not been classified as
non-accruing loans
|
$
|
1,518
|
|
$
|
3,338
|
|
$
|
3,181
|
|
|
|
|
|
|
|
|
|
TABLE 12 — NON-PERFORMING
LOANS
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Non-performing loans:
|
|
|
|
|
|
|
|
Originated and other loans held for
investment
|
|
|
|
|
|
|
|
Mortgage
|
$
|
22,552
|
|
$
|
63,717
|
|
-64.6%
|
Commercial
|
|
39,089
|
|
|
42,456
|
|
-7.9%
|
Consumer
|
|
4,701
|
|
|
3,354
|
|
40.2%
|
Auto and leasing
|
|
14,239
|
|
|
13,494
|
|
5.5%
|
|
|
80,581
|
|
|
123,021
|
|
-34.5%
|
Acquired Scotiabank loans accounted
for under ASC 310-20 (Loans with revolving feature and/or acquired at a
premium)
|
|
|
|
|
|
|
|
Commercial
|
|
2,727
|
|
|
-
|
|
100.0%
|
Consumer
|
|
214
|
|
|
-
|
|
100.0%
|
Auto
|
|
26
|
|
|
-
|
|
100.0%
|
|
|
2,967
|
|
|
-
|
|
100.0%
|
Acquired BBVAPR loans accounted for
under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
|
|
|
|
|
|
|
|
Commercial
|
|
790
|
|
|
950
|
|
-16.8%
|
Consumer
|
|
372
|
|
|
398
|
|
-6.5%
|
Auto
|
|
30
|
|
|
200
|
|
-85.0%
|
|
|
1,192
|
|
|
1,548
|
|
-23.0%
|
Total
|
$
|
84,740
|
|
$
|
124,569
|
|
-32.0%
|
Non-performing loans composition
percentages:
|
|
|
|
|
|
|
|
Originated loans
|
|
|
|
|
|
|
|
Mortgage
|
|
26.6%
|
|
|
51.1%
|
|
|
Commercial
|
|
46.3%
|
|
|
34.1%
|
|
|
Consumer
|
|
5.5%
|
|
|
2.7%
|
|
|
Auto and leasing
|
|
16.8%
|
|
|
10.8%
|
|
|
Acquired Scotiabank loans accounted
for under ASC 310-20 (Loans with
revolving feature and/or
acquired at a premium)
|
|
|
|
|
|
|
|
Commercial
|
|
3.2%
|
|
|
0.0%
|
|
|
Consumer
|
|
0.3%
|
|
|
0.0%
|
|
|
Acquired BBVAPR loans accounted for
under ASC 310-20 (Loans with
revolving feature and/or
acquired at a premium)
|
|
|
|
|
|
|
|
Commercial
|
|
0.9%
|
|
|
0.8%
|
|
|
Consumer
|
|
0.4%
|
|
|
0.3%
|
|
|
Auto
|
|
0.0%
|
|
|
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)
|
|
1.79%
|
|
|
3.30%
|
|
-45.8%
|
Total assets, excluding loans
accounted for
under ASC 310-30 (including
those by analogy)
|
|
1.33%
|
|
|
2.13%
|
|
-37.6%
|
Total capital
|
|
8.11%
|
|
|
12.46%
|
|
-34.9%
|
Non-performing loans with partial
charge-offs to:
|
|
|
|
|
|
|
|
Total loans, excluding loans
accounted for
under ASC 310-30 (including
those by analogy)
|
|
0.52%
|
|
|
1.16%
|
|
-55.17%
|
Non-performing loans
|
|
29.26%
|
|
|
35.30%
|
|
-17.1%
|
Other non-performing loans ratios:
|
|
|
|
|
|
|
|
Charge-off rate on non-performing
loans to non-performing loans
on which charge-offs have been
taken
|
|
122.98%
|
|
|
59.20%
|
|
107.7%
|
Allowance for loan and
lease losses to non-performing
loans on which no charge-offs
have been taken
|
|
141.87%
|
|
|
120.67%
|
|
17.6%
|
TABLE 13 - LIABILITIES
SUMMARY AND COMPOSITION
|
|
December 31,
|
|
Variance
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
$
|
1,675,315
|
|
$
|
1,105,324
|
|
51.6%
|
NOW accounts
|
|
1,903,757
|
|
|
1,086,447
|
|
75.2%
|
Savings and money market accounts
|
|
1,836,480
|
|
|
1,212,260
|
|
51.5%
|
Certificates of deposit
|
|
2,271,286
|
|
|
1,501,002
|
|
51.3%
|
Total deposits
|
|
7,686,838
|
|
|
4,905,033
|
|
56.7%
|
Accrued interest payable
|
|
11,772
|
|
|
3,082
|
|
282.0%
|
Total deposits and accrued
interest payable
|
|
7,698,610
|
|
|
4,908,115
|
|
56.9%
|
Borrowings:
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
190,274
|
|
|
455,508
|
|
-58.2%
|
Advances from FHLB
|
|
78,009
|
|
|
77,620
|
|
0.5%
|
Subordinated capital notes
|
|
36,083
|
|
|
36,083
|
|
0.0%
|
Other term notes
|
|
1,195
|
|
|
1,214
|
|
-1.6%
|
Total borrowings
|
|
305,561
|
|
|
570,425
|
|
-46.4%
|
Total deposits and
borrowings
|
|
8,004,171
|
|
|
5,478,540
|
|
46.1%
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
913
|
|
|
333
|
|
174.2%
|
Acceptances outstanding
|
|
21,599
|
|
|
16,937
|
|
27.5%
|
Lease liability
|
|
39,840
|
|
|
-
|
|
100.0%
|
Other liabilities
|
|
185,660
|
|
|
87,665
|
|
111.8%
|
Total liabilities
|
$
|
8,252,183
|
|
$
|
5,583,475
|
|
47.8%
|
Deposits portfolio composition
percentages:
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
21.8%
|
|
|
22.5%
|
|
|
NOW accounts
|
|
24.8%
|
|
|
22.1%
|
|
|
Savings and money market accounts
|
|
23.9%
|
|
|
24.7%
|
|
|
Certificates of deposit
|
|
29.5%
|
|
|
30.7%
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
Borrowings portfolio composition
percentages:
|
|
|
|
|
|
|
|
Securities sold under agreements to
repurchase
|
|
62.3%
|
|
|
79.9%
|
|
|
Advances from FHLB
|
|
25.5%
|
|
|
13.6%
|
|
|
Other term notes
|
|
0.4%
|
|
|
0.2%
|
|
|
Subordinated capital notes
|
|
11.8%
|
|
|
6.3%
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
Securities sold under agreements to
repurchase (excluding accrued interest)
|
|
|
|
|
|
|
|
Amount outstanding at period-end
|
$
|
190,000
|
|
$
|
454,723
|
|
|
Daily average outstanding balance
|
$
|
299,842
|
|
$
|
357,086
|
|
|
Maximum outstanding balance at any
month-end
|
$
|
461,954
|
|
$
|
457,053
|
|
|
Liabilities
and Funding Sources
As shown in Table 13 above, at December
31, 2019, Oriental’s total liabilities were $8.252
billion, 47.8% more than the $5.583 billion reported at December 31,
2018. Deposits and borrowings, Oriental’s funding
sources, amounted to $8.004 billion at December 31, 2019 versus $5.479 billion at December 31, 2018, a 46.1% increase. These increases are attributable to
the Scotiabank PR & USVI Acquisition, which increased deposits by $3.0
billion.
Borrowings consist mainly of
repurchase agreements, FHLB-NY advances and subordinated capital notes. At December
31, 2019, borrowings amounted to $305.6 million,
representing a decrease of 46.4% when compared with the $570.4 million reported
at December 31, 2018. The decrease in
borrowings reflect the reduction of $265.2 million in repurchase agreements
with the proceeds from the sale of $672.2 million of mortgage-backed securities during 2019
as part of the deleverage in preparation for Scotiabank PR & USVI
Acquisition.
On January 1, 2019, Oriental adopted the
Accounting Standard Update (“ASU”) No. 2016-02, under the effective date
method, which requires lessees to recognize a right-of-use asset and related
lease liability for leases classified as operating leases prospectively. At
December 31, 2019, the lease liability amounted to $39.8 million, including
$18.4 million from the Scotiabank PR & USVI Acquisition.
At December
31, 2019, deposits
represented 96% and borrowings represented 4% of interest-bearing liabilities.
At December 31, 2019, deposits, the largest
category of Oriental’s interest-bearing liabilities, were $7.699 billion, an increase
of 56.9% from $4.908 billion at December
31, 2018. Such increase
reflects the aforementioned $3.0 million in deposits from the Scotiabank PR
& USVI Acquisition, increasing customer deposits by 70.1% to $7.5 billion.
Stockholders’ Equity
At December
31, 2019,
Oriental’s total stockholders’ equity was $1.045 billion, a 4.6% increase when
compared to $999.9 million at December
31, 2018. This
increase in stockholders’ equity reflects increases in retained earnings of $26.6
million, legal surplus of $5.6 million and additional paid-in capital of $2.1
million; and decreases in accumulated other comprehensive loss, net of tax of $10.0
million and treasury stock, at cost, of $1.3 million. Book value per share was
$18.75 at December 31, 2019 compared to $17.90 at December 31, 2018.
From December 31, 2018 to December 31, 2019,
tangible common equity to total assets decreased from 12.59% to 8.83%, leverage
capital ratio decreased from 14.22% to 9.24%, common equity tier 1 capital
ratio decreased from 16.78% to 10.78%, tier 1 risk-based capital ratio decreased
from 19.20% to 12.49%, and total risk-based capital ratio decreased from 20.48%
to 13.76%. The decrease in these ratios reflect an increase of $3.0 billion in
total assets mainly from the Scotiabank PR & USVI Acquisition.
On October 22, 2018, Oriental completed
the conversion of all 84,000 shares of its Series C Preferred Stock into common
stock. Each share of Series C Preferred Stock was converted into 86.4225 shares
of common stock. Upon conversion, the Series C Preferred Stock is no longer
outstanding and all rights with respect to the Series C Preferred Stock have
ceased and terminated, except the right to receive the number of whole shares
of common stock issuable upon conversion of the Series C Preferred Stock and
any required cash-in-lieu of fractional shares.
Capital
Rules to Implement Basel III Capital Requirements
Oriental
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 Oriental and the Bank (“Basel III capital rules”), which have
been effective since January 1, 2015, are based on the final capital framework
for strengthening international capital standards, known as Basel III, of the
Basel Committee on Banking Supervision. As of December 31, 2019, the capital
ratios of Oriental and the Bank continue to exceed the minimum requirements for
being “well-capitalized” under the Basel III capital rules.
The
risk-based capital ratios presented in Table 14, which include common equity
tier 1, tier 1 capital, total capital and leverage capital as of December 31,
2019 and 2018, are calculated based on the Basel III capital rules related to
the measurement of capital, risk-weighted assets and average assets.
The following are the consolidated capital
ratios of Oriental under the Basel III capital rules at December 31, 2019 and
2018:
TABLE 14 — CAPITAL, DIVIDENDS AND STOCK
DATA
|
|
December 31,
|
|
Variance
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands, except per share data)
|
|
|
Capital data:
|
|
|
|
|
|
|
|
Stockholders’ equity
|
$
|
1,045,478
|
|
$
|
999,877
|
|
4.6%
|
Regulatory Capital Ratios data:
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio
|
|
10.78%
|
|
|
16.78%
|
|
-35.8%
|
Minimum common equity tier 1 capital
ratio required
|
|
4.50%
|
|
|
4.50%
|
|
0.0%
|
Actual common equity tier 1 capital
|
$
|
735,441
|
|
|
811,707
|
|
-9.4%
|
Minimum common equity tier 1 capital
required
|
$
|
307,099
|
|
|
217,675
|
|
41.1%
|
Minimum capital conservation buffer
required
|
$
|
170,610
|
|
|
90,698
|
|
88.1%
|
Excess over regulatory requirement
|
$
|
257,732
|
|
|
503,334
|
|
-48.8%
|
Risk-weighted assets
|
$
|
6,824,413
|
|
|
4,837,214
|
|
41.1%
|
Tier 1 risk-based capital ratio
|
|
12.49%
|
|
|
19.20%
|
|
-34.9%
|
Minimum tier 1 risk-based capital
ratio required
|
|
6.00%
|
|
|
6.00%
|
|
0.0%
|
Actual tier 1 risk-based capital
|
$
|
852,311
|
|
$
|
928,577
|
|
-8.2%
|
Minimum tier 1 risk-based capital
required
|
$
|
409,465
|
|
$
|
290,233
|
|
41.1%
|
Excess over regulatory requirement
|
$
|
442,846
|
|
$
|
638,344
|
|
-30.6%
|
Risk-weighted assets
|
$
|
6,824,413
|
|
$
|
4,837,214
|
|
41.1%
|
Total risk-based capital ratio
|
|
13.76%
|
|
|
20.48%
|
|
-32.8%
|
Minimum total risk-based capital
ratio required
|
|
8.00%
|
|
|
8.00%
|
|
0.0%
|
Actual total risk-based capital
|
$
|
938,994
|
|
$
|
990,499
|
|
-5.2%
|
Minimum total risk-based capital
required
|
$
|
545,953
|
|
$
|
386,977
|
|
41.1%
|
Excess over regulatory requirement
|
$
|
393,041
|
|
$
|
603,522
|
|
-34.9%
|
Risk-weighted assets
|
$
|
6,824,413
|
|
$
|
4,837,214
|
|
41.1%
|
Leverage capital ratio
|
|
9.24%
|
|
|
14.22%
|
|
-35.0%
|
Minimum leverage capital ratio
required
|
|
4.00%
|
|
|
4.00%
|
|
0.0%
|
Actual tier 1 capital
|
$
|
852,311
|
|
$
|
928,577
|
|
-8.2%
|
Minimum tier 1 capital required
|
$
|
369,151
|
|
$
|
261,125
|
|
41.4%
|
Excess over regulatory requirement
|
$
|
483,160
|
|
$
|
667,452
|
|
-27.6%
|
Tangible common equity to total
assets
|
|
8.83%
|
|
|
12.59%
|
|
-29.9%
|
Tangible common equity to
risk-weighted assets
|
|
12.02%
|
|
|
17.13%
|
|
-29.8%
|
Total equity to total assets
|
|
11.24%
|
|
|
15.19%
|
|
-26.0%
|
Total equity to risk-weighted assets
|
|
15.32%
|
|
|
20.67%
|
|
-25.9%
|
Stock data:
|
|
|
|
|
|
|
|
Outstanding common shares
|
|
51,398,956
|
|
|
51,293,924
|
|
0.2%
|
Book value per common share
|
$
|
18.75
|
|
$
|
17.90
|
|
4.7%
|
Tangible book value per common share
|
$
|
15.96
|
|
$
|
16.15
|
|
-1.1%
|
Market price at end of period
|
$
|
23.61
|
|
$
|
16.46
|
|
43.4%
|
Market capitalization at end of
period
|
$
|
1,213,529
|
|
$
|
844,298
|
|
43.7%
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
2019
|
|
2018
|
|
%
|
|
2017
|
|
(Dollars in
thousands)
|
Common dividend data:
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
$
|
14,367
|
|
$
|
11,511
|
|
24.8%
|
|
$
|
10,553
|
Cash dividends declared per share
|
$
|
0.28
|
|
$
|
0.25
|
|
12.0%
|
|
$
|
0.24
|
Payout ratio
|
|
30.43%
|
|
|
16.45%
|
|
85.0%
|
|
|
27.91%
|
Dividend yield
|
|
1.19%
|
|
|
1.52%
|
|
-21.7%
|
|
|
2.55%
|
The
following table presents a reconciliation of Oriental’s total stockholders’
equity to tangible common equity and total assets to tangible assets at
December 31, 2019 and 2018:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands, except share or per
share
information)
|
Total stockholders' equity
|
$
|
1,045,478
|
|
$
|
999,877
|
Preferred stock
|
|
(92,000)
|
|
|
(92,000)
|
Preferred stock issuance costs
|
|
10,130
|
|
|
10,130
|
Goodwill
|
|
(86,069)
|
|
|
(86,069)
|
Core deposit intangible
|
|
(43,185)
|
|
|
(2,480)
|
Customer relationship intangible
|
|
(13,213)
|
|
|
(888)
|
Other intangibles
|
|
(567)
|
|
|
-
|
Total tangible common equity (non-GAAP)
|
$
|
820,574
|
|
$
|
828,570
|
Total assets
|
|
9,297,661
|
|
|
6,583,352
|
Goodwill
|
|
(86,069)
|
|
|
(86,069)
|
Core deposit intangible
|
|
(43,185)
|
|
|
(2,480)
|
Customer relationship intangible
|
|
(13,213)
|
|
|
(888)
|
Other intangibles
|
|
(567)
|
|
|
-
|
Total tangible assets
|
$
|
9,154,627
|
|
$
|
6,493,915
|
Tangible common equity to tangible
assets
|
|
8.96%
|
|
|
12.76%
|
Common shares outstanding at end of
period
|
|
51,398,956
|
|
|
51,293,924
|
Tangible book value per common share
|
$
|
15.96
|
|
$
|
16.15
|
The
tangible common equity ratio and tangible book value per common share are
non-GAAP measures and, unlike tier 1 capital and common equity tier 1 capital,
are not codified in the federal banking regulations. Management and many stock
analysts use the tangible common equity ratio and tangible book value per
common share in conjunction with more traditional bank capital ratios to
compare the capital adequacy of banking organizations. Neither tangible common
equity nor tangible assets or related measures should be considered in
isolation or as a substitute for stockholders’ equity, total assets or any
other measure calculated in accordance with GAAP. Moreover, the manner in which
Oriental calculates its tangible common equity, tangible assets and any other related
measures may differ from that of other companies reporting measures with
similar names.
Non-GAAP financial measures have inherent limitations, are
not required to be uniformly applied, and are not audited. To mitigate these
limitations, Oriental has procedures in place to calculate these measures using
the appropriate GAAP or regulatory components. Although these non-GAAP
financial measures are frequently used by stakeholders in the evaluation of a
company, they have limitations as analytical tools and should not be considered
in isolation or as a substitute for analyses of results as reported under GAAP.
The following table presents Oriental’s
capital adequacy information under the Basel III capital rules:
|
December 31,
|
|
Variance
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Risk-based capital:
|
|
|
|
|
|
|
|
Common equity tier 1 capital
|
$
|
735,441
|
|
$
|
811,707
|
|
-9.4%
|
Additional tier 1 capital
|
|
116,870
|
|
|
116,870
|
|
0.0%
|
Tier 1 capital
|
|
852,311
|
|
|
928,577
|
|
-8.2%
|
Additional Tier 2 capital
|
|
86,683
|
|
|
61,922
|
|
40.0%
|
Total risk-based capital
|
$
|
938,994
|
|
$
|
990,499
|
|
-5.2%
|
Risk-weighted assets:
|
|
|
|
|
|
|
|
Balance sheet items
|
$
|
6,405,039
|
|
$
|
4,641,998
|
|
38.0%
|
Off-balance sheet items
|
|
419,374
|
|
|
195,216
|
|
114.8%
|
Total risk-weighted assets
|
$
|
6,824,413
|
|
$
|
4,837,214
|
|
41.1%
|
Ratios:
|
|
|
|
|
|
|
|
Common equity tier 1 capital
(minimum required - 4.5%)
|
|
10.78%
|
|
|
16.78%
|
|
-35.8%
|
Tier 1 capital (minimum required -
6%)
|
|
12.49%
|
|
|
19.20%
|
|
-34.9%
|
Total capital (minimum required -
8%)
|
|
13.76%
|
|
|
20.48%
|
|
-32.8%
|
Leverage ratio (minimum required -
4%)
|
|
9.24%
|
|
|
14.22%
|
|
-35.0%
|
Equity to assets
|
|
11.24%
|
|
|
15.19%
|
|
-26.0%
|
Tangible common equity to assets
|
|
8.83%
|
|
|
12.59%
|
|
-29.9%
|
The Bank is
considered “well capitalized” under the regulatory framework for prompt
corrective action. The table below shows the Bank’s regulatory capital ratios
at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
December 31,
|
|
Variance
|
|
2019
|
|
2018
|
|
%
|
|
(Dollars in
thousands)
|
|
|
Oriental Bank Regulatory Capital Ratios:
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital to
Risk-Weighted Assets
|
|
11.94%
|
|
|
18.40%
|
|
-35.1%
|
Actual common equity tier 1 capital
|
$
|
813,444
|
|
$
|
887,918
|
|
-8.4%
|
Minimum capital requirement (4.5%)
|
$
|
306,542
|
|
$
|
217,120
|
|
41.2%
|
Minimum capital conservation buffer
requirement (1.875%)
|
$
|
170,301
|
|
$
|
90,467
|
|
88.2%
|
Minimum to be well capitalized
(6.5%)
|
$
|
442,783
|
|
$
|
313,618
|
|
41.2%
|
Tier 1 Capital to Risk-Weighted
Assets
|
|
11.94%
|
|
|
18.40%
|
|
-35.1%
|
Actual tier 1 risk-based capital
|
$
|
813,444
|
|
$
|
887,918
|
|
-8.4%
|
Minimum capital requirement (6%)
|
$
|
408,723
|
|
$
|
289,494
|
|
41.2%
|
Minimum to be well capitalized (8%)
|
$
|
544,964
|
|
$
|
385,992
|
|
41.2%
|
Total Capital to Risk-Weighted
Assets
|
|
13.21%
|
|
|
19.68%
|
|
-32.9%
|
Actual total risk-based capital
|
$
|
899,844
|
|
$
|
949,596
|
|
-5.2%
|
Minimum capital requirement (8%)
|
$
|
544,964
|
|
$
|
385,992
|
|
41.2%
|
Minimum to be well capitalized (10%)
|
$
|
681,205
|
|
$
|
482,490
|
|
41.2%
|
Total Tier 1 Capital to Average
Total Assets
|
|
8.85%
|
|
|
13.68%
|
|
-35.3%
|
Actual tier 1 capital
|
$
|
813,444
|
|
$
|
887,918
|
|
-8.4%
|
Minimum capital requirement (4%)
|
$
|
367,537
|
|
$
|
259,547
|
|
41.6%
|
Minimum to be well capitalized (5%)
|
$
|
459,421
|
|
$
|
324,434
|
|
41.6%
|
Oriental’s
common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol
“OFG.” At December 31, 2019 and 2018, Oriental’s market capitalization for its
outstanding common stock was $1.214 billion ($23.61 per share) and $844.3
million ($16.46 per share), respectively.
The following table provides the high and low prices and dividends
per share of Oriental’s common stock for each quarter of the last three
calendar years:
|
|
|
|
|
|
|
Cash
|
|
Price
|
|
Dividend
|
|
High
|
|
Low
|
|
Per share
|
2019
|
|
|
|
|
|
|
|
|
December 31, 2019
|
$
|
23.61
|
|
$
|
20.00
|
|
$
|
0.07
|
September 30, 2019
|
$
|
24.20
|
|
$
|
19.84
|
|
$
|
0.07
|
June 30, 2019
|
|
23.77
|
|
$
|
18.78
|
|
$
|
0.07
|
March 31, 2019
|
$
|
21.24
|
|
$
|
16.37
|
|
$
|
0.07
|
2018
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
18.56
|
|
$
|
14.93
|
|
$
|
0.07
|
September 30, 2018
|
$
|
17.60
|
|
$
|
14.45
|
|
$
|
0.06
|
June 30, 2018
|
$
|
14.75
|
|
$
|
10.60
|
|
$
|
0.06
|
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
|
Under Oriental’s current stock repurchase program, it is
authorized to purchase in the open market up to $7.7 million of its outstanding
shares of common stock. The shares of common stock repurchased are to be held
by Oriental as treasury shares. There were no repurchases during the year ended
December 31, 2019.
At
December 31, 2019, the number of shares that may yet be purchased under such
program is estimated at 327,440 and was
calculated by dividing the remaining balance of $7.7 million by $23.61 (closing price of Oriental's common stock
at December 31, 2019).
Contractual
Obligations and Commercial Commitments
As disclosed in the notes to the consolidated
financial statements, Oriental has certain obligations and commitments to make
future payments under contracts. At December 31, 2019, the aggregate contractual obligations
and commercial commitments, excluding accrued interest and unamortized premiums
(discounts), are as follows:
|
Payments Due
by Period
|
|
Total
|
|
Less than 1
year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
After 5 years
|
CONTRACTUAL OBLIGATIONS:
|
(In thousands)
|
Securities sold under agreements to
repurchase
|
$
|
190,000
|
|
$
|
190,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Advances from FHLB
|
|
77,849
|
|
|
31,955
|
|
|
8,517
|
|
|
33,018
|
|
|
4,359
|
Subordinated capital notes
|
|
35,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35,000
|
Annual rental commitments under
noncancelable
operating leases
|
|
50,109
|
|
|
10,823
|
|
|
15,769
|
|
|
10,159
|
|
|
13,358
|
Certificates of deposits
|
|
2,271,286
|
|
|
1,195,979
|
|
|
907,453
|
|
|
167,854
|
|
|
-
|
Total
|
$
|
2,624,244
|
|
$
|
1,428,757
|
|
$
|
931,739
|
|
$
|
211,031
|
|
$
|
52,717
|
Loan commitments, which represent unused lines of
credit, increased to $853.1 million at December 31, 2019 as compared to
$541.4 million in December 31, 2018, while letters of credit provided to
customers, increased to $49.4 million as compared to $24.2 million at December
31, 2018, mostly as a result of the commitments and letters of credit assumed
as part of the Scotiabank PR & USVI Acquisition, which amounted to $152.3
million and $7.7 million, respectively at December 31, 2019. Commitments to
extend credit are agreements to lend to customers as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates, bear variable interest rate and may require
payment of a fee. Since the commitments may expire unexercised, the total
commitment amounts do not necessarily represent future cash requirements. Oriental
evaluates each customer’s credit-worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by Oriental upon extension of
credit, is based on management’s credit evaluation of the customer. Loans sold
with recourse at December 31, 2019 and 2018 amounted to $147.4 million and $5.4
million, respectively. The increase was mainly from the Scotiabank PR &
USVI Acquisition.
Impact of Inflation and Changing Prices
The
financial statements and related data presented herein (except for certain
non-GAAP measures as previously indicated) have been prepared in accordance
with GAAP which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most
industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution’s performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the prices of goods and services
since such prices are affected by inflation.
QUARTERLY FINANCIAL DATA
The following is a summary of the
quarterly results of operations:
TABLE 17 —
SELECTED QUARTERLY FINANCIAL DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Total
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
EARNINGS
DATA:
|
(In thousands, except per
share data)
|
Interest
income
|
$
|
94,710
|
|
$
|
94,255
|
|
$
|
93,655
|
|
$
|
91,175
|
|
$
|
373,795
|
Interest
expense
|
|
12,921
|
|
|
13,170
|
|
|
12,945
|
|
|
11,966
|
|
|
51,002
|
Net interest income
|
|
81,789
|
|
|
81,085
|
|
|
80,710
|
|
|
79,209
|
|
|
322,793
|
Provision
for loan and lease losses
|
|
12,249
|
|
|
17,705
|
|
|
43,770
|
|
|
23,068
|
|
|
96,792
|
Net interest income after provision for loan
and lease losses
|
|
69,540
|
|
|
63,380
|
|
|
36,940
|
|
|
56,141
|
|
|
226,001
|
Non-interest
income
|
|
17,656
|
|
|
22,948
|
|
|
22,178
|
|
|
19,711
|
|
|
82,493
|
Non-interest
expenses
|
|
52,152
|
|
|
51,452
|
|
|
50,727
|
|
|
78,913
|
|
|
233,244
|
Income before taxes
|
|
35,044
|
|
|
34,876
|
|
|
8,391
|
|
|
(3,061)
|
|
|
75,250
|
Income
tax expense
|
|
11,574
|
|
|
10,897
|
|
|
1,008
|
|
|
(2,070)
|
|
|
21,409
|
Net income
|
|
23,470
|
|
|
23,979
|
|
|
7,383
|
|
|
(991)
|
|
|
53,841
|
Less:
dividends on preferred stock
|
|
(1,628)
|
|
|
(1,628)
|
|
|
(1,628)
|
|
|
(1,628)
|
|
|
(6,512)
|
Income available to common shareholders
|
$
|
21,842
|
|
$
|
22,351
|
|
$
|
5,755
|
|
$
|
(2,619)
|
|
$
|
47,329
|
PER
SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.43
|
|
$
|
0.44
|
|
$
|
0.11
|
|
$
|
(0.05)
|
|
$
|
0.92
|
Diluted
|
$
|
0.42
|
|
$
|
0.43
|
|
$
|
0.11
|
|
$
|
(0.05)
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Total
|
|
2018
|
|
2018
|
|
2018
|
|
2018
|
|
2018
|
EARNINGS
DATA:
|
(In thousands, except per
share data)
|
|
|
|
Interest
income
|
$
|
83,170
|
|
$
|
88,006
|
|
$
|
94,137
|
|
$
|
95,106
|
|
$
|
360,419
|
Interest
expense
|
|
9,176
|
|
|
10,418
|
|
|
11,860
|
|
|
13,071
|
|
|
44,525
|
Net interest income
|
|
73,994
|
|
|
77,588
|
|
|
82,277
|
|
|
82,035
|
|
|
315,894
|
Provision
for loan and lease losses
|
|
15,460
|
|
|
14,747
|
|
|
14,601
|
|
|
11,300
|
|
|
56,108
|
Net interest income after provision for loan
and lease losses
|
|
58,534
|
|
|
62,841
|
|
|
67,676
|
|
|
70,735
|
|
|
259,786
|
Non-interest
income
|
|
18,514
|
|
|
18,703
|
|
|
18,620
|
|
|
24,258
|
|
|
80,095
|
Non-interest
expenses
|
|
52,121
|
|
|
52,300
|
|
|
50,941
|
|
|
51,719
|
|
|
207,081
|
(Loss) income before taxes
|
|
24,927
|
|
|
29,244
|
|
|
35,355
|
|
|
43,274
|
|
|
132,800
|
Income
tax expense (benefit)
|
|
8,010
|
|
|
9,595
|
|
|
12,255
|
|
|
18,530
|
|
|
48,390
|
Net (loss) income
|
|
16,917
|
|
|
19,649
|
|
|
23,100
|
|
|
24,744
|
|
|
84,410
|
Less:
dividends on preferred stock
|
|
(3,465)
|
|
|
(3,465)
|
|
|
(3,466)
|
|
|
(1,628)
|
|
|
(12,024)
|
(Loss) income available to common shareholders
|
$
|
13,452
|
|
$
|
16,184
|
|
$
|
19,634
|
|
$
|
23,116
|
|
$
|
72,386
|
PER
SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.31
|
|
$
|
0.36
|
|
$
|
0.45
|
|
$
|
0.47
|
|
$
|
1.59
|
Diluted
|
$
|
0.30
|
|
$
|
0.35
|
|
$
|
0.42
|
|
$
|
0.45
|
|
$
|
1.52
|
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’s 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 organic growth patterns and core business strategies.
The balance sheet
is divided into groups of assets and liabilities detailed by maturity or
re-pricing and their corresponding interest yields and costs. As interest rates
rise or fall, these simulations incorporate expected future lending rates,
current and expected future funding sources and costs, the possible exercise of
options, changes in prepayment rates, deposits decay and other factors which
may be important in projecting the future growth of net interest income.
Oriental uses a
software application to project future movements in Oriental’s balance sheet
and income statement. The starting point of the projections generally
corresponds to the actual values of the balance sheet on the date of the
simulations.
These simulations are complex and use many
assumptions that are intended to reflect the general behavior of Oriental over
the period in question. There can be no assurance that actual events will match
these assumptions in all cases. For this reason, the results of these
simulations are only approximations of the true sensitivity of net interest
income to changes in market interest rates. The following table presents the
results of the simulations at December 31, 2019 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
|
$
|
20,415
|
|
4.63%
|
|
$
|
21,593
|
|
4.71%
|
+ 100 Basis points
|
$
|
10,935
|
|
2.48%
|
|
$
|
11,573
|
|
2.52%
|
- 100 Basis points
|
$
|
(12,085)
|
|
-2.74%
|
|
$
|
(12,742)
|
|
-2.78%
|
- 200 Basis points
|
$
|
(23,052)
|
|
-5.22%
|
|
$
|
(24,291)
|
|
-5.29%
|
Future net
interest income could be affected by Oriental’s investments in callable
securities, prepayment risk related to mortgage loans and mortgage-backed
securities, and any structured repurchase agreements and advances from the
FHLB-NY in which it may enter into from time to time. As part of the strategy
to limit the interest rate risk and reduce the re-pricing gaps of Oriental’s
assets and liabilities, Oriental has executed certain transactions which
include extending the maturity and the re-pricing frequency of the liabilities
to longer terms reducing the amounts of its structured repurchase agreements
and entering into hedge-designated swaps to hedge the variability of future
interest cash flows of forecasted wholesale borrowings that only consist of
advances from the FHLB-NY as of December 31, 2019.
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 fluctuation 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.
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 borrowing transactions occurred, the interest rate swap
effectively fixes Oriental’s interest payments on an amount of forecasted
interest expense attributable to the one-month LIBOR rate corresponding to the
swap notional stated rate. A derivative liability of $907 thousand (notional amount
of $32.0 million) was recognized at December 31, 2019 related to the valuation
of these swaps.
In addition, Oriental has certain
derivative contracts, including interest rate swaps not designated as hedging
instruments, which are utilized to convert certain variable-rate loans to
fixed-rate loans, and the mirror-images of these interest rate swaps in which Oriental
enters into to minimize its interest rate risk exposure that results from
offering the derivatives to clients. These interest rate swaps are marked to
market through earnings. At December 31, 2019, Oriental did not have interest
rate swaps offered to clients not designated as hedging instruments.
Wholesale
borrowings — Oriental uses
interest rate swaps to hedge the variability of interest cash flows of certain
advances from the FHLB-NY that are tied to a variable rate index. The interest
rate swaps effectively fix Oriental’s interest payments on these borrowings. As
of December 31, 2019, Oriental had $32.0 million in interest rate swaps at an
average rate of 2.42% designated as cash flow hedges for $32.0 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 for Puerto Rico. In addition, as was demonstrated with January 2020
earthquakes and 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 mainland. 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 all agency mortgage-backed securities. Thus,
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.
Liquidity Risk
Liquidity risk is
the risk of Oriental not being able to generate sufficient cash from either
assets or liabilities to meet obligations as they become due without incurring
substantial losses. The Board has established a policy to manage this risk.
Oriental’s cash requirements principally consist of deposit withdrawals,
contractual loan funding, repayment of borrowings as these mature, and funding
of new and existing investments as required.
Oriental’s business requires continuous access to
various funding sources. While Oriental is able to fund its operations through
deposits as well as through advances from the FHLB-NY and other alternative
sources, Oriental’s business is dependent upon other external wholesale funding
sources. Oriental has selectively reduced its use of
certain wholesale funding sources, such as repurchase agreements and brokered
deposits. As of December 31, 2019, Oriental had $190.0 million in
repurchase agreements, excluding accrued interest, and $243.5 million in
brokered deposits.
Brokered deposits
are typically offered through an intermediary to small retail investors.
Oriental’s ability to continue to attract brokered deposits is subject to
variability based upon a number of factors, including volume and volatility in
the global securities markets, Oriental’s credit rating, and the relative
interest rates that it is prepared to pay for these liabilities. Brokered
deposits are generally considered a less stable source of funding than core
deposits obtained through retail bank branches. Investors in brokered deposits
are generally more sensitive to interest rates and will generally move funds
from one depository institution to another based on small differences in
interest rates offered on deposits.
Although Oriental
expects to have continued access to credit from the foregoing sources of funds,
there can be no assurance that such financing sources will continue to be
available or will be available on favorable terms. In a period of financial
disruption or if negative developments occur with respect to Oriental, the
availability and cost of Oriental’s funding sources could be adversely
affected. In that event, Oriental’s cost of funds may increase, thereby
reducing its net interest income, or Oriental may need to dispose of a portion
of its investment portfolio, which depending upon market conditions, could
result in realizing a loss or experiencing other adverse accounting consequences
upon any such dispositions. Oriental’s efforts to monitor and manage liquidity
risk may not be successful to deal with dramatic or unanticipated changes in
the global securities markets or other reductions in liquidity driven by
Oriental or market-related events. In the event that such sources of funds are
reduced or eliminated, and Oriental is not able to replace these on a
cost-effective basis, Oriental may be forced to curtail or cease its loan
origination business and treasury activities, which would have a material
adverse effect on its operations and financial condition.
As of December 31,
2019, Oriental had approximately $851.3 million in unrestricted cash and cash
equivalents, $675.5 million in investment securities that are not pledged as
collateral, and $983.0 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.
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 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
OFG Bancorp
FORM 10-K
FINANCIAL DATA INDEX
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Page
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Management’s
Annual Report on Internal Controls Over Financial Reporting
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83
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Report
of Independent Registered Public Accounting Firm
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84
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Report of Independent Registered
Public Accounting Firm on Internal Control over
Financial Reporting
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88
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Consolidated
Statements of Financial Condition at December 31, 2019 and 2018
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90
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Consolidated Statements of Operations for the years
ended December 31, 2019, 2018, and 2017
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92
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Consolidated Statements of Comprehensive Income for
the years ended December 31, 2019, 2018, and 2017
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94
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Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December
31,
2019, 2018, and 2017
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95
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Consolidated
Statements of Cash Flows for the years ended December 31, 2019, 2018, and
2017
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96
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Notes to the Consolidated Financial Statements
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Note
1– Summary of Significant Accounting Policies
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99
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Note
2 – Business Combination
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118
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Note
3 – Restricted Cash
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122
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Note
4 – Investment Securities
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122
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Note
5 – Pledged Assets
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129
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Note
6 – Loans
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129
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Note
7 – Allowance for Loan and Lease Losses
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157
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|
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Note
8 – FDIC Indemnification Asset and True-up Payment Obligation and FDIC
Shared-loss Expense
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164
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Note
9 – Foreclosed Real Estate
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165
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|
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Note
10 – Premises and Equipment
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165
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Note
11 – Servicing Assets
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165
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Note
12 – Derivatives
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167
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Note
13 – Core deposit, customer relationship intangible and other intangibles
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168
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Note
14 – Accrued Interest Receivable and Other Assets
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168
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Note
15 – Deposits and Related Interest
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169
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Note
16 – Borrowings and Related Interest
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171
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Note
17 – Offsetting of Financial Assets and Liabilities
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174
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Note
18– Employee Benefit Plan
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176
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Note
19 – Related Party Transactions
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176
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Note
20 – Income Taxes
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177
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Note 21 – Regulatory Capital
Requirements
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179
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Note 22 – Equity- Based Compensation
Plan
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182
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Note
23 – Stockholders’ Equity
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183
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Note
24 – Accumulated Other Comprehensive Income
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184
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Note
25 – Earnings per Common Share
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186
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Note
26 – Guarantees
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187
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Note
27 – Commitments and Contingencies
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188
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Note
28 – Operating Leases
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189
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Note
29 – Fair Value of Financial Instruments
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192
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Note
30 – Banking and Financial Service Revenues
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199
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Note
31 – Business Segments
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201
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Note
32 – OFG Bancorp (Holding Company Only) Financial Information
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203
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Note
33 – Subsequent Events
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206
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OFG Bancorp
MANAGEMENT’S ANNUAL
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and stockholders of OFG
Bancorp:
The
management of OFG Bancorp ("Oriental") is responsible for
establishing and maintaining effective internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, and for the assessment of internal control
over financial reporting. Oriental’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.
Oriental’s internal control over financial reporting
includes those policies and procedures that:
(1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of Oriental;
(2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of Oriental are
being made only in accordance with authorization of management and directors of
Oriental; and
(3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of Oriental’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As
called for by Section 404 of the Sarbanes-Oxley Act of 2002, management
has assessed the effectiveness of Oriental’s internal control over financial
reporting as of December 31, 2019. Management made its assessment using the
criteria set forth in Internal Control-Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO Criteria”).
On
December 31, 2019, Oriental purchased from the BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”),
U.S. Virgin Islands banking operations of BNS, and certain loans from BNS’s
Puerto Rico branch, all collectively referred to as
the “Scotiabank PR & USVI Acquisition”. As allowed by guidance of the
Securities and Exchange Commission, management excluded from its assessment of
the effectiveness of Oriental's internal control over financial reporting as of
December 31, 2019, Scotiabank PR & USVI with total assets of $3.6 billion and
liabilities of $3.1 billion, included in Oriental’s consolidated financial
statements as of December 31, 2019.
Based
on its assessment, management has concluded that Oriental maintained effective
internal control over financial reporting as of December 31, 2019 based on the
COSO Criteria.
The effectiveness of
Oriental’s internal control over financial reporting as of December 31, 2019,
has been audited by KPMG LLP, Oriental’s independent registered public
accounting firm, as stated in their report dated March 2, 2020.
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By:
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/s/ José
Rafael Fernández
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By:
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/s/ Maritza
Arizmendi
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José
Rafael Fernández
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Maritza Arizmendi
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President and Chief Executive Officer
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Executive Vice President and Chief Financial Officer
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Date: March 2,
2020
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Date: March 2,
2020
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Report
of Independent Registered Public Accounting Firm
To the
Stockholders and Board of Directors
OFG Bancorp:
Opinion
on the Consolidated Financial
Statements
We have
audited the consolidated financial statements and the related notes
(collectively, the consolidated financial statements) of OFG Bancorp and
subsidiaries (the Company) as of December 31, 2019 and 2018, as listed in the
accompanying index. In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2019 in conformity with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB), the Company’s internal control over
financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated March
2, 2020 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current
period audit of the consolidated financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any
way our opinion on the consolidated financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Assessment of the allowance for loan and lease losses
related to originated loans collectively evaluated for impairment
As
discussed in Notes 1 and 7 to the consolidated financial statements, the
Company’s allowance for loan and lease losses related to originated loans collectively
evaluated for impairment (ALLL) was $68.4 million of a total allowance and loan
and lease losses of $116.5 million as of December 31, 2019. The ALLL estimate
consists of both quantitative and qualitative loss components. The Company
estimates the quantitative component of the ALLL for the commercial, consumer,
and auto loan and leasing portfolio segments by applying loss factors that are
developed considering the Company’s historical loss experience over a look back
period as adjusted for an estimated loss emergence period. For the commercial
loan segment these are also based on assigned loan grades. For the residential
mortgage loan portfolio the methodology incorporates probability of default
(PD) and loss given default (LGD) assumptions to determine the applicable loss
factors. Qualitative adjustments to such loss factors are made when internal
and external factors are identified that are not taken into account by the
quantitative component of the ALLL.
We identified the assessment of the
ALLL as a critical audit matter because it involved significant measurement
uncertainty requiring complex auditor judgment, and knowledge and experience in
the industry. Specifically, complex and subjective auditor judgment was
required to assess the (1) methodologies and data used to derive the
quantitative loss factors, (2) key assumptions including how loans with similar
risk characteristics are segmented, the historical look back periods and the
loss emergence periods, (3) loan grades assigned to commercial loans, and (4)
development and evaluation of qualitative adjustments.
The primary procedures we performed
to address the critical audit matter included the following. We tested certain
internal controls over the Company’s ALLL process, including controls related
to the (1) development of the ALLL methodology, (2) determination of the key
factors and assumptions used to estimate the loss factors, (3) periodic testing
of commercial loan grades, (4) determination of the qualitative adjustments,
and (5) analysis of the ALLL results, trends and ratios. We evaluated the
pooling of loans with similar risk characteristics, including loan mix and
levels of delinquencies, non-performing loans, and net charge-offs. We tested
the relevance of sources of internal and external data and key assumptions,
including the historical look back periods, by evaluating (1) if loss data in
the historical look back period was representative of the credit
characteristics of the current portfolio, and (2) the sufficiency of loss data
within the historical look back period. We assessed the appropriateness of the
loss emergence period assumptions by considering the Company’s credit risk
policies and observable loss data.
In addition, we involved credit
risk professionals with specialized industry knowledge and experience who
assisted in evaluating:
− the Company’s ALLL
methodology for compliance with U.S. generally accepted accounting principles,
− the resulting
quantitative loss factors, including key assumptions,
− the appropriateness of
loan portfolio segmentation,
− the framework used to
develop the resulting qualitative factors and the effect of those factors on
the ALLL compared with relevant credit risk factors and credit trends, and
− individual loan grades
for a selection of commercial loans.
Assessment of the allowance for loan losses and
interest income related to the acquired loan portfolios
As discussed in Notes 1, 6 and 7 to
the consolidated financial statements, the Company accounts for certain
acquired loans with evidence of deterioration in credit quality since
origination (purchased credit impaired or PCI loans) under FASB ASC Topic
310-30 (ASC 310-30). The Company’s allowance for loan losses related to PCI
loans (the ASC 310-30 ALL) was $31.5 million of the total allowance of loan and
lease losses of $116.5 million as of December 31, 2019. Interest income on PCI
loans amounted to $45.1 million during the year ended December 31, 2019,
excluding the acquired loans from the Scotiabank & USVI acquisition. The
Company’s PCI loans predominantly consist of pools of commercial and mortgage
loans. The recognition of the ASC 310-30 ALL and interest income on the PCI
loans is dependent on having a reasonable expectation about the timing and
amount of cash flows expected to be collected from scheduled customer
repayments, collateral values, foreclosures or other collection efforts. The
Company’s determines cash flows expected to be collected from PCI loans using
assumptions including probability of default (PD), loss severity, assigned loan
grades for commercial loans, and prepayment rates for mortgage loans. The
Company performs a quarterly evaluation of actual versus expected cash flows
and assesses the credit quality of these loans based on delinquency, severity
factors and loan grades on commercial loans.
We identified the assessment of the
ASC 310-30 ALL and interest income on PCI loans as a critical audit matter
because it involved significant measurement uncertainty requiring complex
auditor judgment. Specifically, complex and subjective auditor judgement was
required to assess the (1) methodology to derive the expected cash flows, and
(2) key assumptions including the PD, loss severity and assigned loan grades
for commercial loans.
The primary procedures we performed
to address the critical audit matter included the following. We tested certain
internal controls over the Company’s ASC 310-30 ALL process and the process for
recognizing interest income on PCI loans, including controls related to the (1)
development of the ASC 310-30 methodology, (2) determination of key assumptions
used to develop the cash flows expected to be collected, and (3) measurement of
the ASC 310-30 ALL estimate and interest income on PCI loans. We tested the
relevance and reliability of inputs and key assumptions, including the PD and loss
severity assumptions, loan grades on commercial loans and whether additional
factors and alternative assumptions should be used.
In addition, we involved credit
risk professionals with specialized industry knowledge and experience who
assisted in evaluating:
− the Company’s ASC
310-30 methodology for compliance with U.S. generally accepted accounting
principles,
− for a selection of
pools, the Company’s cash flow backtesting results, and the benchmarking of
expected cash flows developed by the Company against expected cash flows
developed by an external specialist, and
− the individual loan
grades for a selection of commercial loans.
Assessment of the fair value measurements of acquired
loans and core deposit intangibles in the Scotiabank & USVI Acquisition
As discussed in Note 2 to the
consolidated financial statements, on December 31, 2019, the Company completed
the acquisition of Scotiabank de Puerto Rico (SBPR) and certain assets and
liabilities of The Bank of Nova Scotia – Puerto Rico Branch and The Bank of
Nova Scotia – Virgin Islands Branch (the “Scotiabank PR & USVI Acquisition”).
The acquisition was accounted for as a business combination using the
acquisition method of accounting. Accordingly, assets acquired, liabilities
assumed and consideration paid were recorded at their estimated fair values at
the acquisition date. The acquisition date fair value of the acquired loans was
$2.2 billion, primarily consisting of loans valued in loan pools (acquired loan
pools) and the acquisition date fair value of the core deposit intangible (CDI)
was $41.5 million. The fair value of acquired loans was based on the income
approach utilizing a discounted cash flow methodology that used projections of
interest and principal payments based on loan contractual terms, and applying certain
valuation assumptions, including probability of default rates, loss severity,
discount rates, and prepayment rates. The fair value of the CDI was estimated
by projecting net cash flow benefits, including assumptions related to customer
attrition rates, discount rate, and alternative costs of funds.
We identified the assessment of the
fair value measurements of acquired loan pool and CDI acquired as part of the
Scotiabank PR & USVI Acquisition as a critical audit matter. The assessment
encompassed the evaluation of the fair value methodologies for acquired loan
pools and CDI, including the assumptions used in the fair value estimates. The
valuation assumptions for acquired loan pools related to probability of default
rates, loss severity and discount rates, and the valuation assumptions for the
CDI related to discount rate and alternative cost of funds rate. These
assumptions involved significant measurement uncertainty and required
specialized skills and knowledge to evaluate. Additionally, there was auditor
judgment involved in designing and performing audit procedures in order to
evaluate and test these key assumptions.
The primary procedures we performed
to address the critical audit matter included testing certain internal controls
over the (1) development of the fair value methodologies, (2) determination of
the key assumptions for acquired loan pools and CDI and (3) analysis of the
fair value measurement results. We involved valuation professionals with
specialized skills and knowledge, who assisted in:
− evaluating the
valuation methodologies for compliance with U.S. generally accepted accounting
principles,
− developing an estimate
of fair value for a selection of acquired loan pools using the loan contractual
terms and independently developed assumptions used by other market
participants, and compared the results to the Company’s estimate of fair value,
− evaluating the CDI
valuation assumptions by comparing those assumptions it against publicly
available market data used by other market participants, and
− developing an estimate
of the fair value for the CDI using the Company’s cash flow assumptions and
independently developed assumptions used by other market participants and
compared the results to the Company’s estimate of fair value.
/s/ KPMG
LLP
San Juan, Puerto Rico
March 2, 2020
We have
served as the Company’s auditor since 2005.
Stamp No. E392164 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
Report of Independent Registered
Public Accounting Firm
To the
Stockholders and Board of Directors
OFG Bancorp:
Opinion
on Internal Control Over Financial Reporting
We have
audited OFG Bancorp and subsidiaries (the Company) internal control over
financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB), the consolidated statements of
financial condition of the Company as of December 31, 2019 and 2018, the
related consolidated statements of operations, comprehensive income, changes in
stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2019, and the related notes (collectively, the
consolidated financial statements), and our report dated March 2, 2020
expressed an unqualified opinion on those consolidated financial statements.
The
Company acquired from The Bank of Nova Scotia (BNS) all outstanding common
stock of Scotiabank de Puerto Rico, the U.S. Virgin Island banking operations
of BNS, and certain loans and liabilities from BNS’s Puerto Rico branch
(collectively, “Scotiabank PR & USVI). Management excluded from its
assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2019, Scotiabank PR & USVI’s
internal control over financial reporting associated with total assets of $3.5
billion and total liabilities of $$3.1 billion included in the consolidated
financial statements of the Company as of December 31, 2019. Our audit of
internal control over financial reporting of the Company also excluded an
evaluation of the internal control over financial reporting of Scotiabank PR
& USVI.
Basis
for Opinion
The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over
financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
Definition
and Limitations of Internal Control Over Financial Reporting
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
KPMG LLP
San
Juan, Puerto Rico
March 2,
2020
Stamp No.
E392163 of the Puerto Rico
Society
of Certified Public Accountants
was
affixed to the record copy of this report
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
844,532
|
|
$
|
442,103
|
Money market investments
|
|
|
6,775
|
|
|
4,930
|
Total cash and cash equivalents
|
|
|
851,307
|
|
|
447,033
|
Restricted
cash
|
|
|
1,450
|
|
|
3,030
|
Investments:
|
|
|
|
|
|
|
Trading securities, at fair value, with amortized cost of $182 (December 31,
2018 - $647)
|
|
|
37
|
|
|
360
|
Investment securities available-for-sale, at fair value, with amortized cost
of $1,074,475 (December 31, 2018 - $854,511)
|
|
|
1,074,169
|
|
|
841,857
|
Investment securities held-to-maturity, at amortized cost, with fair value of
$410,353 at December 31, 2018
|
|
|
-
|
|
|
424,740
|
Federal Home Loan Bank (FHLB) stock, at cost
|
|
|
13,048
|
|
|
12,644
|
Other investments
|
|
|
560
|
|
|
3
|
Total investments
|
|
|
1,087,814
|
|
|
1,279,604
|
Loans:
|
|
|
|
|
|
|
Loans held-for-sale, at lower of cost or fair value
|
|
|
19,591
|
|
|
10,368
|
Loans held for investment, net of allowance for loan losses of $116,539
(December 31, 2018 - $164,231)
|
|
|
6,622,256
|
|
|
4,421,226
|
Total loans
|
|
|
6,641,847
|
|
|
4,431,594
|
Other
assets:
|
|
|
|
|
|
|
Foreclosed real estate
|
|
|
29,909
|
|
|
33,768
|
Accrued interest receivable
|
|
|
37,120
|
|
|
34,254
|
Deferred tax asset, net
|
|
|
176,740
|
|
|
113,763
|
Premises and equipment, net
|
|
|
81,105
|
|
|
68,892
|
Customers' liability on acceptances
|
|
|
21,599
|
|
|
16,937
|
Core deposit, customer relationship and other intangibles
|
|
|
56,965
|
|
|
3,369
|
Servicing assets
|
|
|
50,779
|
|
|
10,716
|
Derivative assets
|
|
|
6
|
|
|
347
|
Goodwill
|
|
|
86,069
|
|
|
86,069
|
Operating lease right-of-use assets
|
|
|
39,112
|
|
|
-
|
Other assets
|
|
|
135,839
|
|
|
53,976
|
Total assets
|
|
$
|
9,297,661
|
|
$
|
6,583,352
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
3,579,115
|
|
$
|
2,191,802
|
Savings accounts
|
|
|
1,836,480
|
|
|
1,212,259
|
Time deposits
|
|
|
2,283,015
|
|
|
1,504,054
|
Total deposits
|
|
|
7,698,610
|
|
|
4,908,115
|
Borrowings:
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
190,274
|
|
|
455,508
|
Advances from FHLB
|
|
|
78,009
|
|
|
77,620
|
Subordinated capital notes
|
|
|
36,083
|
|
|
36,083
|
Other borrowings
|
|
|
1,195
|
|
|
1,214
|
Total borrowings
|
|
|
305,561
|
|
|
570,425
|
Other
liabilities:
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
913
|
|
|
333
|
Acceptances executed and outstanding
|
|
|
21,599
|
|
|
16,937
|
Operating lease liabilities
|
|
|
39,840
|
|
|
-
|
Accrued expenses and other liabilities
|
|
|
185,660
|
|
|
87,665
|
Total liabilities
|
|
|
8,252,183
|
|
|
5,583,475
|
Commitments
and contingencies (See Note 18)
|
|
|
|
|
|
|
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, 2018 - 1,340,000 shares; 1,380,000 shares; and 960,000
shares) $25 liquidation value
|
|
|
92,000
|
|
|
92,000
|
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares
issued: 51,398,956 shares outstanding (December 31, 2018 - $59,885,234;
|
|
|
|
|
|
|
51,293,924)
|
|
|
59,885
|
|
|
59,885
|
Additional paid-in capital
|
|
|
621,515
|
|
|
619,381
|
Legal surplus
|
|
|
95,779
|
|
|
90,167
|
Retained earnings
|
|
|
279,646
|
|
|
253,040
|
Treasury stock, at cost, 8,486,278 shares (December 31, 2018 - 8,591,310
shares)
|
|
|
(102,339)
|
|
|
(103,633)
|
Accumulated other comprehensive loss, net of tax of $206 (December 31, 2018 -
$1,677)
|
|
|
(1,008)
|
|
|
(10,963)
|
Total stockholders’ equity
|
|
|
1,045,478
|
|
|
999,877
|
Total liabilities and stockholders’ equity
|
|
$
|
9,297,661
|
|
$
|
6,583,352
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements
|
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In
thousands, except per share data)
|
Interest income:
|
|
|
|
|
|
|
|
|
Loans
|
$
|
339,875
|
|
$
|
321,381
|
|
$
|
312,421
|
Mortgage-backed securities
|
|
19,854
|
|
|
31,190
|
|
|
26,994
|
Investment securities and other
|
|
14,066
|
|
|
7,848
|
|
|
6,232
|
Total interest
income
|
|
373,795
|
|
|
360,419
|
|
|
345,647
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
39,355
|
|
|
32,953
|
|
|
30,298
|
Securities sold under agreements
to repurchase
|
|
7,423
|
|
|
7,794
|
|
|
7,223
|
Advances from FHLB and other
borrowings
|
|
2,212
|
|
|
1,875
|
|
|
2,398
|
Subordinated capital notes
|
|
2,012
|
|
|
1,903
|
|
|
1,556
|
Total interest
expense
|
|
51,002
|
|
|
44,525
|
|
|
41,475
|
Net interest income
|
|
322,793
|
|
|
315,894
|
|
|
304,172
|
Provision for loan losses, net
|
|
96,792
|
|
|
56,108
|
|
|
113,139
|
Net interest income after provision for
loan and lease losses
|
|
226,001
|
|
|
259,786
|
|
|
191,033
|
Non-interest income:
|
|
|
|
|
|
|
|
|
Banking service revenue
|
|
42,866
|
|
|
43,638
|
|
|
39,468
|
Wealth management revenue
|
|
26,224
|
|
|
25,934
|
|
|
25,790
|
Mortgage banking activities
|
|
4,275
|
|
|
4,767
|
|
|
4,050
|
Total banking and
financial service revenues
|
|
73,365
|
|
|
74,339
|
|
|
69,308
|
|
|
|
|
|
|
|
|
|
FDIC shared-loss benefit, net
|
|
-
|
|
|
-
|
|
|
1,403
|
Net gain on:
|
|
|
|
|
|
|
|
|
Sale of securities
|
|
8,274
|
|
|
-
|
|
|
6,896
|
Derivatives
|
|
-
|
|
|
-
|
|
|
132
|
Early extinguishment of debt
|
|
(7)
|
|
|
-
|
|
|
(80)
|
Bargain purchase from Scotiabank
PR & USVI acquisition
|
|
315
|
|
|
-
|
|
|
-
|
Other non-interest income
|
|
546
|
|
|
5,756
|
|
|
1,028
|
Total non-interest
income, net
|
|
82,493
|
|
|
80,095
|
|
|
78,687
|
The
accompanying notes are an integral part of these consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In
thousands, except per share data)
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
Compensation and employee
benefits
|
|
82,533
|
|
|
76,524
|
|
|
79,751
|
Occupancy, equipment and
infrastructure costs
|
|
30,052
|
|
|
33,084
|
|
|
32,557
|
Merger and restructuring charges
|
|
24,054
|
|
|
-
|
|
|
-
|
Electronic banking charges
|
|
21,244
|
|
|
21,234
|
|
|
19,322
|
Professional and service fees
|
|
14,629
|
|
|
12,442
|
|
|
12,406
|
Loss on sale of foreclosed real
estate, other repossessed assets and credit related expenses
|
|
11,498
|
|
|
13,552
|
|
|
12,626
|
Information technology expenses
|
|
9,865
|
|
|
8,227
|
|
|
8,010
|
Taxes, other than payroll and
income taxes
|
|
8,749
|
|
|
9,017
|
|
|
9,187
|
Advertising, business promotion,
and strategic initiatives
|
|
5,208
|
|
|
5,084
|
|
|
5,616
|
Loan servicing and clearing
expenses
|
|
4,853
|
|
|
4,810
|
|
|
4,693
|
Communication
|
|
3,315
|
|
|
3,447
|
|
|
3,415
|
Insurance
|
|
3,309
|
|
|
6,249
|
|
|
5,223
|
Printing, postage, stationary
and supplies
|
|
2,468
|
|
|
2,217
|
|
|
2,437
|
Director and investor relations
|
|
1,216
|
|
|
1,089
|
|
|
1,072
|
Other
|
|
10,251
|
|
|
10,105
|
|
|
5,316
|
Total non-interest
expense
|
|
233,244
|
|
|
207,081
|
|
|
201,631
|
Income before income taxes
|
|
75,250
|
|
|
132,800
|
|
|
68,089
|
Income tax expense
|
|
21,409
|
|
|
48,390
|
|
|
15,443
|
Net income
|
|
53,841
|
|
|
84,410
|
|
|
52,646
|
Less: dividends on preferred
stock
|
|
(6,512)
|
|
|
(12,024)
|
|
|
(13,862)
|
Income available to common shareholders
|
$
|
47,329
|
|
$
|
72,386
|
|
$
|
38,784
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.92
|
|
$
|
1.59
|
|
$
|
0.88
|
Diluted
|
$
|
0.92
|
|
$
|
1.52
|
|
$
|
0.88
|
Average common shares outstanding and
equivalents
|
|
51,719
|
|
|
51,349
|
|
|
51,096
|
Cash dividends per share of common stock
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
53,841
|
|
$
|
84,410
|
|
$
|
52,646
|
Other
comprehensive income (loss) before tax:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available-for-sale
|
|
20,622
|
|
|
(9,651)
|
|
|
2,276
|
Realized gain on sale of securities available-for-sale
|
|
(8,274)
|
|
|
-
|
|
|
(6,896)
|
Unrealized (loss) gain on cash flow hedges
|
|
(921)
|
|
|
524
|
|
|
494
|
Other
comprehensive income (loss) before taxes
|
|
11,427
|
|
|
(9,127)
|
|
|
(4,126)
|
Income tax effect
|
|
(1,472)
|
|
|
1,113
|
|
|
(419)
|
Other
comprehensive income (loss) after taxes
|
|
9,955
|
|
|
(8,014)
|
|
|
(4,545)
|
Comprehensive
income
|
$
|
63,796
|
|
$
|
76,396
|
|
$
|
48,101
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
$
|
92,000
|
|
$
|
176,000
|
|
$
|
176,000
|
Conversion
of convertible preferred stock to common stock
|
|
-
|
|
|
(84,000)
|
|
|
-
|
Balance at end of year
|
|
92,000
|
|
|
92,000
|
|
|
176,000
|
Common
stock:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
59,885
|
|
|
52,626
|
|
|
52,626
|
Conversion
of convertible preferred stock to common stock
|
|
-
|
|
|
7,259
|
|
|
-
|
Balance at end of year
|
|
59,885
|
|
|
59,885
|
|
|
52,626
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
619,381
|
|
|
541,600
|
|
|
540,948
|
Stock-based
compensation expense
|
|
2,134
|
|
|
1,401
|
|
|
1,109
|
Stock-based
compensation excess tax benefit recognized in income
|
|
-
|
|
|
-
|
|
|
(99)
|
Lapsed
restricted stock units
|
|
-
|
|
|
(361)
|
|
|
(358)
|
Conversion
of convertible preferred stock to common stock
|
|
-
|
|
|
76,741
|
|
|
-
|
Balance at end of year
|
|
621,515
|
|
|
619,381
|
|
|
541,600
|
Legal
surplus:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
90,167
|
|
|
81,454
|
|
|
76,293
|
Transfer
from retained earnings
|
|
5,612
|
|
|
8,713
|
|
|
5,161
|
Balance at end of year
|
|
95,779
|
|
|
90,167
|
|
|
81,454
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
253,040
|
|
|
200,878
|
|
|
177,808
|
Topic
842 adoption
|
|
(736)
|
|
|
-
|
|
|
-
|
Net
income
|
|
53,841
|
|
|
84,410
|
|
|
52,646
|
Cash
dividends declared on common stock
|
|
(14,375)
|
|
|
(11,511)
|
|
|
(10,553)
|
Cash
dividends declared on preferred stock
|
|
(6,512)
|
|
|
(12,024)
|
|
|
(13,862)
|
Transfer
to legal surplus
|
|
(5,612)
|
|
|
(8,713)
|
|
|
(5,161)
|
Balance at end of year
|
|
279,646
|
|
|
253,040
|
|
|
200,878
|
Treasury
stock:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
(103,633)
|
|
|
(104,502)
|
|
|
(104,860)
|
Lapsed
restricted stock units and options
|
|
1,294
|
|
|
869
|
|
|
358
|
Balance at end of year
|
|
(102,339)
|
|
|
(103,633)
|
|
|
(104,502)
|
Accumulated
other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
(10,963)
|
|
|
(2,949)
|
|
|
1,596
|
Other
comprehensive income (loss), net of tax:
|
|
9,955
|
|
|
(8,014)
|
|
|
(4,545)
|
Balance at end of year
|
|
(1,008)
|
|
|
(10,963)
|
|
|
(2,949)
|
Total
stockholders’ equity
|
$
|
1,045,478
|
|
$
|
999,877
|
|
$
|
945,107
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
53,841
|
|
$
|
84,410
|
|
$
|
52,646
|
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
|
|
4,624
|
|
|
4,605
|
|
|
3,537
|
Amortization
of investment securities premiums, net of accretion of discounts
|
|
4,956
|
|
|
5,753
|
|
|
7,865
|
Amortization
of core deposit and customer relationship intangibles
|
|
1,170
|
|
|
1,319
|
|
|
1,473
|
Net
change in operating leases
|
|
(75)
|
|
|
-
|
|
|
-
|
FDIC
shared-loss benefit
|
|
-
|
|
|
-
|
|
|
(1,403)
|
Depreciation
and amortization of premises and equipment
|
|
8,513
|
|
|
8,898
|
|
|
8,986
|
Deferred
income tax (benefit) expense, net
|
|
(4,068)
|
|
|
14,772
|
|
|
(3,658)
|
Provision
for loan losses, net
|
|
96,792
|
|
|
56,108
|
|
|
113,139
|
Stock-based
compensation
|
|
2,134
|
|
|
1,401
|
|
|
1,109
|
Stock-based
compensation excess tax benefit recognized in income
|
|
-
|
|
|
-
|
|
|
(99)
|
Bargain
purchase from Scotiabank PR & USVI acquisition
|
|
(315)
|
|
|
-
|
|
|
-
|
(Gain)
loss on:
|
|
|
|
|
|
|
|
|
Sale of securities
|
|
(8,274)
|
|
|
-
|
|
|
(6,896)
|
Sale of loans
|
|
(524)
|
|
|
(301)
|
|
|
(955)
|
Derivatives
|
|
-
|
|
|
-
|
|
|
(103)
|
Early extinguishment of debt
|
|
7
|
|
|
-
|
|
|
80
|
Foreclosed real estate and other repossessed assets
|
|
3,145
|
|
|
4,662
|
|
|
5,021
|
Sale of other assets
|
|
(187)
|
|
|
(107)
|
|
|
(539)
|
Originations
of loans held-for-sale
|
|
(82,111)
|
|
|
(95,520)
|
|
|
(116,020)
|
Proceeds
from sale of loans held-for-sale
|
|
48,991
|
|
|
27,757
|
|
|
75,637
|
Net
(increase) decrease in:
|
|
|
|
|
|
|
|
|
Trading securities
|
|
323
|
|
|
(169)
|
|
|
156
|
Accrued interest receivable
|
|
1,904
|
|
|
15,715
|
|
|
(29,742)
|
Servicing assets
|
|
401
|
|
|
(895)
|
|
|
37
|
Other assets
|
|
(1,957)
|
|
|
5,486
|
|
|
13,675
|
Net
increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accrued interest on deposits and borrowings
|
|
8,088
|
|
|
1,489
|
|
|
(937)
|
Accrued expenses and other liabilities
|
|
(27,761)
|
|
|
(2,028)
|
|
|
28,431
|
Net
cash provided by operating activities
|
|
109,617
|
|
|
133,355
|
|
|
151,440
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial statements
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of:
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
(1,734)
|
|
|
(271,639)
|
|
|
(182,054)
|
FHLB stock
|
|
(1,167)
|
|
|
(113,731)
|
|
|
(31,950)
|
Other investments
|
|
(467)
|
|
|
-
|
|
|
-
|
Maturities
and redemptions of:
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
165,683
|
|
|
120,709
|
|
|
105,169
|
Investment securities held-to-maturity
|
|
-
|
|
|
77,583
|
|
|
88,726
|
FHLB stock
|
|
3,332
|
|
|
115,082
|
|
|
28,748
|
Proceeds
from sales of:
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
680,466
|
|
|
17,837
|
|
|
256,996
|
Foreclosed real estate and other repossessed assets, including write-offs
|
|
51,481
|
|
|
51,057
|
|
|
40,051
|
Fully charged-off loans
|
|
2,382
|
|
|
-
|
|
|
-
|
Premises and equipment
|
|
2,225
|
|
|
1,668
|
|
|
569
|
Origination
and purchase of loans, excluding loans held-for-sale
|
|
(1,217,137)
|
|
|
(1,315,906)
|
|
|
(801,766)
|
Principal
repayment of loans
|
|
1,102,805
|
|
|
840,064
|
|
|
699,409
|
Repayments
to FDIC on shared-loss agreements
|
|
-
|
|
|
-
|
|
|
(10,125)
|
Additions
to premises and equipment
|
|
(12,966)
|
|
|
(11,491)
|
|
|
(6,469)
|
Outlays
for business acquisitions
|
|
(425,242)
|
|
|
-
|
|
|
-
|
Cash
and cash equivalents received in Scotiabank PR & USVI Acquisition
|
|
492,512
|
|
|
-
|
|
|
-
|
Net
cash provided by (used in) investing activities
|
$
|
842,173
|
|
$
|
(488,767)
|
|
$
|
187,304
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in:
|
|
|
|
|
|
|
|
|
Deposits
|
|
(265,162)
|
|
|
100,147
|
|
|
125,991
|
Securities sold under agreements to repurchase
|
|
(264,730)
|
|
|
262,223
|
|
|
(459,815)
|
FHLB advances, federal funds purchased, and other borrowings
|
|
386
|
|
|
(20,816)
|
|
|
(5,741)
|
Exercise
of stock options with treasury shares
|
|
1,294
|
|
|
508
|
|
|
-
|
Dividends
paid on preferred stock
|
|
(6,509)
|
|
|
(12,024)
|
|
|
(13,862)
|
Dividends
paid on common stock
|
|
(14,375)
|
|
|
(12,796)
|
|
|
(10,553)
|
Net
cash (used in) provided by financing activities
|
$
|
(549,096)
|
|
$
|
317,242
|
|
$
|
(363,980)
|
Net
change in cash, cash equivalents and restricted cash
|
|
402,694
|
|
|
(38,170)
|
|
|
(25,236)
|
Cash,
cash equivalents and restricted cash at beginning of period
|
|
450,063
|
|
|
488,233
|
|
|
513,469
|
Cash,
cash equivalents and restricted cash at end of period
|
$
|
852,757
|
|
$
|
450,063
|
|
$
|
488,233
|
Reconciliation
of the Consolidated Statements of Cash Flows to the Consolidated Balance
Sheets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
844,532
|
|
$
|
442,103
|
|
$
|
478,182
|
Money market investments
|
|
6,775
|
|
|
4,930
|
|
|
7,021
|
Restricted cash
|
|
1,450
|
|
|
3,030
|
|
|
3,030
|
Total
cash, cash equivalents, restricted cash and restricted cash equivalents at
end of period
|
$
|
852,757
|
|
$
|
450,063
|
|
$
|
488,233
|
Supplemental
Cash Flow Disclosure and Schedule of Non-cash Activities:
|
|
|
|
|
|
|
|
|
Interest
paid
|
$
|
41,310
|
|
$
|
41,318
|
|
$
|
40,570
|
Income
taxes paid
|
$
|
39,375
|
|
$
|
17,778
|
|
$
|
30
|
Operating
lease liabilities paid
|
$
|
6,873
|
|
$
|
-
|
|
$
|
-
|
Mortgage
loans securitized into mortgage-backed securities
|
$
|
62,764
|
|
$
|
74,630
|
|
$
|
74,919
|
Transfer
from held-to-maturity securities to available-for-sale securities
|
$
|
424,740
|
|
$
|
-
|
|
$
|
-
|
Transfer
from loans to foreclosed real estate and other repossessed assets
|
$
|
43,915
|
|
$
|
47,084
|
|
$
|
43,163
|
Reclassification
of loans held-for-investment portfolio to held-for-sale portfolio
|
$
|
27,775
|
|
$
|
5,795
|
|
$
|
33,647
|
Reclassification
of loans held-for-sale portfolio to held-for-investment portfolio
|
$
|
49
|
|
$
|
1,247
|
|
$
|
293
|
Conversion
of convertible preferred stock to common stock
|
$
|
-
|
|
$
|
84,000
|
|
$
|
-
|
Financed
sales of foreclosed real estate
|
$
|
1,091
|
|
$
|
2,333
|
|
$
|
1,113
|
Loans booked under the GNMA buy-back
option
|
$
|
75,181
|
|
$
|
13,325
|
|
$
|
8,268
|
Cash
consideration payable
|
$
|
5,195
|
|
$
|
-
|
|
$
|
-
|
Interest
capitalized on loans subject to the temporary payment moratorium
|
$
|
-
|
|
$
|
-
|
|
$
|
39,701
|
Initial
recognition of operating lease right-of-use assets
|
$
|
21,930
|
|
$
|
-
|
|
$
|
-
|
Initial
recognition of operating lease liabilities
|
$
|
23,689
|
|
$
|
-
|
|
$
|
-
|
The accompanying notes are an
integral part of these consolidated financial statements
|
|
|
|
NOTE 1 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of
OFG Bancorp (Oriental) conform with GAAP and to banking industry practices. The
following is a description of Oriental’s most significant accounting policies:
Nature
of Operations
Oriental
is a publicly-owned financial holding company incorporated under the laws of
the Commonwealth of Puerto Rico. Oriental
operates through various subsidiaries including, a commercial bank, Oriental
Bank (the “Bank”), a securities broker-dealer, Oriental Financial Services
Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance,
LLC (“Oriental Insurance”), and a retirement plan administrator, Oriental
Pension Consultants, Inc. (“OPC”). Oriental
also has a special purpose entity, Oriental Financial (PR) Statutory Trust II
(the “Statutory Trust II”). OFG Ventures
LLC (“OFG Ventures”), a limited liability corporation, is also a subsidiary of
Oriental. Through these subsidiaries and
their respective divisions, Oriental provides a wide range of banking and
financial services such as commercial, consumer and mortgage lending, leasing,
auto loans, financial planning, insurance sales, money management and
investment banking and brokerage services, as well as corporate and individual
trust services.
The
main offices of Oriental and most of its subsidiaries are located in San Juan,
Puerto Rico with two branches in the US Virgin Islands. OPC is located in Boca
Raton, Florida, and OFG USA is based in
Cornelius, North Carolina. Oriental is
subject to supervision and regulation by the Board of Governors of the Federal
Reserve System (the “Federal Reserve Board”) under the U.S. Bank Holding
Company Act of 1956, as amended, and the Dodd-Frank Act.
The Bank is subject to the
supervision, examination and regulation of the Office of the Commissioner of
Financial Institutions of Puerto Rico (“OCFI”) and the Federal Deposit
Insurance Corporation (“FDIC”). The Bank offers banking services such as
commercial and consumer lending, leasing, auto loans, savings and time deposit
products, financial planning, and corporate and individual trust services, and
capitalizes on its commercial banking network to provide mortgage lending
products to its clients. The Bank has an operating subsidiary, OFG USA, which
is a commercial lender organized in Delaware and based in Cornelius, North
Carolina. Oriental International Bank Inc. (“OIB”), a wholly-owned subsidiary
of the Bank, and Oriental Overseas and Oriental International, two divisions of
the Bank, are international banking entities licensed pursuant to the
International Banking Center Regulatory Act of Puerto Rico, as amended. OIB,
Oriental Overseas, and Oriental International offer the Bank certain Puerto
Rico tax advantages. Their activities are limited under Puerto Rico law to
persons located in Puerto Rico with assets/liabilities located outside of
Puerto Rico. The Bank’s USVI operations are also subject to the supervision,
examination and regulation of the US Virgin Islands Banking Board.
Oriental
Financial Services is a securities broker-dealer and is subject to the
supervision, examination and regulation of the Financial Industry Regulatory
Authority (“FINRA”), the SEC, and the OCFI. Oriental Financial Services is also
a member of the Securities Investor Protection Corporation. Oriental Insurance
is an insurance agency and is subject to the supervision, examination and
regulation of the Office of the Commissioner of Insurance of Puerto Rico.
Oriental’s
mortgage banking activities are conducted through a division of the Bank. The
mortgage banking activities include the origination of mortgage loans for the
Bank’s own portfolio, the sale of loans directly in the secondary market or the
securitization of conforming loans into mortgage-backed securities, and the purchase or assumption of the right to service
loans originated by others. The Bank
originates Federal Housing Administration (“FHA”) insured and Veterans
Administration (“VA”) guaranteed mortgages that are primarily securitized for
issuance of Government National Mortgage Association (“GNMA”) mortgage-backed
securities which can be resold to individual or institutional investors in the
secondary market. Conventional loans that meet the underwriting requirements
for sale or exchange under certain Federal National Mortgage Association
(“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) programs are
referred to as conforming mortgage loans and are also securitized for issuance
of FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller of
FNMA and FHLMC mortgage loans for issuance of FNMA and FHLMC mortgage-backed
securities. The Bank is also an approved issuer of GNMA mortgage-backed
securities. The Bank is the master servicer of the GNMA, FNMA and FHLMC pools
that it issues and of its mortgage loan portfolio and has a subservicing
arrangement with a third party for a portion of its acquired loan portfolio. During 2016, Oriental began servicing most of its mortgage
loan portfolio.
On
December 18, 2012, Oriental purchased from Banco Bilbao Vizcaya
Argentaria, S. A. (“BBVA”), all of the outstanding common stock of each of (i)
BBVAPR Holding Corporation (“BBVAPR Holding”), the sole shareholder of Banco
Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR Bank”), a Puerto Rico chartered
commercial bank, and BBVA Seguros, Inc. (“BBVA Seguros”), a subsidiary offering
insurance services, and (ii) BBVA Securities of Puerto Rico, Inc. (“BBVA
Securities”), a registered broker-dealer. This
transaction
is referred to as the “BBVAPR Acquisition” and BBVAPR Holding, BBVAPR Bank,
BBVA Seguros and BBVA Securities are collectively referred to as the “BBVAPR
Companies” or “BBVAPR.”
On
December 31, 2019, Oriental purchased from the BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”)
for an aggregate purchase price of $550 million. Immediately
following the closing of the Scotiabank Acquisition, Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank
continuing as the surviving entity. As part of this transaction, Oriental Bank
also acquired the U.S. Virgin Islands banking operations of BNS through an
acquisition of certain assets and an assumption of certain liabilities for
their net book value plus a $10 million premium on
deposits, which were settled as part of the final consideration from the
acquisition. In addition, Oriental acquired certain loans and assumed certain
liabilities, from BNS’s Puerto Rico branch for their net book value which were
settled as part of the final consideration from the acquisition. This
transaction is referred to as the “Scotiabank PR & USVI Acquisition”.
Principles
of Consolidation
The accompanying consolidated financial statements
include the accounts of OFG Bancorp and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
The Statutory Trust II is exempt from the consolidation requirements of GAAP.
Business
Combinations
Oriental accounted for the Scotiabank PR & USVI Acquisition, BBVAPR
Acquisition and the FDIC-assisted acquisition of Eurobank under the accounting
guidance of ASC Topic No. 805, Business Combinations, which requires the use of
the acquisition method of accounting. All identifiable assets and liabilities
acquired were initially recorded at fair value. No allowance for loan losses
related to the acquired loans was recorded on the acquisition date. Loans
acquired were recorded at fair value in accordance with the fair value
methodology prescribed in ASC Topic 820. These fair value estimates associated
with the loans included estimates related to expected prepayments and the
amount and timing of expected principal, interest and other cash flows. The
initial valuation of these loans required management to make subjective
judgments concerning estimates about how the acquired loans would perform in
the future using valuation methods, including discounted cash flow analyses.
Factors that may significantly affect the initial valuation include, among
others, market-based and industry data related to expected changes in interest
rates, assumptions related to probability and severity of credit losses,
estimated timing of credit losses including the timing of foreclosure and
liquidation of collateral, expected prepayment rates, the specific terms and
provisions of any shared-loss agreements, and specific industry and market
conditions that may impact independent third-party appraisals.
The fair values initially assigned to assets acquired
and liabilities assumed are preliminary and subject to refinement for up to one
year after the closing date of the acquisition as new information relative to
closing date fair values becomes available.
Use
of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity
with GAAP requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate
mainly to the determination of the allowance for loan and lease losses, the
valuation of securities, revisions to expected cash flows in acquired loans,
the determination of income taxes, other-than-temporary impairment of securities,
and goodwill valuation and impairment assessment.
Cash Equivalents
Oriental considers as cash equivalents all money
market instruments that are not pledged and that have maturities of three
months or less.
Earnings per Common Share
Basic earnings per share is calculated by dividing
income available to common shareholders (net income reduced by dividends on
preferred stock) by the weighted average of outstanding common shares. Diluted
earnings per share is similar to the computation of basic earnings per share
except that the weighted average of common shares is increased to include the
number of additional common shares that would have been outstanding if the
potentially dilutive common shares underlying stock options and restricted units
had been issued, assuming that proceeds from exercise are used to repurchase
shares in the market (treasury stock method). Any stock splits and dividends
are retroactively recognized in all periods presented in the consolidated
financial statements.
Securities Purchased/Sold Under Agreements to
Resell/Repurchase
Oriental purchases securities under
agreements to resell the same or similar securities. Amounts advanced under
these agreements represent short-term loans and are reflected as assets in the
consolidated statements of financial condition. It is Oriental’s policy to take
possession of securities purchased under resale agreements while the
counterparty retains effective control over the securities. Oriental monitors
the fair value of the underlying securities as compared to the related
receivable, including accrued interest, and requests additional collateral when
deemed appropriate.
Oriental also sells securities under
agreements to repurchase the same or similar securities. Oriental retains
effective control over the securities sold under these agreements. Accordingly,
such agreements are treated as financing arrangements, and the obligations to
repurchase the securities sold are reflected as liabilities. The securities
underlying the financing agreements remain included in the asset accounts. The
counterparty to repurchase agreements generally has the right to repledge the
securities received as collateral.
Investment Securities
Securities
are classified as held-to-maturity, available-for-sale or trading. Securities
for which Oriental has the intent and ability to hold until maturity are
classified as held-to-maturity and are carried at amortized cost. Securities
that might be sold prior to maturity because of interest rate changes to meet
liquidity needs or to better match the repricing characteristics of funding
sources are classified as available-for-sale. These securities are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported net of tax in other comprehensive income (loss).
Oriental
classifies as trading those securities that are acquired and held principally
for the purpose of selling them in the near future. These securities are
carried at fair value with realized and unrealized changes in fair value
included in earnings in the period in which the changes occur.
Oriental’s
investment in the Federal Home Loan Bank of New York (“FHLB-NY”) stock, a
restricted security, has no readily determinable fair value and can only be
sold back to the FHLB-NY at cost. Therefore, these stock shares are deemed to
be nonmarketable equity securities and are carried at cost.
Premiums
and discounts are amortized to interest income over the life of the related
securities using the interest method. Net realized gains or losses on sales of
investment securities and unrealized gains and losses valuation adjustments
considered other than temporary, if any, on securities classified as either
available-for-sale or held-to-maturity are reported separately in the statements
of operations. The cost of securities sold is determined by the specific
identification method.
Financial
Instruments
Certain
financial instruments, including derivatives, trading securities and investment
securities available-for-sale, are recorded at fair value and unrealized gains
and losses are recorded in other comprehensive income (loss) or as part of
non-interest income, as appropriate. Fair values are based on listed market
prices, if available. If listed market prices are not available, fair value is
determined based on other relevant factors, including price quotations for
similar instruments. The fair values of certain derivative contracts are
derived from pricing models that consider current market and contractual prices
for the underlying financial instruments as the well as time value and yield
curve or volatility factors underlying the positions.
Oriental determines the fair value of its financial
instruments based on the fair value measurement framework, which establishes a
fair value hierarchy that prioritizes the inputs of valuation techniques used
to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy are described below:
Level 1 — Level 1 assets and liabilities include equity
securities that are traded in an active exchange market. Valuations are
obtained from readily available pricing sources for market transactions
involving identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices, such
as quoted prices for similar assets or liabilities, quoted prices in markets
that are not active, or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or
liabilities. Level 2 assets and liabilities include (i) mortgage-backed
securities for which the fair value is estimated based on valuations obtained
from third-party pricing services for identical or comparable assets,
(ii) debt securities with quoted prices that are traded less frequently
than exchange-traded instruments and (iii) derivative contracts and
financial liabilities whose value is determined using a pricing model with
inputs that are observable in the market or can be derived principally from or
corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose
value is determined using pricing models for which the determination of fair
value requires significant management judgment or estimation.
There were no transfers in and/or out of
Level 1, Level 2, or Level 3 for financial instruments measured at fair value
on a recurring basis during the years ended December 31, 2019, 2018, and 2017.
Oriental’s policy is to recognize transfers at the date of the event or change
in circumstances that caused the transfer.
Impairment of Investment Securities
Oriental
conducts periodic reviews to identify and evaluate each investment in an
unrealized loss position for other-than-temporary impairment. Oriental
separates the amount of total impairment into credit and noncredit-related
amounts. The term “other-than-temporary impairment” is not intended to indicate
that the decline is permanent but indicates that the prospects for a near-term
recovery of value is not favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Any portion of a decline in value associated with a credit loss is
recognized in income, while the remaining noncredit-related component is
recognized in other comprehensive income (loss). A credit loss is determined by
assessing whether the amortized cost basis of the security will be recovered by
comparing it to the present value of cash flows expected to be collected from
the security discounted at the rate equal to the yield used to accrete current
and prospective beneficial interest for the security. The shortfall of the
present value of the cash flows expected to be collected in relation to the
amortized cost basis is considered to be the “credit loss.”
Oriental’s review for impairment generally entails,
but is not limited to:
•
the identification and evaluation of investments that have indications of
possible other-than-temporary impairment;
• the
analysis of individual investments that have fair values less than amortized
cost, including consideration of the length of time the investment has been in
an unrealized loss position, and the expected recovery period;
•
the financial condition of the issuer or issuers;
•
the creditworthiness of the obligor of the security;
•
actual collateral attributes;
•
any rating changes by a rating agency;
•
current analysts’ evaluations;
•
the payment structure of the debt security and the likelihood of the issuer
being able to make payments;
•
current market conditions;
•
adverse conditions specifically related to the security, industry, or a
geographic area;
•
Oriental’s intent to sell the debt security;
•
whether it is more-likely-than-not that Oriental will be required to sell the
debt security before its anticipated recovery; and
•
other qualitative factors that could support or not an other-than-temporary
impairment.
Derivative Instruments and Hedging Activities
Oriental’s
overall interest rate risk-management strategy incorporates the use of
derivative instruments to minimize significant unplanned fluctuations in
earnings that are caused by interest rate volatility. Oriental’s goal is to
manage interest rate sensitivity by modifying the repricing or maturity
characteristics of certain balance sheet assets and liabilities so that the net
interest margin is not, on a material basis, adversely affected by movements in
interest rates. As a result of interest rate fluctuations, hedged fixed-rate
assets and liabilities will appreciate or depreciate in market value. Also, for
some fixed-rate assets or liabilities, the effect of this variability in
earnings is expected to be substantially offset by Oriental’s gains and losses
on the derivative instruments that are linked to the forecasted cash flows of
these hedged assets and liabilities. Oriental considers its strategic use of
derivatives to be a prudent method of managing interest-rate sensitivity as it
reduces the exposure of earnings and the market value of its equity to undue
risk posed by changes in interest rates. The effect of this unrealized
appreciation or depreciation is expected to be substantially offset by
Oriental’s gains or losses on the derivative instruments that are linked to
these hedged assets and liabilities. Another result of interest rate
fluctuation is that the contractual interest income and interest expense of
hedged variable-rate assets and liabilities, respectively, will increase or
decrease.
Derivative
instruments that are used as part of Oriental’s interest rate risk-management
strategy include interest rate swaps, caps, forward-settlement swaps, and
futures contracts. Interest rate swaps generally involve the exchange of fixed
and variable-rate interest payments between two parties based on a common
notional principal amount and maturity date. Interest rate futures generally
involve exchange-traded contracts to buy or sell U.S. Treasury bonds and notes
in the future at specified prices. Interest rate options represent contracts
that allow the holder of the option to (i) receive cash or
(ii) purchase, sell, or enter into a financial instrument at a specified
price within a specified period. Some purchased option contracts give Oriental
the right to enter into interest rate swaps and cap and floor agreements with
the writer of the option. In addition, Oriental enters into certain
transactions that contain embedded derivatives. When the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract, it is bifurcated and carried
at fair value.
When
using derivative instruments, Oriental exposes itself to credit and market
risk. If a counterparty fails to fulfill its performance obligations under a
derivative contract due to insolvency or any other event of default, Oriental’s
credit risk will equal the fair value gain in a derivative plus any cash or
securities that may have been delivered to the counterparty as part of the
transaction terms. Generally, when the fair value of a derivative contract is
positive, this indicates that the counterparty owes Oriental, thus creating a
repayment risk for Oriental. This risk is generally mitigated by requesting
cash or securities from the counterparty to cover the positive fair value. When
the fair value of a derivative contract is negative, Oriental owes the
counterparty and, therefore, assumes no credit risk other than to the extent
that the cash or value of the collateral delivered as part of the transactions
exceeds the fair value of the derivative. Oriental minimizes the credit (or
repayment) risk in derivative instruments by entering into transactions with
high-quality counterparties.
Oriental
uses forward-settlement swaps to hedge the variability of future interest cash
flows of forecasted wholesale borrowings attributable to changes in LIBOR. Once
the forecasted wholesale borrowing transactions occur, the interest rate swap
will effectively lock-in Oriental’s interest rate payments on an amount of
forecasted interest expense attributable to the one-month LIBOR corresponding
to the swap notional amount. By employing this strategy, Oriental minimizes its
exposure to volatility in LIBOR.
As
part of this hedging strategy, Oriental formally documents all relationships
between hedging instruments and hedged items, as the well as its
risk-management objective and strategy for undertaking various hedging
transactions. This process includes linking all derivatives that are designated
as cash flow hedges to (i) specific assets and liabilities on the balance
sheet or (ii) specific firm commitments or forecasted transactions.
Oriental also formally assesses (both at the hedge’s inception and on an
ongoing basis) whether the derivatives that are used in hedging transactions
have been highly effective in offsetting changes in the fair value or cash
flows of hedged items and whether those derivatives may be expected to remain
highly effective in future periods. The changes in fair value of the forward-settlement
swaps are recorded in accumulated other comprehensive income (loss) to the
extent there is no significant ineffectiveness.
Oriental
discontinues hedge accounting prospectively when (i) it determines that
the derivative is no longer effective in offsetting changes in the cash flows
of a hedged item (including hedged items such as firm commitments or forecasted
transactions); (ii) the derivative expires or is sold, terminated, or
exercised; (iii) it is no longer probable that the forecasted transaction
will occur; (iv) a hedged firm commitment no longer meets the definition
of a firm commitment; or (v) management determines that designating the
derivative as a hedging instrument is no longer appropriate or desired.
Oriental’s derivative activities are monitored by its
Asset/Liability Management Committee which is also responsible for approving
hedging strategies that are developed through its analysis of data derived from
financial simulation models and other internal and industry sources. The resulting
hedging strategies are then incorporated into Oriental’s overall interest rate
risk-management.
Off-Balance Sheet Instruments
In the ordinary course of business, Oriental enters
into off-balance sheet instruments consisting of commitments to extend credit,
further discussed in Note 27 hereto. Such financial instruments are
recorded in the financial statements when these are funded or related fees are
incurred or received. Oriental periodically evaluates the credit risks inherent
in these commitments and establishes accruals for such risks if and when these
are deemed necessary.
Mortgage
Banking Activities and Loans Held-For-Sale
The residential mortgage loans reported as
held-for-sale are stated at the lower of cost or fair value, cost being determined
on the outstanding loan balance less unearned income, and fair value determined
in the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. Realized gains or losses on these loans are
determined using the specific identification method. Loans held-for-sale
include all conforming mortgage loans originated and purchased, which from time
to time Oriental sells to other financial institutions or securitizes
conforming mortgage loans into GNMA, FNMA and FHLMC pass-through certificates.
Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities
Oriental recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. Oriental is not engaged in sales of mortgage loans and
mortgage-backed securities subject to recourse provisions except for those
provisions that allow for the repurchase of loans as a result of a breach of
certain representations and warranties other than those related to the credit
quality of the loans included in the sale transactions.
The transfer of an entire financial asset, a group of
entire financial assets, or a participating interest in an entire financial
asset in which Oriental surrenders control over the assets is accounted for as
a sale if all of the following conditions set forth in Accounting Standards
Codification ("ASC") Topic 860 are met: (i) the assets must be
isolated from creditors of the transferor, (ii) the transferee must obtain
the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (iii) the
transferor cannot maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. When Oriental
transfers financial assets and the transfer fails any one of these criteria,
Oriental is prevented from derecognizing the transferred financial assets and
the transaction is accounted for as a secured borrowing. For federal and Puerto
Rico income tax purposes, Oriental treats the transfers of loans which do not
qualify as “true sales” under the applicable accounting guidance, as sales,
recognizing a deferred tax asset or liability on the transaction. For transfers
of financial assets that satisfy the conditions to be accounted for as sales,
Oriental derecognizes all assets sold; recognizes all assets obtained and
liabilities incurred in consideration as proceeds of the sale, including
servicing assets and servicing liabilities, if applicable; initially measures
at fair value assets obtained and liabilities incurred in a sale; and
recognizes in earnings any gain or loss on the sale. The guidance on transfer
of financial assets requires a true sale analysis of the treatment of the
transfer under state law as if Oriental was a debtor under the bankruptcy code.
A true sale legal analysis includes several legally relevant factors, such as
the intent of the parties, the nature and level of recourse to the transferor,
and the nature of retained interests in the loans sold. The analytical
conclusion as to a true sale is never absolute and unconditional, but contains
qualifications based on the inherent equitable powers of a bankruptcy court, as
well as the unsettled state of the common law. Once the legal isolation test
has been met, other factors concerning the nature and extent of the
transferor’s control over the transferred assets are taken into account in
order to determine whether derecognition of assets is warranted.
When Oriental sells or
securitizes mortgage loans, it generally makes customary representations and
warranties regarding the characteristics of the loans sold. Conforming
conventional mortgage loans are combined into pools which are exchanged for
FNMA and GNMA mortgage-backed securities, which are generally sold to private
investors, or sold directly to FNMA or other private investors for cash. To the
extent the loans do not meet the specified characteristics, investors are
generally entitled to require Oriental to repurchase such loans or indemnify
the investor against losses if the assets do not meet certain guidelines. GNMA
programs allow financial institutions to buy back individual delinquent
mortgage loans that meet certain criteria from the securitized loan pool for
which Oriental provides servicing. At Oriental’s option and without GNMA prior
authorization, Oriental may repurchase such delinquent loans for an amount
equal to 100% of the loan’s remaining principal balance. This buy-back option
is considered a conditional option until the delinquency criteria is met, at
which time the option becomes unconditional. When the loans backing a GNMA
security are initially securitized, Oriental treats the transaction as a sale
for accounting purposes because the conditional nature of the buy-back option
means that Oriental does not maintain effective control over the loans, and
therefore these are derecognized from the statement of financial condition.
When individual loans later meet GNMA’s specified delinquency criteria and are
eligible for repurchase, Oriental is deemed to have regained effective control
over these loans, and these must be brought back onto Oriental’s books as
assets, regardless of whether Oriental intends to exercise the buy-back option.
Quality review procedures are performed by Oriental as required under the
government agency programs to ensure that asset guideline qualifications are
met. Oriental has not recorded any specific contingent liability in the
consolidated financial statements for these customary representation and
warranties related to loans sold by Oriental, and management believes that,
based on historical data, the probability of payments and expected losses under
these representation and warranty arrangements is not significant.
Oriental has liability for residential
mortgage loans sold subject to credit recourse, principally loans associated with FNMA residential mortgage loan sales
and securitization programs. In the event of
any customer default, pursuant to the credit recourse provided, Oriental is
required to repurchase the loan or reimburse the third party investor for the
incurred loss. The maximum potential amount of future payments that Oriental
would be required to make under the recourse arrangements in the event of
nonperformance by the borrowers is equivalent to the total outstanding balance
of the residential mortgage loans serviced with recourse and interest, if applicable.
In the event of nonperformance by the borrower, Oriental has rights to the
underlying collateral securing the mortgage loan. Oriental suffers ultimate
losses on these loans when the proceeds from a foreclosure sale of the property
underlying a defaulted mortgage loan are less than the outstanding principal
balance of the loan plus any uncollected interest advanced and the costs of
holding and disposing the related property. Oriental has established a
liability to cover the estimated credit loss exposure related to loans sold
with credit recourse.
The estimated losses to be absorbed under the credit
recourse arrangements are recorded as a liability when the loans are sold or
credit recourse is assumed as part of acquired servicing rights, and are updated
by accruing or reversing expense (categorized in the line item "mortgage
banking activities" in the consolidated statements of operations)
throughout the life of the loan, as necessary, when additional relevant
information becomes available. The methodology used to estimate the recourse
liability is a function of the recourse arrangements given and considers a
variety of factors, which include actual defaults and historical loss
experience, foreclosure rate, estimated future defaults and the probability that
a loan would be delinquent. Statistical methods are used to estimate the
recourse liability. The expected loss, which represents the amount expected to
be lost on a given loan, considers the probability of default and loss
severity. The probability of default represents the probability that a loan in
good standing would become 120 days delinquent within the following
twelve-month period.
Servicing
Assets
Oriental periodically sells or securitizes mortgage
loans while retaining the obligation to perform the servicing of such loans. In
addition, Oriental may purchase or assume the right to service mortgage loans
originated by others. Whenever Oriental undertakes an obligation to service a
loan, management assesses whether a servicing asset and/or liability should be
recognized. A servicing asset is recognized whenever the compensation for
servicing is expected to more than adequately compensate Oriental for servicing
the loans. Likewise, a servicing liability would be recognized in the event
that servicing fees to be received are not expected to adequately compensate
Oriental for its expected cost.
All separately recognized servicing assets are
recognized at fair value using the fair value measurement method. Under the
fair value measurement method, Oriental measures servicing rights at fair value
at each reporting date and reports changes in fair value of servicing asset in
the statement of operations in the period in which the changes occur, and
includes these changes, if any, with mortgage banking activities in the
consolidated statement of operations. The fair value of servicing rights is
subject to fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses.
The fair value of
servicing rights is estimated by using a cash flow valuation model which
calculates the present value of estimated future net servicing cash flows,
taking into consideration actual and expected loan prepayment rates, discount
rates, servicing costs, and other economic factors, which are determined based
on current market conditions.
Loans
and Leases
Originated and Other Loans and Leases Held in Portfolio
Loans
that Oriental originates and intends to hold in portfolio are stated at the
principal amount outstanding, adjusted for unamortized deferred fees and costs
which are amortized to interest income over the expected life of the loan using
the interest method. Oriental discontinues accrual of interest on originated
loans after payments become more than 90 days
past due or earlier if Oriental does not expect the full collection of
principal or interest. The delinquency status is based upon the contractual
terms of the loans.
Loans for which the recognition of interest income has
been discontinued are designated as non-accruing. Collections are accounted for
on the cash method thereafter, until qualifying to return to accrual status.
Such loans are not reinstated to accrual status until interest is received on a
current basis and other factors indicative of doubtful collection cease to
exist. The determination as to the ultimate collectability of the loan’s
balance may involve management’s judgment in the evaluation of the borrower’s
financial condition and prospects for repayment.
Oriental follows a systematic methodology
to establish and evaluate the adequacy of the allowance for loan and lease
losses to provide for inherent losses in the loan portfolio. This methodology
includes the consideration of factors such as economic conditions, portfolio
risk characteristics, prior loss experience, and results of loan grades
assigned to commercial loans. The provision for loan and lease losses charged
to current operations is based on such methodology. Loan and lease losses are
charged, and recoveries are credited to the allowance for loan and lease losses
on originated and other loans.
Larger commercial loans that exhibit
potential or observed credit weaknesses are subject to individual review and
grading. Where appropriate, allowances are allocated to individual loans based
on management’s estimate of the borrower’s ability to repay the loan given the
availability of collateral, other sources of cash flow, and legal options
available to Oriental.
Included in the review of individual loans
are those that are impaired. A loan is considered impaired when, based on
current information and events, it is probable that Oriental will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Impaired loans are measured based
on the present value of expected future cash flows discounted at the loan’s
effective interest rate, or as a practical expedient, at the observable market
price of the loan or the fair value of the collateral, if the loan is
collateral dependent. Loans are individually evaluated for impairment, except
large groups of small balance homogeneous loans that are collectively evaluated
for impairment and loans that are recorded at fair value or at the lower of
cost or fair value. Oriental measures for impairment all commercial loans over
$500 thousand (i) that are either over 90 days past due or adversely
classified, (ii) that are troubled-debt restructurings (each, a "TDR”), or
(iii) when deemed necessary by management. The portfolios of mortgage loans,
auto and leasing, and consumer loans are considered homogeneous and are
evaluated collectively for impairment.
Oriental uses a rating system to apply an
overall allowance percentage to each originated and other loan portfolio
segment based on historical credit losses adjusted for current conditions and
trends. The historical loss experience is determined by portfolio segment and
is based on the actual loss history experienced by Oriental over a determined
look back period for each segment. The actual loss factor is adjusted by the
appropriate loss emergence period as calculated for each portfolio. Then, the
adjusted loss experience is supplemented with other qualitative factors based
on the risks present for each portfolio segment. These qualitative factors
include consideration of the following: the loan grades assigned to commercial
loans; levels of and trends in delinquencies and impaired loans; levels of and
trends in charge-offs and recoveries; trends in volume and terms of loans;
effects of any changes in risk selection and underwriting standards; other
changes in lending policies, procedures, and practices; experience, ability,
and depth of lending management and other relevant staff, including the bank’s
loan review system as graded by regulatory agencies in their last examination;
local economic trends and conditions; industry conditions; effects of external
factors such as competition and regulatory requirements on the level of
estimated credit losses in the current portfolio; and effects of changes in
credit concentrations and collateral value. An additional impact from the historical loss experience is applied
based on levels of delinquency, loan classification, FICO score and/or
origination date, depending on the portfolio.
At origination, a determination is made whether a loan will be held in
our portfolio or is intended for sale in the secondary market. Loans that will
be held in Oriental’s portfolio are carried at amortized cost. Residential
mortgage loans held for sale are recorded at the lower of the aggregate cost or
market value (“LOCOM”).
Acquired Loans and Leases
Loans that Oriental acquires
in acquisitions are recorded at fair value with no carryover of the related
allowance for loan losses. Determining the fair value of the loans involves
estimating the amount and timing of principal and interest cash flows expected
to be collected on the loans and discounting those cash flows at a market rate
of interest.
Oriental has acquired loans in
three separate acquisitions, the Scotiabank PR & USVI Acquisition on
December 31, 2019, the BBVAPR Acquisition in December 2012 and the
FDIC-assisted Eurobank acquisition in April 2010. For each acquisition,
Oriental considered the following factors as indicators that an acquired loan
had evidence of deterioration in credit quality and was therefore in the scope
of ASC 310-30:
·
Loans that were 90 days or more
past due;
·
Loans that had an internal risk
rating of substandard or worse (substandard is consistent with regulatory
definitions and is defined as having a well-defined weakness that jeopardizes
liquidation of the loan);
·
Loans that were classified as
nonaccrual by the acquired bank at the time of acquisition; and
·
Loans that had been previously
modified in a TDR.
Any acquired loans that were
not individually in the scope of ASC 310-30 because they did not meet the
criteria above were either (i) pooled into groups of similar loans based on the
borrower type, loan purpose, and collateral type and accounted for under ASC
310-30 by analogy or (ii) accounted for under ASC 310-20 (non-refundable fees
and other costs).
Acquired Loans Accounted for under ASC 310-20 (loans with revolving
feature and/or acquired at a premium)
Revolving credit facilities such as credit cards,
retail and commercial lines of credit and floor plans which are specifically
scoped out of ASC 310-30 are accounted for under the provisions of ASC 310-20.
Also, performing auto loans with FICO scores over 660 acquired at a premium in
the Scotiabank PR & USVI Acquisition and BBVAPR Acquisition are accounted
for under this guidance. Auto loans with FICO scores below 660 were acquired
at a discount and are accounted for under the provisions of ASC 310-30. The
provisions of ASC 310-20 require that any differences between the contractually
required loan payments in excess of Oriental’s initial investment in the loans
be accreted into interest income on a level-yield basis over the life of the
loan. Loans acquired in the BBVAPR Acquisition that were accounted for under
the provisions of ASC 310-20 which had fully amortized their premium or
discount, recorded at the date of acquisition, are removed from the acquired
loan category. Loans accounted for under ASC 310-20 are placed on non-accrual
status when past due in accordance with Oriental’s non-accruing policy and any
accretion of discount is discontinued. These assets were recorded at estimated
fair value on their acquisition date, incorporating an estimate of future
expected cash flows. Such fair value includes a credit discount which accounts
for expected loan losses over the estimated life of these loans. Management
takes into consideration this credit discount when determining the necessary
allowance for acquired loans that are accounted for under the provisions of ASC
310-20.
The allowance for loan and lease losses model for
acquired loans accounted for under ASC 310-20 is the same as for the originated
and other loan portfolio.
Acquired Loans Accounted under ASC 310-30 (including
those accounted for under ASC 310-30 by analogy)
Oriental
performed a fair market valuation of each of the loan pools, and each pool was
recorded at a discount. Oriental determined that at least part of the discount
on the acquired individual or pools of loans was attributable to credit quality
by reference to the valuation model used to estimate the fair value of these pools
of loans. The valuation model incorporated lifetime expected credit losses into
the loans’ fair valuation in consideration of factors such as evidence of
credit deterioration since origination and the amounts of contractually
required principal and interest that Oriental did not expect to collect as of
the acquisition date. Based on the guidance included in the December 18, 2009
letter from the AICPA Depository Institutions Panel to the Office of the Chief
Accountant of the SEC, Oriental has made an accounting policy election to apply
ASC 310-30 by analogy to all of these acquired pools of loans as they all (i)
were acquired in a business combination or asset purchase, (ii) resulted in
recognition of a discount attributable, at least in part, to credit quality;
and (iii) were not subsequently accounted for at fair value.
The excess of expected cash
flows from acquired loans over the estimated fair value of acquired loans at
acquisition is referred to as the accretable discount and is recognized into
interest income over the remaining life of the acquired loans using the
interest method. The difference between contractually required payments at
acquisition and the cash flows expected to be collected at acquisition is
referred to as the nonaccretable discount. The nonaccretable discount
represents estimated future credit losses expected to be incurred over the life
of the acquired loans. Subsequent decreases to the expected cash flows require
Oriental to evaluate the need for an addition to the allowance for loan losses.
Subsequent improvements in expected cash flows result in the reversal of the
associated allowance for loan losses, if any and the reversal of a
corresponding amount of the nonaccretable discount which Oriental then
reclassifies as accretable discount that is recognized into interest income
over the remaining life of the loan using the interest method. Oriental’s
evaluation of the amount of future cash flows that it expects to collect takes
into account actual credit performance of the acquired loans to date and
Oriental’s best estimates for the expected lifetime credit performance of the
loans using currently available information. Charge-offs of the principal
amount on acquired loans would be first applied to the nonaccretable discount
portion of the fair value adjustment.
In accordance with ASC 310-30,
recognition of income is dependent on having a reasonable expectation about the
timing and amount of cash flows expected to be collected. Oriental performs
such an evaluation on a quarterly basis on both its acquired loans individually
accounted for under ASC 310-30 and those in pools accounted for under ASC
310-30 by analogy.
Cash flows for acquired loans
individually accounted for under ASC 310-30 are estimated on a quarterly basis.
Based on this evaluation, a determination is made as to whether or not Oriental
has a reasonable expectation about the timing and amount of cash flows. Such an
expectation includes cash flows from normal customer repayment, collateral
value, foreclosure or other collection efforts. Cash flows for acquired loans
accounted for on a pooled basis under ASC 310-30 by analogy are also estimated
on a quarterly basis. For mortgage and other consumer loans, expected cash flow
estimates are calculated based on a model that incorporates a probability of
default (PD). For commercial loans, it is based on the same methodology with
probability of default and loss assigned to each pool with consideration given
for pool make-up, considering individual loan grades for commercial loans. The
probability of default and loss are developed from internally generated
historical loss data and are applied to each pool.
To
the extent that Oriental cannot reasonably estimate cash flows, interest income
recognition is discontinued. The unit of account for loans in pools accounted
for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as
Oriental can reasonably estimate cash flows for the pool as a whole, accretable
yield on the pool is recognized and all individual loans within the pool - even
those more than 90 days past due - would be considered to be accruing interest
in Oriental’s financial statement disclosures, regardless of whether or not
Oriental expects any principal or interest cash flows on an individual loan 90
days or more past due.
Oriental writes-off the loan’s recorded investment and
derecognizes the associated allowance for loan and lease losses for loans that
exit the acquired pools.
Allowance for Loan and Lease Losses
Oriental follows a systematic
methodology to establish and evaluate the adequacy of the allowance for loan
and lease losses to provide for inherent losses in loan portfolio. This
methodology includes the consideration of factors such as economic conditions,
portfolio risk characteristics, prior loss experience, and results of periodic
credit reviews of individual loans.
Oriental’s assessment of
the allowance for loan losses is determined in accordance with the guidance of
loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC
Section 310-10-35. Also, Oriental determines the allowance for loan losses on
purchased impaired loans and purchased loans accounted for under ASC Subtopic
310-30 by analogy, by evaluating decreases in expected cash flows after the
acquisition date.
The quantitative
component uses a loss factor for the general reserve of these loans established
by considering Oriental’s historical loss experience adjusted for an estimated
loss emergence period and the consideration of qualitative factors. Qualitative
factors considered are: change in non-performing loans; migration in
classification; trends in charge offs; trends in volume of loans; changes in
collateral values; changes in risk selections and underwriting standards, and
other changes in lending policies, procedures and practices; experience,
ability and depth of lending management and other relevant staff, including
Oriental’s loan review system; national and local economic trends and industry
conditions; and effect of external factors such as competition and regulatory
requirements on the level of estimated credit losses. The sum of the adjusted
loss experience factors and the qualitative factors will be the general
valuation reserve (“GVA”) factor to be used for the determination of the
allowance for loan and lease losses in each category.
Originated and Other Loans and Leases Held for
Investment and Acquired Loans Accounted for under ASC 310-20 (Loans
with revolving feature and/or acquired at a premium)
Oriental determines the allowance for loan and lease
losses by portfolio segment, which consist of mortgage loans, commercial loans,
consumer loans, and auto and leasing, as follows:
Mortgage loans: These loans are divided into four classes: traditional
mortgages, non-traditional mortgages, loans in loan modification programs and
mortgage secured personal loans. Traditional mortgage loans include loans
secured by a dwelling, fixed coupons and regular amortization schedules.
Non-traditional mortgages include loans with interest-first amortization
schedules and loans with balloon considerations as part of their terms.
Mortgages in loan modification programs are loans that are being serviced under
such programs. Mortgage loans are mainly equity lines of credit. The allowance
factor on mortgage loans is impacted by the adjusted historical loss factors on
the sub-segments and the qualitative factors described above and by delinquency
buckets. The traditional mortgage loan portfolio is further segregated by
vintages and then by delinquency buckets. Effective on the fourth quarter of
2018, the calculation of the loss factor was changed from historical loss
experience to a probability of default (“PD”) and loss given default (“LGD”)
methodology. The PD results from a delinquency migration analysis and the LGD
is based on the Bank’s historical loss experience. The segments and
sub-segments remained unchanged as well as the qualitative factors adjustments.
These changes are considered
a change in accounting estimate as per ASC 250-10 provisions, where adjustments
should be made prospectively.
Commercial
loans: The commercial portfolio is segmented by business line (corporate,
institutional, middle market, corporate retail, floor plan, and real estate),
by collateral type (secured by real estate and other commercial and industrial
assets), and loan grades. Quantitative components use a loss factor for the GVA
of these loans established by considering Oriental's historical loss experience
of each segment adjusted for the loss realization period and the consideration
of qualitative factors. The sum of the adjusted loss experience and the qualitative
factors is the GVA factor used for the determination of the allowance for loan
and lease losses on each segment.
Consumer loans: The consumer portfolio consists of smaller retail loans
such as retail credit cards, overdrafts, unsecured personal lines of credit,
and personal unsecured loans. The allowance factor, consisting of the adjusted
historical loss factor and the qualitative factors, will be calculated for each
sub-class of loans by delinquency bucket.
Auto
and Leasing: The auto and leasing portfolio consists of financing for the
purchase of new or used motor vehicles for private or public use. The allowance
factor is impacted by the adjusted historical loss factor and the qualitative
factors. For the determination of the allowance factor, the portfolio is
segmented by FICO score, which is updated on a quarterly basis and then by
delinquency bucket.
Oriental
establishes its allowance for loan losses through a provision for credit losses
based on our evaluation of the credit quality of the loan portfolio. This
evaluation, which includes a review of loans on which full collectability may
not be reasonably assured, considers, among other matters, the estimated fair
value of the underlying collateral, economic conditions, historical net loan
loss experience, and other factors that warrant recognition in determining our
allowance for loan losses. Oriental continues to monitor and modify the level
of the allowance for loan losses to ensure it is adequate to cover losses
inherent in our loan portfolio.
Our allowance for
loan losses consists of the following elements: (i) specific valuation
allowances based on probable losses on specifically identified impaired loans;
and (ii) valuation allowances based on net historical loan loss experience for
similar loans with similar inherent risk characteristics and performance
trends, adjusted, as appropriate, for qualitative risk factors specific to
respective loan types.
When current information and events indicate that it is probable that
we will be unable to collect all amounts of principal and interest due under
the original terms of a business or commercial real estate loan greater than
$500 thousand, such loan will be classified as impaired. Additionally, all
loans modified in a TDR are considered impaired. The need for specific
valuation allowances are determined for impaired loans and recorded as
necessary. For impaired loans, we consider the fair value of the underlying
collateral, less estimated costs to sell, if the loan is collateral dependent,
or we use the present value of estimated future cash flows in determining the
estimates of impairment and any related allowance for loan losses for these
loans. Confirmed losses are charged off immediately.
Loan loss ratios and
loan grades, for commercial loans, are updated at least quarterly and are
applied in the context of GAAP. Management uses current available information
in estimating possible loan and lease losses, factors beyond Oriental’s control,
such as those affecting general economic conditions, may require future changes
to the allowance.
Acquired Loans Accounted for under ASC 310-30
(including those accounted for under ASC 310-30 by analogy)
For our acquired loans
accounted for under ASC 310-30, our allowance for loan losses is estimated
based upon our expected cash flows for these loans. To the extent that we
experience a deterioration in borrower credit quality resulting in a decrease
in the net present value of our expected cash flows (which are used as a proxy
to identify probable incurred losses) subsequent to the acquisition of the
loans, an allowance for loan losses is established based on our estimate of
future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC Subtopic 310-30
are not considered non-performing and continue to have an accretable yield as
long as there is a reasonable expectation about the timing and amount of cash
flows expected to be collected. Also, loans charged-off against the
non-accretable difference established in purchase accounting are not reported
as charge-offs. Charge-offs on loans accounted under ASC Subtopic 310-30 are
recorded only to the extent that losses exceed the non-accretable difference
established with purchase accounting.
For the principal enhancements management made to its
methodology, refer to Note 7.
Troubled
Debt Restructuring
A TDR is the restructuring of a receivable in which
Oriental, as creditor, grants a concession for legal or economic reasons due to
the debtor’s financial difficulties. A concession is granted when, as a result
of the restructuring, Oriental does not expect to collect all amounts due,
including interest accrued at the original contract rate. These concessions may
include a reduction of the interest rate, principal or accrued interest,
extension of the maturity date or other actions intended to minimize potential
losses.
To assess whether the debtor is having financial difficulties,
Oriental evaluates whether it is probable that the debtor will default on any
of its debt in the foreseeable future.
Receivables that are restructured in a TDR are
presumed to be impaired and are subject to a specific impairment-measurement
method. If the payment of principal at original maturity is primarily dependent
on the value of collateral, Oriental considers the current value of that
collateral in determining whether the principal will be paid. For
non-collateral dependent loans, the specific reserve is calculated based on the
present value of expected cash flows discounted at the loan’s effective
interest rate. An accruing loan that is modified in a TDR can remain in accrual
status if, based on a current, well-documented credit analysis, collection of
principal and interest in accordance with the modified terms is reasonably
assured, and the borrower has demonstrated sustained historical repayment
performance for a reasonable period before the modification.
Reserve
for Unfunded Commitments
The
reserve for unfunded commitments is maintained at a level believed by
management to be sufficient to absorb estimated probable losses related to
unfunded credit facilities and is included in other liabilities in the
consolidated statements of financial condition. The determination of the
adequacy of the reserve is based upon an evaluation of the unfunded credit
facilities. Net adjustments to the reserve for unfunded commitments are
included in other operating expenses in the consolidated statements of
operations.
FDIC
Indemnification Asset and True-up Payment Obligation
The FDIC
indemnification asset was accounted for and measured separately from the
covered loans acquired in the Eurobank FDIC-assisted acquisition as it was not
contractually embedded in any of the covered loans. The indemnification asset
was recorded at fair value at the acquisition date and represented the present
value of the estimated cash payments expected to be received from the FDIC for
future losses on covered assets based on the credit adjustment estimated for
each covered asset and the shared-loss percentages. This balance also included
incurred expenses under the shared-loss agreements. These cash flows were then
discounted at a market-based rate to reflect the uncertainty of the timing and
receipt of the shared-loss reimbursements from the FDIC. The time value of
money incorporated into the present value computation was accreted into
earnings over the shorter of the life of the shared-loss agreements or the
holding period of the covered assets.
The FDIC indemnification asset was reduced
as shared-loss payments were received from the FDIC. Realized credit losses in
excess of acquisition-date estimates resulted in an increase in the FDIC
indemnification asset. Conversely, if realized credit losses were less than
acquisition-date estimates, the FDIC indemnification asset was amortized
through the term of the shared-loss agreements.
The true-up
payment obligation associated with the loss share agreements was accounted for
at fair value in accordance with ASC Section 805-30-25-6 as it was considered
contingent consideration. The true-up payment obligation was included as part
of other liabilities in the consolidated statements of financial condition. Any
changes in the carrying value of the obligation were included in the category
of FDIC loss share income (expense) in the consolidated statements of
operations.
On February 6,
2017, the Bank and the FDIC agreed to terminate the single family and commercial
shared-loss agreements related to the FDIC assisted acquisition of Eurobank on
April 30, 2010. As part of the loss share termination transaction, the Bank
made a payment of $10.1 million to the FDIC and
recorded a net benefit of $1.4 million. Such termination
payment took into account the anticipated reimbursements over the life of the
shared-loss agreements and the true-up payment liability of the Bank
anticipated at the end of the ten-year term of the single family shared-loss
agreement. All rights and obligations of the parties under the shared-loss
agreements terminated as of the closing date of the agreement.
Goodwill and Intangible Assets
Oriental’s goodwill
and other identifiable intangible assets having an indefinite useful life are
tested for impairment. Intangibles with indefinite lives are evaluated for
impairment at least annually, and on a more frequent basis, if events or
circumstances indicate impairment could have taken place. Such events could
include, among others, a significant adverse change in the business climate, an
adverse action by a regulator, an unanticipated change in the competitive
environment and a decision to change the operations or dispose of a reporting
unit.
Under applicable
accounting standards, goodwill impairment analysis is a two-step test. Oriental
has the option to first assess qualitative factors to determine whether there
are events or circumstances that exist that make it more likely than not that
the fair value of the reporting unit is less than its carrying amount. If it
is more likely than not that the fair value of the reporting unit is less than
its carrying amount, or if Oriental chooses to bypass the qualitative
assessment, Oriental compares each reporting unit's fair value to its carrying
value to identify potential impairment. If the estimated fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not considered impaired. However, if the carrying amount of the reporting unit
were to exceed its estimated fair value, a second step would be performed that
would compare the implied fair value of the reporting unit's goodwill with the
carrying amount. The implied fair value of goodwill is determined in the same
manner as goodwill that is recognized in a business combination. Significant
judgment and estimates are involved in estimating the fair value of the assets
and liabilities of the reporting units. Oriental performs annual goodwill
impairment test as of October 31 and monitors for interim triggering events on
an ongoing basis. Oriental performed its annual impairment review of goodwill
during the fourth quarter of 2019 and 2018 using October 31, 2019 and 2018 as
the annual evaluation dates and concluded that there was no impairment at December 31,
2019 and 2018.
Foreclosed
Real Estate and Other Repossessed Property
Foreclosed real estate and other repossessed property
are initially recorded at the fair value of the real estate or repossessed
property less the cost of selling it at the date of foreclosure or
repossession. At the time properties are acquired in full or partial
satisfaction of loans, any excess of the loan balance over the estimated fair
value of the property is charged against the allowance for loan and lease
losses on non-covered loans. After foreclosure or repossession, these
properties are carried at the lower of cost or fair value less estimated cost
to sell based on recent appraised values or options to purchase the foreclosed
or repossessed property. Any excess of the carrying value over the estimated
fair value, less estimated costs to sell, is charged to non-interest expense.
The costs and expenses associated to holding these properties in portfolio are
expensed as incurred.
Premises and Equipment
Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful life of each type of asset. Amortization of
leasehold improvements is computed using the straight-line method over the
terms of the leases or estimated useful lives of the improvements, whichever is
shorter.
Impairment
of Long-Lived Assets
Oriental periodically reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, an estimate of the future cash flows expected to result
from the use of the asset and its eventual disposition is made. If the sum of
the future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the assets, an impairment loss is recognized. The amount
of the impairment is the excess of the carrying amount over the fair value of
the asset. As of December 31, 2019 and 2018, there was no indication of
impairment as a result of such review.
Income Taxes
In preparing the consolidated financial statements,
Oriental is required to estimate income taxes. This involves an estimate of
current income tax expense together with an assessment of deferred taxes
resulting from differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. The determination of current income tax expense involves
estimates and assumptions that require Oriental to assume certain positions
based on its interpretation of current tax laws and regulations. Changes in
assumptions affecting estimates may be required in the future, and estimated
tax assets or liabilities may need to be increased or decreased accordingly.
The accrual for tax contingencies is adjusted in light of changing facts and
circumstances, such as the progress of tax audits, case law and emerging
legislation. When particular matters arise, a number of years may elapse before
such matters are audited and finally resolved. Favorable resolution of such
matters could be recognized as a reduction to Oriental’s effective tax rate in
the year of resolution. Unfavorable settlement of any particular issue could
increase the effective tax rate and may require the use of cash in such year.
The determination of deferred tax expense or benefit
is based on changes in the carrying amounts of assets and liabilities that
generate temporary differences. The carrying value of Oriental’s net deferred
tax assets assumes that Oriental will be able to generate sufficient future
taxable income based on estimates and assumptions. If these estimates and
related assumptions change in the future, Oriental may be required to record
valuation allowances against its deferred tax assets resulting in additional
income tax expense in the consolidated statements of operations.
Management evaluates on a regular basis whether the
deferred tax assets can be realized and assesses the need for a valuation
allowance. A valuation allowance is established when management believes that
it is more likely than not that some portion of its deferred tax assets will
not be realized. Changes in valuation allowance from period to period are
included in Oriental’s tax provision in the period of change.
In addition to valuation allowances, Oriental
establishes accruals for uncertain tax positions when, despite the belief that
Oriental’s tax return positions are fully supported, Oriental believes that certain
positions are likely to be challenged. The accruals for uncertain tax positions
are adjusted in light of changing facts and circumstances, such as the progress
of tax audits, case law, and emerging legislation. The accruals for Oriental’s
uncertain tax positions are reflected as income tax payable as a component of
accrued expenses and other liabilities. These accruals are reduced upon
expiration of the applicable statute of limitations.
Oriental follows a two-step approach for recognizing
and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon ultimate settlement.
Oriental’s policy is to include interest and penalties
related to unrecognized income tax benefits within the provision for income
taxes on the consolidated statements of operations.
Oriental is potentially subject to income tax audits
in the Commonwealth of Puerto Rico for taxable years 2015 to 2018, until the
applicable statute of limitations expires. In addition, Oriental’s US
subsidiaries are potentially subject to income tax audits by the IRS for
taxable years 2016 to 2018. Tax audits by their nature are often complex and
can require several years to complete.
Revenue
Recognition
In May 2014 FASB issued
ASU No. 2014-09 - Revenue from Contracts with Customers (ASC 606) to clarify
the principles for recognizing revenue and to develop a common revenue standard
that would remove inconsistencies in revenue requirements, provide a more
robust framework for addressing the revenue issues, improve comparability in
revenue recognition and to simplify the preparation of financial statements by
reducing the number of requirements to which an entity must refer.
The standard defines
revenue (ASC-606-10-20) as inflows or other enhancements of assets of an entity
or settlements of its liabilities (or a combination of both) from delivering or
producing goods, rendering services, or other activities that constitute the
entity’s ongoing major or central operations.
Revenue is recognized when (or as) the performance
obligation is satisfied by transferring control of a promised good or service
to a customer, either at a point in time or over time. Where a performance
obligation is satisfied over time, the related revenue is also recognized over
time.
Equity-Based
Compensation Plan
Oriental’s 2007 Omnibus Performance Incentive Plan, as
amended and restated (the “Omnibus Plan”), provides for equity-based
compensation incentives through the grant of stock options, stock appreciation
rights, restricted stock, restricted units and dividend equivalents, as well as
equity-based performance awards. The Omnibus Plan was adopted in 2007, amended
and restated in 2008, and further amended in 2010 and 2013.
The purpose of the Omnibus Plan is to provide
flexibility to Oriental to attract, retain and motivate directors, officers,
and key employees through the grant of awards based on performance and to
adjust its compensation practices to the best compensation practice and
corporate governance trends as they develop from time to time. The Omnibus Plan
is further intended to motivate high levels of individual performance coupled
with increased shareholder returns. Therefore, awards under the Omnibus Plan
(each, an “Award”) are intended to be based upon the recipient’s individual
performance, corporate performance, level of responsibility and potential to
make significant contributions to Oriental. Generally, the Omnibus Plan will
terminate as of (a) the date when no more of Oriental’s shares of common
stock are available for issuance under the Omnibus Plan or, (b) if earlier, the
date the Omnibus Plan is terminated by Oriental’s Board of Directors.
The Board’s Compensation Committee (the “Committee”),
or such other committee as the Board may designate, has full authority to
interpret and administer the Omnibus Plan in order to carry out its provisions
and purposes. The Committee has the authority to determine those persons
eligible to receive an Award and to establish the terms and conditions of any
Award. The Committee may delegate, subject to such terms or conditions or
guidelines as it shall determine, to any employee or group of employees any
portion of its authority and powers under the Omnibus Plan with respect to
participants who are not directors or executive officers subject to the
reporting requirements under Section 16(a) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Only the Committee may exercise
authority in respect to Awards granted to such participants.
The expected term of stock options granted represents
the period of time that such options are expected to be outstanding. Expected
volatilities are based on historical volatility of Oriental’s shares of common
stock over the most recent period equal to the expected term of the stock
options. For stock options issued during 2015, the expected volatilities are
based on both historical and implied volatility of Oriental’s shares of common
stock.
Oriental follows the fair value method of recording
stock-based compensation. Oriental used the modified prospective transition
method, which requires measurement of the cost of employee services received in
exchange for an award of equity instruments based on the grant date fair value
of the award with the cost to be recognized over the service period. It applies
to all awards unvested and granted after the effective date and awards
modified, repurchased, or cancelled after that date.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances, except for those resulting from investments by owners
and distributions to owners. GAAP requires that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities and on derivative activities that qualify and are designated for
cash flows hedge accounting, net of taxes, are reported as a separate component
of the stockholders’ equity section of the consolidated statements of financial
condition, such items, along with net income, are components of comprehensive
income (loss).
Commitments and Contingencies
Liabilities
for loss contingencies, arising from claims, assessments, litigation, fines,
and penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably estimated.
Legal costs incurred in connection with loss contingencies are expensed as
incurred.
Lessee
Accounting
Right of use assets and lease liabilities
are recognized at the commencement of an arrangement where it is determined at
inception that a lease exists. Lease assets represent the right to use an
underlying asset for the lease term, and lease liabilities represent the
obligation to make lease payments arising from the lease. These assets and
liabilities are initially recognized based on the present value of lease
payments over the lease term calculated using our incremental borrowing
rate. Lease terms include options to extend or terminate the lease when it
is reasonably certain that those options will be exercised. The right-of-use
asset is measured at the amount of the lease liability adjusted for the
remaining balance of any lease incentives received, any cumulative prepaid or
accrued rent if the lease payments are uneven throughout the lease term, any
unamortized initial direct costs, and any impairment of the right-of-use-asset.
Operating lease expense consists of a
single lease cost calculated so that the remaining cost of the lease is
allocated over the remaining lease term on a straight-line basis, and any
impairment of the right-of-use asset. Variable lease payments are generally
expensed as incurred and include certain non-lease components, such as
maintenance and other services provided by the lessor, and other charges
included in the lease. Leases with an initial term of 12 months or less are not
recorded on the balance sheet, and the expense for these short-term leases and
for operating leases is recognized on a straight-line basis over the lease
term.
Oriental’s leases do not contain residual
value guarantees or material variable lease payments. All leases were
classified as operating leases.
Substantially all
of the leases in which Oriental is the lessee are comprised of real estate
property for branches, ATM locations, and office space with terms extending
through 2032. All of our leases are classified as operating leases, and
therefore, were previously not recognized on Oriental’s consolidated statements
of financial condition. With the adoption of Topic 842, operating lease
agreements are required to be recognized on the consolidated statements of
financial condition as a right-of-use asset and a corresponding lease
liability. Oriental leases to others certain space in its principal offices for
terms extending through 2023; all are operating leases.
Subsequent
Events
Oriental
has evaluated other events subsequent to the balance sheet date and prior to
the filing of this annual report on Form 10-K for the year ended December 31,
2019, and has adjusted and disclosed those events that have occurred that would
require adjustment or disclosure in the consolidated financial statements.
New Accounting Updates Not Yet Adopted
Measurement
of Credit Losses on Financial Instruments. In June
2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments," (CECL) which replaces
the existing incurred loss impairment methodology for loans that are
collectively evaluated for impairment with a methodology that reflects
management’s best estimate of lifetime expected credit losses and requires
consideration of reasonable and supportable economic forecasts to develop a
lifetime credit loss estimate. Topic 326 requires additional qualitative and
quantitative disclosure to allow users to better understand the credit risk
within the portfolio and the methodologies for determining the allowance for
credit losses. The CECL standard also simplifies the accounting model for
purchased credit impaired loans. Oriental will adopt Topic 326 effective January 1, 2020 using the
modified retrospective approach.
Our methodology for estimating lifetime expected credit losses for
our loan portfolios will include the following key components:
- Segmentation of loans into pools that share common risk
characteristics;
- An economic forecast period based on the relation of losses
with key economic variables for each portfolio segment;
- Reversion period to historical loss experience using
straight-line method;
- Inclusion of qualitative adjustments to consider factors that
have not been accounted for;
- Discounted cash flow (DCF) method to measure credit
impairment on most of our loan portfolios;
- Credit losses for loans that do not share similar risk
characteristics are estimated on an individual basis. Individual
evaluations are typically performed for nonaccrual loans and modified
loans classified as troubled debt restructurings. The lifetime losses for
individually measured loans are estimated based on one of several methods,
including the estimated fair value of the underlying collateral,
observable market value of similar debt or the present value of expected
cash flows.
- The estimation methodology for credit losses on unfunded
lending-related commitments is similar to the process for estimating
credit losses for loans, with the addition of a probability of draw
estimate that is applied to each commitment.
As part of our evaluation of the estimated impacts of CECL, we
have run simulations based on our portfolio composition and current
expectations of future economic conditions. The ultimate effect of CECL on our
ACL will depend the portfolio’s credit quality and economic conditions at the
time of adoption. The
Company’s CECL implementation efforts are in process and continue to focus on
model validation, refinement of the model assumptions, the qualitative factor,
and the operational control framework to support the new process. During the
first quarter of 2020, we expect all internal reviews of the adjustments to be
finalized, and all processes and controls surrounding the ongoing estimate to
be fully implemented and documented. At adoption, we expect to have a cumulative-effect adjustment to
retained earnings for this change in the ACL, which would impact our capital.
Oriental expects to continue to be well capitalized under the Basel III
regulatory framework after the adoption of this standard. Oriental will avail
itself of the option to phase-in over a period of three years the day one
effects on regulatory capital from the adoption of CECL. For PCD loans,
including BBVA and Eurobank acquired book plus the recently acquired
Scotiabank, the adjustment will be made through the allowance and loan balances
with no impact in capital.
Topic 326 also
requires expected credit losses on available-for-sale (AFS) debt securities be
recorded as an allowance for credit losses. For certain types of debt
securities, such as U.S. Treasuries and other securities with government
guarantees, entities may expect zero credit losses. Oriental estimates that the adoption
of this standard on January 1, 2020 will not have a material impact on our
portfolio of AFS debt securities.
Intangibles—Goodwill and Other—Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract (a
consensus of the FASB Emerging Issues Task Force). In August
2018, the FASB issued Accounting
Standards Update (“ASU”) 2018-15, which aligns the requirements for
capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software (and hosting arrangements
that include an internal-use software license). Accordingly, ASU 2018-15
requires an entity (customer) in a hosting arrangement that is a service
contract to follow the guidance in Subtopic 350-40 to determine which
implementation costs to capitalize as an asset related to the service contract
and which costs to expense. The ASU also requires the entity (customer) to
expense the capitalized implementation costs of a hosting arrangement that is a
service contract over the term of the hosting arrangement, which includes
reasonably certain renewals. This ASU is the final version of Proposed
Accounting Standards Update 2018–230—Intangibles—Goodwill and
Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract, which has been deleted. This ASU
will be applied prospectively for annual and interim periods in fiscal years
beginning after December 15, 2019. Early adoption is permitted. The effects of this standard on
our consolidated statement of financial position, results of operations or cash
flows are not expected to be material.
Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. In August
2018, the FASB issued ASU
2018-13, which modifies
disclosure requirements related to fair value measurement. The amendments
in this ASU are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. Implementation on a
prospective or retrospective basis varies by specific disclosure
requirement. Early adoption is permitted. The standard also allows for
early adoption of any removed or modified disclosures upon issuance of this ASU
while delaying adoption of the additional disclosures until their effective
date.
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. The effects of this standard on
our consolidated statement of financial position, results of operations or cash
flows are not expected to be material.
New Accounting Updates Adopted During the Current Year
Leases. In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), the
FASB issued ASU No. 2016-02, under the new guidance, lessees are required to
recognize the following for all leases (with the exception of short-term
leases): 1) a lease liability, which is the present value of a lessee’s
obligation to make lease payments, and 2) a right-of-use asset, which is an
asset that represents the lessee’s right to use, or control the use of, a
specified asset for the lease term. Lessor accounting under the new guidance
remains largely unchanged as it is substantially equivalent to existing
guidance for sales-type leases, direct financing leases, and operating leases.
Leveraged leases have been eliminated, although lessors can continue to account
for existing leveraged leases using the current accounting guidance. Other
limited changes were made to align lessor accounting with the lessee accounting
model and the new revenue recognition standard. All entities will classify
leases to determine how to recognize lease-related revenue and expense.
Quantitative and qualitative disclosures are required by lessees and lessors to
meet the objective of enabling users of financial statements to assess the
amount, timing, and uncertainty of cash flows arising from leases. The intention
is to require enough information to supplement the amounts recorded in the
financial statements so that users can understand more about the nature of an
entity’s leasing activities. All entities are required to use a modified
retrospective approach for leases that exist or are entered into after the
beginning of the earliest comparative period in the financial statements. As
Oriental elected the transition option provided in ASU No. 2018-11 (see below),
the modified retrospective approach was applied on January 1, 2019 (as opposed
to January 1, 2017). Oriental also elected certain relief options offered in
ASU 2016-02 including the package of practical expedients and the option not to
recognize right-of-use assets and lease liabilities that arise from short-term
leases (i.e., leases with terms of twelve months or less). Oriental also
elected the hindsight practical expedient, which allows entities to use
hindsight when determining lease term and impairment of right-of-use assets.
Oriental has several lease agreements, mainly branch locations, which are
considered operating leases, and therefore, were not previously recognized on
Oriental’s consolidated statements of financial condition. The new guidance
requires these lease agreements to be recognized on the consolidated statements
of financial condition as a right-of-use asset and a corresponding lease
liability. The new guidance did not have a material impact on the consolidated
statements of operations or the consolidated statements of cash flows. See Note
28 Leases for more information.
Leases - Targeted Improvements. In July 2018, the FASB issued
ASU No. 2018-11 to provide entities with relief from the costs of
implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically,
under the amendments in ASU 2018-11: (1) entities may elect not to recast the
comparative periods presented when transitioning to the new leasing standard,
and (2) lessors may elect not to separate lease and non-lease components when
certain conditions are met. The amendments have the same effective date as ASU
2016-02 (January 1, 2019 for Oriental). Oriental adopted ASU 2018-11 on its
required effective date of January 1, 2019 and elected both transition options
mentioned above. ASU 2018-11 did not have a material impact on Oriental’s
consolidated financial statements.
Narrow-Scope Improvements for Lessors. In December 2018, the FASB
issued ASU No. 2018-20 which allows lessors to make an accounting policy
election of presenting sales taxes and other similar taxes collected from
lessees on a net basis, (2) requires a lessor to exclude lessor costs paid
directly by a lessee to third parties on the lessor’s behalf and include lessor
costs that are paid by the lessor and reimbursed by the lessee in the
measurement of variable lease revenue and the associated expense, and (3)
clarifies that when lessors allocate variable payments to lease and non-lease
components they are required to follow the recognition guidance in the new
leases standard for the lease component and other applicable guidance, such as
the new revenue standard, for the non-lease component. Oriental adopted ASU
2018-20 on its required effective date of January 1, 2019 and elected to
present sales taxes and other similar taxes collected from lessees on a net
basis as described in (1) above. ASU 2018-20 did not have a material impact on
Oriental’s consolidated financial statements.
Leases: Codification Improvements. In March 2019, the FASB issued
ASU No. 2019-01 which states that for lessors that are not manufacturers or
dealers, the fair value of the underlying asset is its cost, less any volume or
trade discounts, as long as there isn’t a significant amount of time between
acquisition of the asset and lease commencement; (2) clarifies that lessors in
the scope of ASC 942 (such as Oriental) must classify principal payments
received from sales-type and direct financing leases in investing activities in
the statement of cash flows; and (3) clarifies the transition guidance related
to certain interim disclosures provided in the year of adoption. To coincide
with the adoption of ASU No. 2016-02, Oriental elected to early adopt ASU
2019-01 on January 1, 2019. The adoption of this ASU did not have a material
impact on Oriental’s consolidated financial statements.
Targeted
Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued ASU
No. 2017-12 with the objectives to (1) improve the transparency and
understandability of information conveyed to financial statement users about an
entity’s risk management activities by better aligning the entity’s financial
reporting for hedging relationships with those risk management activities; and
(2) reduce the complexity of and simplify the application of hedge accounting
by preparers. This guideline allows the entity to elect whether to perform
quantitative or qualitative assessments for their hedge accounting
transactions. In addition, the guideline provides that “an entity may
reclassify a debt security from held-to-maturity (HTM) to available-for-sale
(AFS) if the debt security is eligible to be hedged under the last-of-layer
method in accordance with paragraph 815-20-25-12A. Any unrealized gain or loss
at the date of the transfer shall be recorded in accumulated other comprehensive
income in accordance with paragraph 320-10-35-10(c).” Transition elections must
be adopted within the timeframe outlined in paragraphs 815-20-65-3(f) to
65-3(g). This includes the transition election available for the transfer of
eligible securities from the HTM to the AFS category. ASU No. 2017-12 is
effective for interim and annual reporting periods beginning after December 15,
2018. Oriental elected to maintain its current quantitative assessment for the
existing hedge accounting transaction. In addition, Oriental elected to
reclassify all of the securities in its held-to-maturity portfolio amounting to
$424.7 million to its available-for-sale portfolio, as they were debt
securities that qualified as eligible to be hedged under the last-of-layer
method. The new guidance did not have a material impact on the consolidated
statements of operations or the consolidated statement of cash flows.
NOTE 2 – BUSINESS
COMBINATIONS AND INTANGIBLE ASSETS
On
December 31, 2019, Oriental purchased from the Bank of Nova Scotia (“BNS”) all
outstanding common stock of Scotiabank de Puerto Rico for an aggregate purchase
price of $550.0 million, subject to
settlement amounts as described herein. Immediately following the closing,
Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with
Oriental Bank continuing as the surviving entity. As part of this transaction,
Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS
through an acquisition of certain assets (including loans, ATMs and physical
branch locations) and an assumption of certain liabilities (including deposits)
for their net book value plus a $10.0 million premium on
deposits which were settled as part of the final consideration from the
acquisition. In addition, Oriental acquired certain loans and assumed certain
liabilities, from BNS’s Puerto Rico branch for their net book value which were
settled as part of the final consideration from the acquisition. As a result of
the acquisition, Oriental added $2.2 billion net loans and $3.0 billion dollars in core
low-cost deposits and resulted in a bargain purchase gain of $315 thousand, included as
“Bargain purchase from Scotiabank PR & USVI acquisition” in the
Consolidated Statement of Operations. The reason for the bargain purchase gain
is primarily due to the pricing strategy on the deal and the value of acquired tax benefits which are considered
realizable based on the combined results.
The audited consolidated financial statements contemplate the effect of the
Scotiabank PR & USVI Acquisition. Oriental entered into the Scotiabank PR
& USVI Acquisition as part of its growth strategy to increase its market
share and improve its core deposit base and competitive positioning.
Cash consideration (in thousands):
|
|
|
SBPR purchase price
|
$
|
550,000
|
Premium on USVI deposits
|
|
10,000
|
BNS USVI net liabilities assumed
|
|
(182,244)
|
BNS PR net assets acquired
|
|
52,681
|
Total cash consideration
|
|
430,437
|
Cash consideration paid on December 31,
2019
|
|
425,242
|
Cash consideration payable
|
$
|
5,195
|
The following amounts represent the
preliminary determination of the fair value of identifiable assets acquired and
liabilities assumed from the Scotiabank PR & USVI Acquisition. The final
determination of the fair value of certain assets and liabilities will be
completed up to a one-year measurement period from the date of acquisition as
required by the FASB ASC Topic 805, “Business Combinations”. As of December
31, 2019, we continued to analyze the assumptions and related valuation results
associated with the acquired loans. Due to the complexity in valuing the loans
and the significant amount of data inputs required, the valuation of the loans,
including unfunded lending-related commitments, is not yet final. The table
below reflects provisional adjustments recorded as of December 31, 2019. Any
additional potential adjustment could be material in relation to the
preliminary values presented below:
|
December 31,
2019
|
|
|
|
|
Fair Value
|
|
|
|
|
Book Value
|
|
Adjustments,
net
|
|
Fair Value
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
492,512
|
|
$
|
-
|
|
$
|
492,512
|
Investments
|
|
576,319
|
|
|
(102)
|
|
|
576,217
|
Loans
|
|
2,237,337
|
|
|
(21,134)
|
|
|
2,216,203
|
Accrued interest receivable
|
|
7,722
|
|
|
(2,952)
|
|
|
4,770
|
Foreclosed real estate
|
|
8,636
|
|
|
(352)
|
|
|
8,284
|
Deferred tax asset, net
|
|
37,606
|
|
|
22,335
|
|
|
59,941
|
Premises and equipment
|
|
10,866
|
|
|
(1,068)
|
|
|
9,798
|
Servicing asset
|
|
40,258
|
|
|
206
|
|
|
40,464
|
Core deposit intangible
|
|
-
|
|
|
41,507
|
|
|
41,507
|
Customer relationship intangible
|
|
-
|
|
|
12,693
|
|
|
12,693
|
Other intangible
|
|
-
|
|
|
567
|
|
|
567
|
Operating lease right-of-use assets
|
|
15,452
|
|
|
4,011
|
|
|
19,463
|
Other assets
|
|
86,016
|
|
|
(6,507)
|
|
|
79,509
|
Total identifiable assets
acquired
|
|
3,512,724
|
|
|
49,204
|
|
|
3,561,928
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
3,028,066
|
|
|
(2,607)
|
|
|
3,025,459
|
Operating lease liability
|
|
16,317
|
|
|
2,091
|
|
|
18,408
|
Accrued expenses and other
liabilities
|
|
87,309
|
|
|
-
|
|
|
87,309
|
Total liabilities assumed
|
|
3,131,692
|
|
|
(516)
|
|
|
3,131,176
|
Total identifiable net assets
|
|
|
|
|
|
|
$
|
430,752
|
Bargain purchase gain
|
|
|
|
|
|
|
|
315
|
Total consideration
|
|
|
|
|
|
|
$
|
430,437
|
Fair
Value of Identifiable Assets Acquired and Liabilities Assumed
In
order to allocate the consideration transferred for Scotiabank PR & USVI,
the fair value of all identifiable assets and liabilities were established. For
accounting and financial reporting purposes, fair value is defined under FASB
ASC Topic 820, “Fair Value Measurements and Disclosures” as the practice
that would be received upon the sale of an asset or the amount paid to transfer
a liability in an orderly transaction between market participants at the
measurement date. Market participants are assumed to be buyers and sellers in
the principal (most advantageous) market for the asset or liability.
Additionally, fair value measurements for an asset assume the highest and best
use of that asset by market participants. Use of the different estimates and
judgments could yield different results. In determining the fair value of
identifiable assets and liabilities assumed, a review was conducted for any
significant contingent asset or liabilities existing as of the acquisition
date. The preliminary assessment did not identify any significant contingencies
related to existing legal or government action.
The
methods used to determine the fair values of the significant identifiable
assets acquired and liabilities assumed are described below.
Cash and cash equivalents - Cash and cash equivalents include cash and due from
banks, and interest-earning deposits with banks and the Federal Reserve System.
The fair value of financial instruments that are short-term or re-price
frequently and that have little or no risk were considered to have a fair value
that approximates to carrying value.
Investment securities
– The fair value of securities were
based on quoted market prices.
Federal Home Loan Bank stock - The fair value of acquired FHLB stock was estimated
to be its redemption value.
Loans – The
fair values of loans acquired in the Scotiabank PR & USVI Acquisition was
based on a discounted cash flow methodology that used projections of interest
and principal payments based on certain valuation assumptions such as default
rates, loss severity, discount rates and prepayment rates. Other factors
expected by market participants were considered in determining the fair value
of acquired loans, including loan pool level estimated cash flows, type of loan
and related collateral, risk classification status (i.e., performing or
nonperforming), term of loan, whether or not the loan was amortizing, and
current discount rates.
The methods used to estimate fair value are extremely
sensitive to the assumptions and estimates used. While management attempted to
use assumptions and estimates that best reflected the acquired loan portfolios
and current market conditions, a greater degree of subjectivity is inherent in
these values than in those determined in active markets. Accordingly, there can
be no assurance that this information is useful for purposes of evaluating the
financial condition and/or value of Oriental in and of itself or in comparison
with any other company.
Foreclosed real estate - Foreclosed real estate and other repossessed
properties (vehicles) are presented at their estimated fair value. The fair
values were determined using their expected selling price, less selling and
carrying costs, discounted to present value.
Deferred taxes - Deferred income taxes relate to the differences
between the book and tax bases of assets acquired and liabilities assumed in
this transaction pursuant to ASC 740, Income Taxes. The deferred tax asset, net
assumes non-taxable transaction through a stock acquisition. Therefore, the tax
basis of assets acquired and liabilities assumed will carry over to Oriental
without consideration of fair value adjustments. Oriental used the enacted tax
rate of 37.5%, and the 20% preferential tax rate
where applicable, in measuring deferred taxes resulting from the Scotiabank PR
& USVI Acquisition.
Premises and equipment – The fair value of
premises, including land, buildings and improvements, was determined based upon
appraisals by licensed appraisers. These appraisals were based upon the best
and highest use of the property with final values determined based upon an
analysis of the cost, sales comparison, and income capitalization approaches
for each property appraised. This fair value of owned real estate resulted in
an estimated premium of $2.1 million, to be amortized
over the weighted average remaining useful life of the properties, estimated to
be nine years.
Servicing asset
- The fair value of servicing asset was 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.
Core
deposit intangible (“CDI”) - CDI is a
measure of the value of non-interest checking, savings, and NOW and money
market deposits that are acquired in business combinations. The fair value of
the CDI stemming from the business combination is based on projecting net cash
flow benefits, including assumptions related to customer attrition rates,
discount rate, and alternative costs of funds, to be amortized using an
accelerated method over a useful life of ten years.
Customer
relationship intangible (“CRI”) - CRI
is a measure of the value of insurance client relationships that were acquired
in the business combination. The fair value was computed using a multiperiod
cash flow model, a form of the income approach and discounted using an
appropriate risk-adjusted discount rate. This measure of fair value requires
considerable judgments about future events, including customer retention and
attrition estimates, to be amortized using an accelerated method over a useful
life of ten years.
Other
intangibles – Other intangibles
represents the non-competition
and non-solicitation covenants by BNS for a period of three and two years, respectively. The fair value was computed using a “with-and-without
method” cash flow model, a form of the income approach and discounted using an
appropriate risk-adjusted discount rate. This measure of fair value requires
considerable judgments about future events, including customer retention and
attrition estimates, to be amortized using an accelerated method over a useful
life of three years.
Operating lease right-of-use asset – The fair value of the operating lease
right-of-use asset was determined by comparing with market terms of leases of
the same or similar terms at the acquisition date, if terms were favorable Oriental
recognized an
intangible asset, if terms were
unfavorable Oriental recognized an intangible liability. This fair value of operating
lease right-of-use assets resulted in an estimated premium of $1.1 million, to be amortized
over the lease term.
Deposit liabilities - The fair values used for demand and savings deposits are, by
definition, equal to the amount payable on demand at the reporting date. The
fair values for time deposits were estimated using a discounted cash flow
method that applies interest rates currently being offered on time deposits to
a schedule of aggregated contractual maturities of such time deposits, to be
amortized using a straight-line method over a useful life of one year.
Other assets and other liabilities - Given the short-term nature of these financial
instruments, the carrying amounts reflected in the statement of assets acquired
and liabilities assumed approximated fair value.
Financial Information — Scotiabank PR & USVI Acquisition
Oriental’s consolidated results of operations for 2019
do not include any operations from Scotiabank PR & USVI acquisition since
the acquisition date was December 31, 2019. Expenses relating to the Scotiabank
PR & USVI Acquisition amounted to $24.1 million and were included
in the December 31, 2019 consolidated statement of operations.
The following summarizes the unaudited pro forma
results of operations as if Oriental had acquired Scotiabank de Puerto Rico
(“SBPR”) on January 1, 2018. Oriental believes that given the nature of assets and liabilities assumed and
the significant amount of fair value adjustments, historical results of BNS
USVI and BNS Puerto Rico branches are not meaningful to Oriental’s results, and
thus not included in the pro-forma information presented. The pro-forma results
were calculated by combining the results of Oriental with the stand-alone
results of SBPR for the pre-acquisition periods, which were adjusted to account
for certain costs that would have been incurred during this pre-acquisition
period:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Net interest income
|
$
|
478,293
|
|
$
|
488,791
|
Net income
|
|
147,848
|
|
|
161,555
|
Earnings per share:
|
|
|
|
|
|
Basic
|
|
3.01
|
|
|
3.55
|
Diluted
|
|
2.99
|
|
|
3.25
|
Merger and Restructuring Charges
Merger and restructuring charges are recorded in the
consolidated statement of operations and include incremental costs to integrate
the operations of Oriental and its most recent acquisition, including the costs
of transition services provided by the Bank of Nova Scotia. These charges
represent costs associated with these one-time activities and do not represent
ongoing costs of the fully integrated combined organization. These costs were
recorded in merger and restructuring charges within the consolidated statement
of operations. Payments under merger and restructuring associated with the
Scotiabank PR & USVI Acquisition are expected to continue into 2020 and
will be under applicable accounting guidance to the cost being incurred.
NOTE 3 – RESTRICTED CASH
The
following table includes the composition of Oriental’s restricted cash:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Cash pledged as collateral to other financial
institutions to secure:
|
|
|
|
|
|
Derivatives
|
$
|
-
|
|
$
|
1,980
|
Regulatory requirements
|
|
400
|
|
|
-
|
Obligations under agreement of loans
sold with recourse
|
|
1,050
|
|
|
1,050
|
|
$
|
1,450
|
|
$
|
3,030
|
At December 31, 2019 and 2018, the Bank’s international banking entities,
OIB and Oriental Overseas, a division of the Bank, held short-term highly
liquid securities in the amount of $305 thousand and $325 thousand, respectively, as
the legal reserve required for international banking entities under Puerto Rico
law. In addition, as part of the
Scotiabank PR & USVI acquisition on December 31, 2019, a certificate of
deposit of $300 thousand was held for the
international banking entity that was retained as part of the integration. These
instruments cannot be
withdrawn or transferred by OIB or Oriental Overseas without the prior written
approval of the Office of the Commissioner of Financial Institutions of Puerto
Rico (the "OCFI").
As
part of regulatory requirements for the administration of Individual Retirement
Accounts (IRAs), Scotiabank maintained $100 thousand on a certificate
of deposit that was registered as part of the integration on December 31, 2019.
As part of its derivative
activities, Oriental enters into collateral agreements with certain financial
counterparties. At December 31, 2019 collateral agreements have expired. At
December 31, 2018, 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 December 31, 2019 and 2018, Oriental delivered as
collateral cash amounting to approximately $1.1 million, for both periods.
The Bank is required by Puerto
Rico law to maintain average weekly reserve balances to cover demand deposits.
The amount of those minimum average reserve balances for the week that covered December
31, 2019 was $289.3 million (December 31, 2018
- $211.6 million). At December 31,
2019 and 2018, the Bank complied with this requirement. Cash and due from bank
as well as other short-term, highly liquid securities, are used to cover the
required average reserve balances.
NOTE 4 –
INVESTMENT SECURITIES
Money
Market Investments
Oriental considers as cash
equivalents all money market instruments that are not pledged and that have
maturities of three months or less at the date of acquisition. At December 31,
2019 and 2018, money market instruments included as part of cash and cash
equivalents amounted to $6.8 million and $4.9 million, respectively.
Investment
Securities
The
amortized cost, gross unrealized gains and losses, fair value, and weighted
average yield of the securities owned by Oriental at December 31, 2019 and 2018
were as follows:
|
December 31,
2019
|
|
|
|
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
|
$
|
403,227
|
|
$
|
846
|
|
$
|
1,417
|
|
$
|
402,656
|
|
2.00%
|
GNMA certificates
|
|
215,755
|
|
|
718
|
|
|
4
|
|
|
216,469
|
|
2.33%
|
CMOs issued by US
government-sponsored agencies
|
|
55,235
|
|
|
16
|
|
|
490
|
|
|
54,761
|
|
1.97%
|
Total mortgage-backed
securities
|
|
674,217
|
|
|
1,580
|
|
|
1,911
|
|
|
673,886
|
|
2.11%
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities
|
|
397,183
|
|
|
-
|
|
|
-
|
|
|
397,183
|
|
1.60%
|
Obligations of US
government-sponsored agencies
|
|
1,967
|
|
|
-
|
|
|
6
|
|
|
1,961
|
|
1.38%
|
Other debt securities
|
|
1,108
|
|
|
31
|
|
|
-
|
|
|
1,139
|
|
3.00%
|
Total investment securities
|
|
400,258
|
|
|
31
|
|
|
6
|
|
|
400,283
|
|
1.60%
|
Total securities
available for sale
|
$
|
1,074,475
|
|
$
|
1,611
|
|
$
|
1,917
|
|
$
|
1,074,169
|
|
1.92%
|
|
December 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
|
$
|
561,878
|
|
$
|
404
|
|
$
|
8,951
|
|
$
|
553,331
|
|
2.59%
|
GNMA certificates
|
|
211,947
|
|
|
1,050
|
|
|
2,827
|
|
|
210,170
|
|
3.10%
|
CMOs issued by US
government-sponsored agencies
|
|
66,230
|
|
|
-
|
|
|
2,166
|
|
|
64,064
|
|
1.90%
|
Total mortgage-backed
securities
|
|
840,055
|
|
|
1,454
|
|
|
13,944
|
|
|
827,565
|
|
2.66%
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities
|
|
10,924
|
|
|
-
|
|
|
119
|
|
|
10,805
|
|
1.36%
|
Obligations of US
government-sponsored agencies
|
|
2,325
|
|
|
-
|
|
|
60
|
|
|
2,265
|
|
1.38%
|
Other debt securities
|
|
1,207
|
|
|
15
|
|
|
-
|
|
|
1,222
|
|
2.99%
|
Total investment securities
|
|
14,456
|
|
|
15
|
|
|
179
|
|
|
14,292
|
|
1.50%
|
Total securities
available-for-sale
|
$
|
854,511
|
|
$
|
1,469
|
|
$
|
14,123
|
|
$
|
841,857
|
|
2.64%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
424,740
|
|
$
|
-
|
|
$
|
14,387
|
|
$
|
410,353
|
|
2.07%
|
On January 1, 2019, Oriental adopted the ASU No.
2017-12 and reclassified all of its mortgage backed securities with a carrying
value of $424.7 million and unrealized losses of $14.4 million from the
held-to-maturity portfolio into the available-for-sale portfolio.
The amortized cost and fair
value of Oriental’s investment securities at December 31, 2019, 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.
|
December 31, 2019
|
|
Available-for-sale
|
|
Amortized Cost
|
|
Fair Value
|
|
(In thousands)
|
Mortgage-backed
securities
|
|
|
|
|
|
Due from 1 to 5 years
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
1,611
|
|
$
|
1,640
|
GNMA certificates
|
|
785
|
|
|
785
|
Total due from 1 to 5 years
|
|
2,396
|
|
|
2,425
|
Due after 5 to 10 years
|
|
|
|
|
|
CMOs issued by US government-sponsored agencies
|
$
|
45,481
|
|
$
|
45,003
|
FNMA and FHLMC certificates
|
|
111,923
|
|
|
111,916
|
GNMA certificates
|
|
80,675
|
|
|
80,676
|
Total due after 5 to 10 years
|
|
238,079
|
|
|
237,595
|
Due after 10 years
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
289,693
|
|
$
|
289,100
|
GNMA certificates
|
|
134,295
|
|
|
135,008
|
CMOs issued by US government-sponsored agencies
|
|
9,754
|
|
|
9,758
|
Total due after 10 years
|
|
433,742
|
|
|
433,866
|
Total mortgage-backed securities
|
|
674,217
|
|
|
673,886
|
Investment
securities
|
|
|
|
|
|
Due less than one year
|
|
|
|
|
|
US Treasury securities
|
$
|
377,153
|
|
$
|
377,153
|
Other debt securities
|
|
250
|
|
|
250
|
Total due in less than one year
|
|
377,403
|
|
|
377,403
|
Due from 1 to 5 years
|
|
|
|
|
|
Obligations of US government-sponsored agencies
|
$
|
1,967
|
|
$
|
1,961
|
US Treasury securities
|
|
20,030
|
|
|
20,030
|
Total due from 1 to 5 years
|
|
21,997
|
|
|
21,991
|
Due from 5 to 10 years
|
|
|
|
|
|
Other debt securities
|
|
858
|
|
|
889
|
Total due after 5 to 10 years
|
|
858
|
|
|
889
|
Total investment securities
|
|
400,258
|
|
|
400,283
|
Total
|
$
|
1,074,475
|
|
$
|
1,074,169
|
During the year ended December 31, 2019 Oriental sold
$680.4 million available-for-sale mortgage-backed securities, at attractive
yields and terms and recognized a gain in the sale of $8.3 million, preparing for the
Scotiabank PR & USVI Acquisition. During the year ended 2018, Oriental also
sold $17.8 million available-for-sale
Government National Mortgage Association (“GNMA”) certificates from its
recurring mortgage loan origination and securitization activities. These sales
did not realize any gains or losses during such period. During the year ended
2017 Oriental sold $166.0 million available-for-sale
mortgage-backed securities and $84.1 million of US Treasury
securities and recorded a net gain on sale of securities of $6.9 million.
During the year ended December 31, 2019,
Oriental retained securitized GNMA pools totaling $62.8 million amortized cost, at
a yield of 3.23% from its own
originations, while during the year ended 2018 that amount totaled $56.8 million amortized cost, at
a yield of 3.93%. During the year ended
2017, that amount totaled $74.9 million amortized cost, at
a yield of 3.14% from its own originations.
During the year ended December 31, 2019,
Oriental completed the Scotiabank PR & USVI Acquisition recognizing
available-for-sale securities amounting to $574.6 million with an average
yield of 1.79% and an average duration
of 1.55 years. This portfolio is
comprised of US Treasury Notes, agency mortgage-backed-securities and agency
CMO’s.
|
Year Ended December 31, 2019
|
|
|
|
Book Value
|
|
|
|
|
Description
|
Sale Price
|
|
at Sale
|
|
Gross Gains
|
|
Gross Losses
|
|
(In thousands)
|
Sale
of securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
451,081
|
|
$
|
447,305
|
|
$
|
3,776
|
|
$
|
-
|
GNMA certificates
|
|
229,385
|
|
|
224,887
|
|
|
4,498
|
|
|
-
|
Total
|
$
|
680,466
|
|
$
|
672,192
|
|
$
|
8,274
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Book Value
|
|
|
|
|
Description
|
Sale Price
|
|
at Sale
|
|
Gross Gains
|
|
Gross Losses
|
|
(In thousands)
|
Sale
of securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
GNMA certificates
|
$
|
17,837
|
|
$
|
17,837
|
|
$
|
-
|
|
$
|
-
|
Total
|
$
|
17,837
|
|
$
|
17,837
|
|
$
|
-
|
|
$
|
-
|
|
Year Ended
December 31, 2017
|
|
|
|
Book Value
|
|
|
|
|
Description
|
Sale Price
|
|
at Sale
|
|
Gross Gains
|
|
Gross Losses
|
|
(In
thousands)
|
Sale of securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
107,510
|
|
$
|
102,311
|
|
$
|
5,199
|
|
$
|
-
|
GNMA certificates
|
|
65,284
|
|
|
63,704
|
|
|
1,580
|
|
|
-
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities
|
|
84,202
|
|
|
84,085
|
|
|
117
|
|
|
-
|
Total mortgage-backed
securities
|
$
|
256,996
|
|
$
|
250,100
|
|
$
|
6,896
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show Oriental’s gross unrealized
losses and fair value of investment securities available-for-sale and
held-to-maturity at December 31, 2019 and 2018, aggregated by investment
category and the length of time that individual securities have been in a
continuous unrealized loss position:
|
December 31,
2019
|
|
12 months or
more
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Loss
|
|
Value
|
|
(In
thousands)
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
CMOs issued by US
Government-sponsored agencies
|
$
|
35,417
|
|
$
|
387
|
|
$
|
35,030
|
FNMA and FHLMC certificates
|
|
259,099
|
|
|
1,415
|
|
|
257,684
|
Obligations of US Government and
sponsored agencies
|
|
1,967
|
|
|
6
|
|
|
1,961
|
GNMA certificates
|
|
19
|
|
|
-
|
|
|
19
|
|
$
|
296,502
|
|
$
|
1,808
|
|
$
|
294,694
|
|
|
|
|
|
|
|
|
|
|
Less than 12
months
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Loss
|
|
Value
|
|
(In
thousands)
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
CMOs issued by US
Government-sponsored agencies
|
|
11,503
|
|
|
103
|
|
|
11,400
|
FNMA and FHLMC certificates
|
|
4,919
|
|
|
2
|
|
|
4,917
|
GNMA certificates
|
|
3,549
|
|
|
4
|
|
|
3,545
|
US Treasury Securities
|
|
627
|
|
|
-
|
|
|
627
|
|
$
|
20,598
|
|
$
|
109
|
|
$
|
20,489
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Loss
|
|
Value
|
|
(In
thousands)
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
CMOs issued by US
government-sponsored agencies
|
$
|
46,920
|
|
$
|
490
|
|
$
|
46,430
|
FNMA and FHLMC certificates
|
|
264,018
|
|
|
1,417
|
|
|
262,601
|
Obligations of US government and
sponsored agencies
|
|
1,967
|
|
|
6
|
|
|
1,961
|
GNMA certificates
|
|
3,568
|
|
|
4
|
|
|
3,564
|
US Treasury Securities
|
|
627
|
|
|
-
|
|
|
627
|
|
$
|
317,100
|
|
$
|
1,917
|
|
$
|
315,183
|
|
December 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
|
$
|
66,230
|
|
$
|
2,166
|
|
$
|
64,064
|
FNMA and FHLMC certificates
|
|
357,955
|
|
|
8,603
|
|
|
349,352
|
Obligations of US Government and sponsored agencies
|
|
2,325
|
|
|
60
|
|
|
2,265
|
GNMA certificates
|
|
131,044
|
|
|
2,739
|
|
|
128,305
|
US Treasury Securities
|
|
9,977
|
|
|
119
|
|
|
9,858
|
|
$
|
567,531
|
|
$
|
13,687
|
|
$
|
553,844
|
Securities
held-to-maturity
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
424,740
|
|
$
|
14,387
|
|
$
|
410,353
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Loss
|
|
Value
|
|
(In thousands)
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
|
109,772
|
|
|
348
|
|
|
109,424
|
GNMA certificates
|
|
17,126
|
|
|
88
|
|
|
17,038
|
US Treasury Securities
|
|
323
|
|
|
-
|
|
|
323
|
|
$
|
127,221
|
|
$
|
436
|
|
$
|
126,785
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Loss
|
|
Value
|
|
(In thousands)
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
CMOs issued by US Government-sponsored agencies
|
|
66,230
|
|
|
2,166
|
|
|
64,064
|
FNMA and FHLMC certificates
|
|
467,727
|
|
|
8,951
|
|
|
458,776
|
Obligations of US government and sponsored agencies
|
|
2,325
|
|
|
60
|
|
|
2,265
|
GNMA certificates
|
|
148,170
|
|
|
2,827
|
|
|
145,343
|
US Treasury Securities
|
|
10,300
|
|
|
119
|
|
|
10,181
|
|
$
|
694,752
|
|
$
|
14,123
|
|
$
|
680,629
|
Securities
held-to-maturity
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates
|
$
|
424,740
|
|
$
|
14,387
|
|
$
|
410,353
|
Oriental performs valuations of its 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. 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.
All of the investments ($317.1 million, amortized cost)
with an unrealized loss position at December 31, 2019 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.
NOTE 5 - PLEDGED
ASSETS
The following table shows a
summary of pledged and not pledged assets at December 31, 2019 and 2018.
Investment securities available for sale are presented at fair value, and
investment securities held-to-maturity, residential mortgage loans, commercial
loans and leases are presented at amortized cost:
|
December 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Pledged
investment securities to secure:
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
$
|
204,068
|
|
$
|
487,181
|
Derivatives
|
|
1,775
|
|
|
423
|
Bond for the Bank's trust operations
|
|
323
|
|
|
322
|
Puerto Rico public fund deposits
|
|
191,908
|
|
|
141,162
|
Total pledged investment securities
|
|
398,074
|
|
|
629,088
|
Pledged
residential mortgage loans to secure:
|
|
|
|
|
|
Advances from the Federal Home Loan Bank
|
|
803,317
|
|
|
880,591
|
Pledged
commercial loans to secure:
|
|
|
|
|
|
Advances from the Federal Home Loan Bank
|
|
518,473
|
|
|
275,451
|
Federal Reserve Bank Credit Facility
|
|
45,175
|
|
|
651
|
Puerto Rico public fund deposits
|
|
129,152
|
|
|
140,123
|
|
|
692,800
|
|
|
416,225
|
Pledged
auto loans and leases to secure:
|
|
1,182,272
|
|
|
-
|
Total pledged assets
|
$
|
3,076,463
|
|
$
|
1,925,904
|
Financial
assets not pledged:
|
|
|
|
|
|
Investment securities
|
$
|
676,095
|
|
$
|
637,509
|
Residential mortgage loans
|
|
1,706,981
|
|
|
354,868
|
Commercial loans
|
|
1,529,642
|
|
|
1,414,054
|
Consumer loans
|
|
504,437
|
|
|
373,814
|
Auto loans and leases
|
|
329,972
|
|
|
1,148,535
|
Total assets not pledged
|
$
|
4,747,127
|
|
$
|
3,928,780
|
NOTE 6 - LOANS
Oriental’s
loan portfolio is composed of two segments, loans initially accounted for under
the amortized cost method (referred to as "originated and other"
loans) and loans acquired (referred to as "acquired" loans). Acquired
loans are further segregated among acquired Scotiabank PR & USVI loans,
acquired BBVAPR loans and acquired Eurobank loans.
The
composition of Oriental’s loan portfolio at December 31, 2019 and 2018 was as
follows:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Originated and other loans and leases
held for investment:
|
|
|
|
|
|
Mortgage
|
$
|
577,416
|
|
$
|
668,809
|
Commercial
|
|
1,667,494
|
|
|
1,597,588
|
Consumer
|
|
361,638
|
|
|
348,980
|
Auto and leasing
|
|
1,277,732
|
|
|
1,129,695
|
|
|
3,884,280
|
|
|
3,745,072
|
Allowance for loan and lease
losses on originated and other loans and leases
|
|
(83,471)
|
|
|
(95,188)
|
|
|
3,800,809
|
|
|
3,649,884
|
Deferred loan costs, net
|
|
8,965
|
|
|
7,740
|
Total originated and other loans
held for investment, net
|
|
3,809,774
|
|
|
3,657,624
|
Acquired loans:
|
|
|
|
|
|
Acquired Scotiabank PR & USVI
loans:
|
|
|
|
|
|
Accounted for under ASC 310-20
(Loans with revolving feature and/or
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
Mortgage
|
|
322,179
|
|
|
-
|
Commercial
|
|
193,192
|
|
|
-
|
Consumer
|
|
112,757
|
|
|
-
|
Auto
|
|
191,015
|
|
|
-
|
|
|
819,143
|
|
|
-
|
Accounted for under ASC 310-30
(Loans acquired with deteriorated
|
|
|
|
|
|
credit quality, including those
by analogy)
|
|
|
|
|
|
Mortgage
|
|
1,130,964
|
|
|
-
|
Commercial
|
|
212,866
|
|
|
-
|
Consumer
|
|
8,539
|
|
|
-
|
Auto
|
|
41,571
|
|
|
-
|
|
|
1,393,940
|
|
|
-
|
Total acquired Scotiabank PR &
USVI loans, net
|
|
2,213,083
|
|
|
-
|
Acquired BBVAPR loans:
|
|
|
|
|
|
Accounted for under ASC 310-20
(Loans with revolving feature and/or
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
Commercial
|
|
2,141
|
|
|
2,546
|
Consumer
|
|
20,794
|
|
|
23,988
|
Auto
|
|
135
|
|
|
4,435
|
|
|
23,070
|
|
|
30,969
|
Allowance for loan and lease
losses on acquired BBVAPR loans accounted for under ASC 310-20
|
|
(1,573)
|
|
|
(2,062)
|
|
|
21,497
|
|
|
28,907
|
Accounted for under ASC 310-30
(Loans acquired with deteriorated
|
|
|
|
|
|
credit quality, including those
by analogy)
|
|
|
|
|
|
Mortgage
|
|
411,531
|
|
|
492,890
|
Commercial
|
|
117,694
|
|
|
182,319
|
Auto
|
|
1,790
|
|
|
14,403
|
|
|
531,015
|
|
|
689,612
|
Allowance for loan and lease
losses on acquired BBVAPR loans accounted for under ASC 310-30
|
|
(17,036)
|
|
|
(42,010)
|
|
|
513,979
|
|
|
647,602
|
Total acquired BBVAPR loans, net
|
|
535,476
|
|
|
676,509
|
Acquired Eurobank loans:
|
|
|
|
|
|
Mortgage
|
|
48,617
|
|
|
63,392
|
Commercial
|
|
29,041
|
|
|
47,826
|
Consumer
|
|
724
|
|
|
846
|
Total acquired Eurobank loans
|
|
78,382
|
|
|
112,064
|
Allowance for loan and lease
losses on Eurobank loans
|
|
(14,459)
|
|
|
(24,971)
|
Total acquired Eurobank loans, net
|
|
63,923
|
|
|
87,093
|
Total acquired loans, net
|
|
2,812,482
|
|
|
763,602
|
Total held for investment, net
|
|
6,622,256
|
|
|
4,421,226
|
Mortgage loans held-for-sale
|
|
19,591
|
|
|
10,368
|
Total loans, net
|
$
|
6,641,847
|
|
$
|
4,431,594
|
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 tables below present the
aging of the recorded investment in gross originated and other loans held for
investment at December 31, 2019 and 2018,
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.
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
71
|
|
$
|
669
|
|
$
|
1,362
|
|
$
|
2,102
|
|
$
|
32,194
|
|
$
|
34,296
|
|
$
|
248
|
Years 2003 and 2004
|
|
81
|
|
|
2,772
|
|
|
1,784
|
|
|
4,637
|
|
|
59,280
|
|
|
63,917
|
|
|
-
|
Year 2005
|
|
77
|
|
|
1,146
|
|
|
1,486
|
|
|
2,709
|
|
|
29,905
|
|
|
32,614
|
|
|
-
|
Year 2006
|
|
277
|
|
|
953
|
|
|
898
|
|
|
2,128
|
|
|
45,339
|
|
|
47,467
|
|
|
-
|
Years 2007, 2008
and 2009
|
|
-
|
|
|
665
|
|
|
1,279
|
|
|
1,944
|
|
|
47,358
|
|
|
49,302
|
|
|
-
|
Years 2010, 2011, 2012, 2013
|
|
343
|
|
|
537
|
|
|
2,336
|
|
|
3,216
|
|
|
93,578
|
|
|
96,794
|
|
|
88
|
Years 2014 to present
|
|
-
|
|
|
232
|
|
|
1,170
|
|
|
1,402
|
|
|
136,762
|
|
|
138,164
|
|
|
294
|
|
|
849
|
|
|
6,974
|
|
|
10,315
|
|
|
18,138
|
|
|
444,416
|
|
|
462,554
|
|
|
630
|
Non-traditional
|
|
-
|
|
|
112
|
|
|
972
|
|
|
1,084
|
|
|
8,553
|
|
|
9,637
|
|
|
-
|
Loss mitigation program
|
|
8,436
|
|
|
5,452
|
|
|
7,641
|
|
|
21,529
|
|
|
72,668
|
|
|
94,197
|
|
|
1,788
|
|
|
9,285
|
|
|
12,538
|
|
|
18,928
|
|
|
40,751
|
|
|
525,637
|
|
|
566,388
|
|
|
2,418
|
Mortgage secured personal loans
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
223
|
|
|
223
|
|
|
-
|
GNMA's buy-back option program
|
|
-
|
|
|
-
|
|
|
10,805
|
|
|
10,805
|
|
|
-
|
|
|
10,805
|
|
|
-
|
|
|
9,285
|
|
|
12,538
|
|
|
29,733
|
|
|
51,556
|
|
|
525,860
|
|
|
577,416
|
|
|
2,418
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
7,264
|
|
|
7,264
|
|
|
231,379
|
|
|
238,643
|
|
|
-
|
Institutional
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
137,610
|
|
|
137,610
|
|
|
-
|
Middle market
|
|
30
|
|
|
500
|
|
|
4,928
|
|
|
5,458
|
|
|
200,380
|
|
|
205,838
|
|
|
-
|
Retail
|
|
839
|
|
|
367
|
|
|
2,855
|
|
|
4,061
|
|
|
224,468
|
|
|
228,529
|
|
|
-
|
Floor plan
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,337
|
|
|
3,337
|
|
|
-
|
Real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,083
|
|
|
17,083
|
|
|
-
|
US Loan Program
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,459
|
|
|
25,459
|
|
|
-
|
|
|
869
|
|
|
867
|
|
|
15,047
|
|
|
16,783
|
|
|
839,716
|
|
|
856,499
|
|
|
-
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
137,350
|
|
|
137,350
|
|
|
-
|
Institutional
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
190,741
|
|
|
190,741
|
|
|
-
|
Middle market
|
|
2,934
|
|
|
250
|
|
|
1,550
|
|
|
4,734
|
|
|
66,799
|
|
|
71,533
|
|
|
-
|
Retail
|
|
4,370
|
|
|
90
|
|
|
345
|
|
|
4,805
|
|
|
115,067
|
|
|
119,872
|
|
|
-
|
Floor plan
|
|
209
|
|
|
-
|
|
|
-
|
|
|
209
|
|
|
44,154
|
|
|
44,363
|
|
|
-
|
US Loan Program
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
247,136
|
|
|
247,136
|
|
|
-
|
|
|
7,513
|
|
|
340
|
|
|
1,895
|
|
|
9,748
|
|
|
801,247
|
|
|
810,995
|
|
|
-
|
|
|
8,382
|
|
|
1,207
|
|
|
16,942
|
|
|
26,531
|
|
|
1,640,963
|
|
|
1,667,494
|
|
|
-
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
800
|
|
$
|
243
|
|
$
|
546
|
|
$
|
1,589
|
|
$
|
26,025
|
|
$
|
27,614
|
|
$
|
-
|
Overdrafts
|
|
51
|
|
|
-
|
|
|
-
|
|
|
51
|
|
|
165
|
|
|
216
|
|
|
-
|
Personal lines of credit
|
|
153
|
|
|
-
|
|
|
9
|
|
|
162
|
|
|
1,616
|
|
|
1,778
|
|
|
-
|
Personal loans
|
|
4,796
|
|
|
2,090
|
|
|
1,262
|
|
|
8,148
|
|
|
306,539
|
|
|
314,687
|
|
|
-
|
Cash collateral personal loans
|
|
149
|
|
|
5
|
|
|
294
|
|
|
448
|
|
|
16,895
|
|
|
17,343
|
|
|
-
|
|
|
5,949
|
|
|
2,338
|
|
|
2,111
|
|
|
10,398
|
|
|
351,240
|
|
|
361,638
|
|
|
-
|
Auto and leasing
|
|
72,211
|
|
|
31,351
|
|
|
14,225
|
|
|
117,787
|
|
|
1,159,945
|
|
|
1,277,732
|
|
|
-
|
Total
|
$
|
95,827
|
|
$
|
47,434
|
|
$
|
63,011
|
|
$
|
206,272
|
|
$
|
3,678,008
|
|
$
|
3,884,280
|
|
$
|
2,418
|
|
December 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
|
$
|
77
|
|
$
|
1,516
|
|
$
|
2,707
|
|
$
|
4,300
|
|
$
|
36,344
|
|
$
|
40,644
|
|
$
|
168
|
Years 2003 and 2004
|
|
91
|
|
|
2,412
|
|
|
5,632
|
|
|
8,135
|
|
|
67,707
|
|
|
75,842
|
|
|
-
|
Year 2005
|
|
-
|
|
|
552
|
|
|
3,531
|
|
|
4,083
|
|
|
35,004
|
|
|
39,087
|
|
|
-
|
Year 2006
|
|
255
|
|
|
1,693
|
|
|
5,074
|
|
|
7,022
|
|
|
49,213
|
|
|
56,235
|
|
|
-
|
Years 2007, 2008
and 2009
|
|
255
|
|
|
1,059
|
|
|
6,677
|
|
|
7,991
|
|
|
52,781
|
|
|
60,772
|
|
|
56
|
Years 2010, 2011, 2012, 2013
|
|
253
|
|
|
328
|
|
|
8,697
|
|
|
9,278
|
|
|
104,429
|
|
|
113,707
|
|
|
270
|
Years 2014, 2015, 2016, 2017 and 2018
|
|
-
|
|
|
483
|
|
|
1,462
|
|
|
1,945
|
|
|
139,500
|
|
|
141,445
|
|
|
-
|
|
|
931
|
|
|
8,043
|
|
|
33,780
|
|
|
42,754
|
|
|
484,978
|
|
|
527,732
|
|
|
494
|
Non-traditional
|
|
-
|
|
|
116
|
|
|
3,085
|
|
|
3,201
|
|
|
11,072
|
|
|
14,273
|
|
|
-
|
Loss mitigation program
|
|
10,793
|
|
|
6,258
|
|
|
19,389
|
|
|
36,440
|
|
|
70,393
|
|
|
106,833
|
|
|
2,223
|
|
|
11,724
|
|
|
14,417
|
|
|
56,254
|
|
|
82,395
|
|
|
566,443
|
|
|
648,838
|
|
|
2,717
|
Mortgage secured personal loans
|
|
9
|
|
|
-
|
|
|
-
|
|
|
9
|
|
|
241
|
|
|
250
|
|
|
-
|
GNMA's buy-back option program
|
|
-
|
|
|
-
|
|
|
19,721
|
|
|
19,721
|
|
|
-
|
|
|
19,721
|
|
|
-
|
|
|
11,733
|
|
|
14,417
|
|
|
75,975
|
|
|
102,125
|
|
|
566,684
|
|
|
668,809
|
|
|
2,717
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
289,052
|
|
|
289,052
|
|
|
-
|
Institutional
|
|
-
|
|
|
-
|
|
|
1,200
|
|
|
1,200
|
|
|
68,413
|
|
|
69,613
|
|
|
-
|
Middle market
|
|
-
|
|
|
1,430
|
|
|
5,202
|
|
|
6,632
|
|
|
200,831
|
|
|
207,463
|
|
|
-
|
Retail
|
|
1,641
|
|
|
463
|
|
|
8,570
|
|
|
10,674
|
|
|
210,251
|
|
|
220,925
|
|
|
-
|
Floor plan
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,184
|
|
|
4,184
|
|
|
-
|
Real estate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,009
|
|
|
19,009
|
|
|
-
|
US Loan Program
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,189
|
|
|
3,189
|
|
|
-
|
|
|
1,641
|
|
|
1,893
|
|
|
14,972
|
|
|
18,506
|
|
|
794,929
|
|
|
813,435
|
|
|
-
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
179,885
|
|
|
179,885
|
|
|
-
|
Institutional
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
156,410
|
|
|
156,410
|
|
|
-
|
Middle market
|
|
917
|
|
|
-
|
|
|
6,020
|
|
|
6,937
|
|
|
81,030
|
|
|
87,967
|
|
|
-
|
Retail
|
|
571
|
|
|
546
|
|
|
817
|
|
|
1,934
|
|
|
88,000
|
|
|
89,934
|
|
|
-
|
Floor plan
|
|
-
|
|
|
-
|
|
|
46
|
|
|
46
|
|
|
49,633
|
|
|
49,679
|
|
|
-
|
US Loan Program
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
220,278
|
|
|
220,278
|
|
|
-
|
|
|
1,488
|
|
|
546
|
|
|
6,883
|
|
|
8,917
|
|
|
775,236
|
|
|
784,153
|
|
|
-
|
|
|
3,129
|
|
|
2,439
|
|
|
21,855
|
|
|
27,423
|
|
|
1,570,165
|
|
|
1,597,588
|
|
|
-
|
|
December 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
|
$
|
725
|
|
$
|
363
|
|
$
|
411
|
|
$
|
1,499
|
|
$
|
26,535
|
|
$
|
28,034
|
|
$
|
-
|
Overdrafts
|
|
10
|
|
|
-
|
|
|
-
|
|
|
10
|
|
|
204
|
|
|
214
|
|
|
-
|
Personal lines of credit
|
|
57
|
|
|
11
|
|
|
22
|
|
|
90
|
|
|
1,827
|
|
|
1,917
|
|
|
-
|
Personal loans
|
|
3,966
|
|
|
1,740
|
|
|
1,262
|
|
|
6,968
|
|
|
296,151
|
|
|
303,119
|
|
|
-
|
Cash collateral personal loans
|
|
74
|
|
|
339
|
|
|
3
|
|
|
416
|
|
|
15,280
|
|
|
15,696
|
|
|
-
|
|
|
4,832
|
|
|
2,453
|
|
|
1,698
|
|
|
8,983
|
|
|
339,997
|
|
|
348,980
|
|
|
-
|
Auto
and leasing
|
|
58,094
|
|
|
27,945
|
|
|
13,494
|
|
|
99,533
|
|
|
1,030,162
|
|
|
1,129,695
|
|
|
-
|
Total
|
$
|
77,788
|
|
$
|
47,254
|
|
$
|
113,022
|
|
$
|
238,064
|
|
$
|
3,507,008
|
|
$
|
3,745,072
|
|
$
|
2,717
|
At December 31, 2019, and 2018, Oriental had a carrying
balance of $92.6 million and $91.4 million, respectively, in
current status, 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. We have acquired loans in the acquisitions of Scotiabank, BBVAPR
and Eurobank.
Acquired Scotiabank PR & USVI 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 loans
acquired, except for those acquired with credit discount and showed specific
credit risk indicators, 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
Scotiabank PR & USVI loans that were accounted for under the provisions of
ASC 310-20 are removed from the acquired loan category at the end of the
reporting period upon refinancing, renewal or normal re-underwriting.
The
following tables present the aging of the recorded investment in gross acquired
Scotiabank PR & USVI loans accounted for under ASC 310-20 as of December 31, 2019, by class of loans:
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 year 2002
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
383
|
|
$
|
383
|
|
$
|
-
|
Year 2003 and 2004
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,055
|
|
|
1,055
|
|
|
-
|
Year 2005
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,018
|
|
|
1,018
|
|
|
-
|
Year 2006
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,331
|
|
|
3,331
|
|
|
-
|
Year 2007, 2008, 2009
|
|
-
|
|
|
19
|
|
|
-
|
|
|
19
|
|
|
21,458
|
|
|
21,477
|
|
|
-
|
Year 2010, 2011, 2012, 2013
|
|
-
|
|
|
478
|
|
|
-
|
|
|
478
|
|
|
144,881
|
|
|
145,359
|
|
|
-
|
Year 2014 to present
|
|
-
|
|
|
70
|
|
|
-
|
|
|
70
|
|
|
85,110
|
|
|
85,180
|
|
|
-
|
|
|
-
|
|
|
567
|
|
|
-
|
|
|
567
|
|
|
257,236
|
|
|
257,803
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA's buy-back option
|
|
-
|
|
|
-
|
|
|
64,376
|
|
|
64,376
|
|
|
-
|
|
|
64,376
|
|
|
-
|
|
|
-
|
|
|
567
|
|
|
64,376
|
|
|
64,943
|
|
|
257,236
|
|
|
322,179
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
125
|
|
$
|
79
|
|
$
|
1,684
|
|
$
|
1,888
|
|
$
|
32,993
|
|
$
|
34,881
|
|
$
|
-
|
|
|
125
|
|
|
79
|
|
|
1,684
|
|
|
1,888
|
|
|
32,993
|
|
|
34,881
|
|
|
-
|
Other commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
23
|
|
|
13
|
|
|
795
|
|
|
831
|
|
|
153,078
|
|
|
153,909
|
|
|
-
|
Corporate
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,402
|
|
|
4,402
|
|
|
-
|
|
|
23
|
|
|
13
|
|
|
795
|
|
|
831
|
|
|
157,480
|
|
|
158,311
|
|
|
-
|
|
|
148
|
|
|
92
|
|
|
2,479
|
|
|
2,719
|
|
|
190,473
|
|
|
193,192
|
|
|
-
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
161
|
|
|
75
|
|
|
-
|
|
|
236
|
|
|
28,538
|
|
|
28,774
|
|
|
-
|
Personal lines of credit
|
|
380
|
|
|
20
|
|
|
212
|
|
|
612
|
|
|
50,224
|
|
|
50,836
|
|
|
-
|
Personal loans
|
|
11
|
|
|
28
|
|
|
1
|
|
|
40
|
|
|
33,107
|
|
|
33,147
|
|
|
-
|
|
|
552
|
|
|
123
|
|
|
213
|
|
|
888
|
|
|
111,869
|
|
|
112,757
|
|
|
-
|
Auto
|
|
105
|
|
|
40
|
|
|
15
|
|
|
160
|
|
|
190,855
|
|
|
191,015
|
|
|
-
|
Total
|
$
|
805
|
|
$
|
822
|
|
$
|
67,083
|
|
$
|
68,710
|
|
$
|
750,433
|
|
$
|
819,143
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR
Loans
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Credit cards,
retail and commercial revolving lines of credits, floor plans and performing
auto loans with FICO scores over 660 acquired at a premium are accounted for under the guidance of ASC 310-20,
which requires that any contractually required loan payment receivable in
excess of Oriental’s initial investment in the loans be accreted into interest
income on a level-yield basis over the life of the loan. Loans accounted for
under ASC 310-20 are placed on non-accrual status when past due in accordance with
Oriental’s non-accrual policy, and any accretion of discount or amortization of
premium is discontinued. Acquired BBVAPR loans that were accounted for under
the provisions of ASC 310-20 are removed from the acquired loan category at the
end of the reporting period upon refinancing, renewal or normal
re-underwriting.
The
following tables present the aging of the recorded investment in gross acquired
BBVAPR loans accounted for under ASC 310-20 as of December 31, 2019 and 2018, by class of loans:
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Floor plan
|
$
|
-
|
|
$
|
-
|
|
$
|
764
|
|
$
|
764
|
|
$
|
21
|
|
$
|
785
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
|
764
|
|
|
764
|
|
|
21
|
|
|
785
|
|
|
-
|
Other commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
48
|
|
|
18
|
|
|
26
|
|
|
92
|
|
|
1,264
|
|
|
1,356
|
|
|
-
|
Floor plan
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48
|
|
|
18
|
|
|
26
|
|
|
92
|
|
|
1,264
|
|
|
1,356
|
|
|
-
|
|
|
48
|
|
|
18
|
|
|
790
|
|
|
856
|
|
|
1,285
|
|
|
2,141
|
|
|
-
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
477
|
|
|
99
|
|
|
350
|
|
|
926
|
|
|
17,888
|
|
|
18,814
|
|
|
-
|
Personal loans
|
|
22
|
|
|
-
|
|
|
22
|
|
|
44
|
|
|
1,936
|
|
|
1,980
|
|
|
-
|
|
|
499
|
|
|
99
|
|
|
372
|
|
|
970
|
|
|
19,824
|
|
|
20,794
|
|
|
-
|
Auto
|
|
20
|
|
|
21
|
|
|
30
|
|
|
71
|
|
|
64
|
|
|
135
|
|
|
-
|
Total
|
$
|
567
|
|
$
|
138
|
|
$
|
1,192
|
|
$
|
1,897
|
|
$
|
21,173
|
|
$
|
23,070
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
$
|
-
|
|
$
|
-
|
|
$
|
54
|
|
$
|
54
|
|
$
|
-
|
|
$
|
54
|
|
$
|
-
|
Floor plan
|
|
-
|
|
|
-
|
|
|
888
|
|
|
888
|
|
|
94
|
|
|
982
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
942
|
|
|
942
|
|
|
94
|
|
|
1,036
|
|
|
-
|
Other commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
30
|
|
|
11
|
|
|
8
|
|
|
49
|
|
|
1,461
|
|
|
1,510
|
|
|
-
|
Floor plan
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
30
|
|
|
11
|
|
|
8
|
|
|
49
|
|
|
1,461
|
|
|
1,510
|
|
|
-
|
|
|
30
|
|
|
11
|
|
|
950
|
|
|
991
|
|
|
1,555
|
|
|
2,546
|
|
|
-
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
499
|
|
|
147
|
|
|
380
|
|
|
1,026
|
|
|
20,796
|
|
|
21,822
|
|
|
-
|
Personal loans
|
|
64
|
|
|
32
|
|
|
18
|
|
|
114
|
|
|
2,052
|
|
|
2,166
|
|
|
-
|
|
|
563
|
|
|
179
|
|
|
398
|
|
|
1,140
|
|
|
22,848
|
|
|
23,988
|
|
|
-
|
Auto
|
|
405
|
|
|
241
|
|
|
200
|
|
|
846
|
|
|
3,589
|
|
|
4,435
|
|
|
-
|
Total
|
$
|
998
|
|
$
|
431
|
|
$
|
1,548
|
|
$
|
2,977
|
|
$
|
27,992
|
|
$
|
30,969
|
|
$
|
-
|
Acquired
Scotiabank PR & USVI Loans Accounted for under ASC 310-30 (including those
accounted for under ASC 310-30 by analogy)
Acquired
Scotiabank loans, except for credit cards, retail and commercial revolving
lines of credits, floor plans and performing loans that did not showed specific
credit risk indicators are accounted for by Oriental in accordance with ASC
310-30.
The carrying amount corresponding to
acquired Scotiabank PR & USVI loans with deteriorated credit quality,
including those accounted under ASC 310-30 by analogy, in the statements of
financial condition at December 31, 2019 is as follows:
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
|
(In
thousands)
|
Contractual required payments
receivable:
|
$
|
2,147,249
|
|
$
|
-
|
Less: Non-accretable discount
|
|
294,424
|
|
|
-
|
Cash expected to be collected
|
|
1,852,825
|
|
|
-
|
Less: Accretable yield
|
|
458,885
|
|
|
-
|
Carrying amount, gross
|
|
1,393,940
|
|
|
-
|
Less: allowance for loan and lease
losses
|
|
-
|
|
|
-
|
Carrying amount, net
|
$
|
1,393,940
|
|
$
|
-
|
|
|
|
|
|
|
At December 31,
2019 and 2018, Oriental had $41.4 million and $44.5 million, respectively, in
loans granted to Puerto Rico municipalities as part of its acquired Scotiabank
loans and 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 Scotiabank PR & USVI loans accounted for under ASC 310-30 for the
year ended December 31, 2019:
|
Year Ended
December 31, 2019
|
|
Mortgage
|
|
Commercial
|
|
Auto
|
|
Consumer
|
|
Total
|
|
(In thousands)
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Additions
|
|
325,731
|
|
|
129,182
|
|
|
3,715
|
|
|
257
|
|
|
458,885
|
Accretion
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Change in expected cash flows
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Transfer (to) non-accretable
discount
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Balance at end of year
|
$
|
325,731
|
|
$
|
129,182
|
|
$
|
3,715
|
|
$
|
257
|
|
$
|
458,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Additions
|
|
217,113
|
|
|
73,198
|
|
|
3,720
|
|
|
393
|
|
|
294,424
|
Change in actual and expected losses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Transfer from accretable yield
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Balance at end of year
|
$
|
217,113
|
|
$
|
73,198
|
|
$
|
3,720
|
|
$
|
393
|
|
$
|
294,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for
under ASC 310-30 by analogy)
Acquired BBVAPR
loans, except for credit cards, retail and commercial revolving lines of
credits, floor plans and performing auto loans with FICO scores over 660
acquired at a premium, are accounted for by Oriental in accordance with ASC
310-30.
The carrying amount corresponding to acquired BBVAPR loans with
deteriorated credit quality, including those accounted under ASC 310-30 by
analogy, in the statements of financial condition at December 31, 2019 and
2018 is as follows:
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
|
(In
thousands)
|
Contractual required payments receivable:
|
$
|
1,086,367
|
|
$
|
1,304,545
|
Less: Non-accretable discount
|
|
340,466
|
|
|
345,423
|
Cash expected to be collected
|
|
745,901
|
|
|
959,122
|
Less: Accretable yield
|
|
214,886
|
|
|
269,510
|
Carrying amount, gross
|
|
531,015
|
|
|
689,612
|
Less: allowance for loan and lease
losses
|
|
17,036
|
|
|
42,010
|
Carrying amount, net
|
$
|
513,979
|
|
$
|
647,602
|
|
|
|
|
|
|
The
following tables describe the accretable yield and non-accretable discount
activity of acquired BBVAPR loans
accounted for under ASC 310-30 for the years ended December 31, 2019, 2018 and
2017:
|
Year Ended
December 31, 2019
|
|
Mortgage
|
|
Commercial
|
|
Auto
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
232,199
|
|
$
|
36,508
|
|
$
|
243
|
|
$
|
560
|
|
$
|
269,510
|
Accretion
|
|
(23,871)
|
|
|
(10,312)
|
|
|
(430)
|
|
|
(739)
|
|
|
(35,352)
|
Change in expected cash flows
|
|
(212)
|
|
|
23,080
|
|
|
(19)
|
|
|
739
|
|
|
23,588
|
Transfer (to) from non-accretable
discount
|
|
(12,033)
|
|
|
(30,653)
|
|
|
253
|
|
|
(427)
|
|
|
(42,860)
|
Balance at end of year
|
$
|
196,083
|
|
$
|
18,623
|
|
$
|
47
|
|
$
|
133
|
|
$
|
214,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
291,887
|
|
$
|
10,346
|
|
$
|
24,245
|
|
$
|
18,945
|
|
$
|
345,423
|
Change in actual and expected losses
|
|
(27,741)
|
|
|
(19,295)
|
|
|
(169)
|
|
|
(612)
|
|
|
(47,817)
|
Transfer from (to) accretable yield
|
|
12,033
|
|
|
30,653
|
|
|
(253)
|
|
|
427
|
|
|
42,860
|
Balance at end of year
|
$
|
276,179
|
|
$
|
21,704
|
|
$
|
23,823
|
|
$
|
18,760
|
|
$
|
340,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2018
|
|
Mortgage
|
|
Commercial
|
|
Auto
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
258,498
|
|
$
|
46,764
|
|
$
|
2,766
|
|
$
|
885
|
|
$
|
308,913
|
Accretion
|
|
(27,248)
|
|
|
(14,160)
|
|
|
(2,360)
|
|
|
(871)
|
|
|
(44,639)
|
Change in expected cash flows
|
|
-
|
|
|
7,895
|
|
|
890
|
|
|
484
|
|
|
9,269
|
Transfer from (to) non-accretable
discount
|
|
949
|
|
|
(3,991)
|
|
|
(1,053)
|
|
|
62
|
|
|
(4,033)
|
Balance at end of year
|
$
|
232,199
|
|
$
|
36,508
|
|
$
|
243
|
|
$
|
560
|
|
$
|
269,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
299,501
|
|
$
|
10,596
|
|
$
|
23,050
|
|
$
|
19,284
|
|
$
|
352,431
|
Change in actual and expected losses
|
|
(6,665)
|
|
|
(4,241)
|
|
|
142
|
|
|
(277)
|
|
|
(11,041)
|
Transfer (to) from accretable yield
|
|
(949)
|
|
|
3,991
|
|
|
1,053
|
|
|
(62)
|
|
|
4,033
|
Balance at end of year
|
$
|
291,887
|
|
$
|
10,346
|
|
$
|
24,245
|
|
$
|
18,945
|
|
$
|
345,423
|
|
Year Ended
December 31, 2017
|
|
Mortgage
|
|
Commercial
|
|
Auto
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
292,115
|
|
$
|
50,366
|
|
$
|
8,538
|
|
$
|
3,682
|
|
$
|
354,701
|
Accretion
|
|
(30,205)
|
|
|
(20,572)
|
|
|
(6,339)
|
|
|
(1,841)
|
|
|
(58,957)
|
Change in expected cash flows
|
|
2
|
|
|
22,250
|
|
|
170
|
|
|
143
|
|
|
22,565
|
Transfer from (to) non-accretable
discount
|
|
(3,414)
|
|
|
(5,280)
|
|
|
397
|
|
|
(1,099)
|
|
|
(9,396)
|
Balance at end of year
|
$
|
258,498
|
|
$
|
46,764
|
|
$
|
2,766
|
|
$
|
885
|
|
$
|
308,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
305,615
|
|
$
|
16,965
|
|
$
|
22,407
|
|
$
|
18,120
|
|
$
|
363,107
|
Change in actual and expected losses
|
|
(9,528)
|
|
|
(11,649)
|
|
|
1,040
|
|
|
65
|
|
|
(20,072)
|
Transfer (to) from accretable yield
|
|
3,414
|
|
|
5,280
|
|
|
(397)
|
|
|
1,099
|
|
|
9,396
|
Balance at end of year
|
$
|
299,501
|
|
$
|
10,596
|
|
$
|
23,050
|
|
$
|
19,284
|
|
$
|
352,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Eurobank Loans
The carrying amount of
acquired Eurobank loans at December 31,
2019 and 2018 is as follows:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Contractual required payments receivable
|
$
|
117,107
|
|
$
|
156,722
|
Less: Non-accretable discount
|
|
4,285
|
|
|
2,959
|
Cash expected to be collected
|
|
112,822
|
|
|
153,763
|
Less: Accretable yield
|
|
34,441
|
|
|
41,699
|
Carrying amount, gross
|
|
78,381
|
|
|
112,064
|
Less: Allowance for loan and lease
losses
|
|
14,458
|
|
|
24,971
|
Carrying amount, net
|
$
|
63,923
|
|
$
|
87,093
|
The following tables describe the accretable yield and
non-accretable discount activity of acquired Eurobank loans for the years ended December 31, 2019, 2018 and 2017:
|
Year Ended
December 31, 2019
|
|
Mortgage
|
|
Commercial
|
|
Leasing
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
38,389
|
|
$
|
3,310
|
|
$
|
-
|
|
$
|
-
|
|
$
|
41,699
|
Accretion
|
|
(4,999)
|
|
|
(4,611)
|
|
|
(14)
|
|
|
(164)
|
|
|
(9,788)
|
Change in expected cash flows
|
|
2,578
|
|
|
2,270
|
|
|
(145)
|
|
|
273
|
|
|
4,976
|
Transfer (to) from non-accretable
discount
|
|
(1,947)
|
|
|
(549)
|
|
|
159
|
|
|
(109)
|
|
|
(2,446)
|
Balance at end of year
|
$
|
34,021
|
|
$
|
420
|
|
$
|
-
|
|
$
|
-
|
|
$
|
34,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2,826
|
|
$
|
-
|
|
$
|
-
|
|
$
|
133
|
|
$
|
2,959
|
Change in actual and expected losses
|
|
(3,051)
|
|
|
1,928
|
|
|
159
|
|
|
(156)
|
|
|
(1,120)
|
Transfer from (to) accretable yield
|
|
1,947
|
|
|
549
|
|
|
(159)
|
|
|
109
|
|
|
2,446
|
Balance at end of year
|
$
|
1,722
|
|
$
|
2,477
|
|
$
|
-
|
|
$
|
86
|
|
$
|
4,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2018
|
|
Mortgage
|
|
Commercial
|
|
Leasing
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
42,921
|
|
$
|
6,751
|
|
|
-
|
|
$
|
-
|
|
$
|
49,672
|
Accretion
|
|
(5,964)
|
|
|
(6,430)
|
|
|
(52)
|
|
|
(389)
|
|
|
(12,835)
|
Change in expected cash flows
|
|
(1,129)
|
|
|
5,023
|
|
|
(329)
|
|
|
700
|
|
|
4,265
|
Transfer from (to) non-accretable
discount
|
|
2,561
|
|
|
(2,034)
|
|
|
381
|
|
|
(311)
|
|
|
597
|
Balance at end of year
|
$
|
38,389
|
|
$
|
3,310
|
|
$
|
-
|
|
$
|
-
|
|
$
|
41,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
5,334
|
|
$
|
276
|
|
$
|
-
|
|
$
|
235
|
|
$
|
5,845
|
Change in actual and expected losses
|
|
53
|
|
|
(2,310)
|
|
|
381
|
|
|
(413)
|
|
|
(2,289)
|
Transfer (to) from accretable yield
|
|
(2,561)
|
|
|
2,034
|
|
|
(381)
|
|
|
311
|
|
|
(597)
|
Balance at end of year
|
$
|
2,826
|
|
$
|
-
|
|
$
|
-
|
|
$
|
133
|
|
$
|
2,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Mortgage
|
|
Commercial
|
|
Leasing
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Accretable Yield Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
48,033
|
|
$
|
16,475
|
|
$
|
-
|
|
$
|
-
|
|
$
|
64,508
|
Accretion
|
|
(7,262)
|
|
|
(12,985)
|
|
|
(30)
|
|
|
(283)
|
|
|
(20,560)
|
Change in expected cash flows
|
|
242
|
|
|
1,881
|
|
|
(217)
|
|
|
759
|
|
|
2,665
|
Transfer from (to) non-accretable
discount
|
|
1,908
|
|
|
1,380
|
|
|
247
|
|
|
(476)
|
|
|
3,059
|
Balance at end of year
|
$
|
42,921
|
|
$
|
6,751
|
|
$
|
-
|
|
$
|
-
|
|
$
|
49,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Accretable Discount Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
8,452
|
|
$
|
3,880
|
|
$
|
-
|
|
$
|
8
|
|
$
|
12,340
|
Change in actual and expected losses
|
|
(1,210)
|
|
|
(2,224)
|
|
|
247
|
|
|
(249)
|
|
|
(3,436)
|
Transfer (to) from accretable yield
|
|
(1,908)
|
|
|
(1,380)
|
|
|
(247)
|
|
|
476
|
|
|
(3,059)
|
Balance at end of year
|
$
|
5,334
|
|
$
|
276
|
|
$
|
-
|
|
$
|
235
|
|
$
|
5,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual Loans
The following table presents
the recorded investment in loans in non-accrual status by class of loans as of
December 31, 2019 and 2018:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Originated and other loans and leases
held for investment
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
Traditional (by origination year):
|
|
|
|
|
|
Up to the year 2002
|
$
|
1,117
|
|
$
|
2,538
|
Years 2003 and 2004
|
|
1,784
|
|
|
5,818
|
Year 2005
|
|
1,486
|
|
|
3,600
|
Year 2006
|
|
898
|
|
|
5,140
|
Years 2007, 2008 and 2009
|
|
1,418
|
|
|
6,697
|
Years 2010, 2011, 2012, 2013
|
|
2,244
|
|
|
8,427
|
Years 2014, 2015, 2016, 2017 and
2018
|
|
876
|
|
|
1,462
|
|
|
9,823
|
|
|
33,682
|
Non-traditional
|
|
972
|
|
|
3,085
|
Loss mitigation program
|
|
7,940
|
|
|
22,107
|
|
|
18,735
|
|
|
58,874
|
Commercial
|
|
|
|
|
|
Commercial secured by real estate
|
|
|
|
|
|
Corporate
|
|
7,264
|
|
|
-
|
Institutional
|
|
9,092
|
|
|
9,911
|
Middle market
|
|
5,654
|
|
|
7,266
|
Retail
|
|
8,024
|
|
|
16,123
|
|
|
30,034
|
|
|
33,300
|
Other commercial and industrial
|
|
|
|
|
|
Middle market
|
|
4,484
|
|
|
6,481
|
Retail
|
|
4,362
|
|
|
2,629
|
Floor plan
|
|
209
|
|
|
46
|
|
|
9,055
|
|
|
9,156
|
|
|
39,089
|
|
|
42,456
|
Consumer
|
|
|
|
|
|
Credit cards
|
|
546
|
|
|
411
|
Overdrafts
|
|
-
|
|
|
-
|
Personal lines of credit
|
|
15
|
|
|
31
|
Personal loans
|
|
3,846
|
|
|
2,909
|
Cash collateral personal loans
|
|
294
|
|
|
3
|
|
|
4,701
|
|
|
3,354
|
Auto and leasing
|
|
14,239
|
|
|
13,494
|
Total non-accrual originated loans
|
$
|
76,764
|
|
$
|
118,178
|
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Acquired Scotiabank PR & USVI loans
accounted for under ASC 310-20
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
Commercial secured by real estate
|
|
|
|
|
|
Retail
|
$
|
1,922
|
|
$
|
-
|
|
|
1,922
|
|
|
-
|
Other commercial and industrial
|
|
|
|
|
|
Retail
|
|
805
|
|
|
-
|
|
|
2,727
|
|
|
-
|
Consumer
|
|
|
|
|
|
Personal lines of credit
|
|
212
|
|
|
-
|
Personal loans
|
|
2
|
|
|
-
|
|
|
214
|
|
|
-
|
Auto
|
|
26
|
|
|
-
|
Total non-accrual acquired
Scotiabank PR & USVI loans accounted for under ASC 310-20
|
|
2,967
|
|
|
-
|
|
|
|
|
|
|
Acquired BBVAPR loans accounted for
under ASC 310-20
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
Commercial secured by real estate
|
|
|
|
|
|
Retail
|
$
|
-
|
|
$
|
54
|
Floor plan
|
|
764
|
|
|
888
|
|
|
764
|
|
|
942
|
Other commercial and industrial
|
|
|
|
|
|
Retail
|
|
26
|
|
|
8
|
|
|
790
|
|
|
950
|
Consumer
|
|
|
|
|
|
Credit cards
|
|
350
|
|
|
380
|
Personal loans
|
|
22
|
|
|
18
|
|
|
372
|
|
|
398
|
Auto
|
|
30
|
|
|
200
|
Total non-accrual acquired BBVAPR
loans accounted for under ASC 310-20
|
|
1,192
|
|
|
1,548
|
Total non-accrual loans
|
$
|
80,923
|
|
$
|
119,726
|
|
|
|
|
|
|
Loans accounted for under ASC 310-30 are
excluded from the above table as they are considered to be performing due to
the application of the accretion method, in which these loans will accrete
interest income over the remaining life of the loans using estimated cash flow
analyses or are accounted under the cost recovery method.
Delinquent
residential mortgage loans insured or guaranteed under applicable FHA and VA
programs are classified as non-performing loans when they become 90 days or
more past due, but are not placed in non-accrual status until they become 12
months or more past due, since they are insured loans. Therefore, these loans
are included as non-performing loans but excluded from non-accrual loans. In addition, these loans are excluded from the impairment analysis.
At
December 31, 2019 and 2018, loans whose terms have been extended and which are
classified as troubled-debt restructurings that are not included in non-accrual
loans amounted to $103.7 million and $112.9 million, respectively, as
they are performing under their new terms.
At December 31, 2019 and 2018, loans that are current
in their monthly payments, but placed in non-accrual due to credit
deterioration amounted to $17.6 million and $21.2 million, respectively.
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 $61.1 million and $82.0 million at December 31,
2019 and 2018, 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 $8.2 million and $8.4 million at December 31,
2019 and 2018, respectively. The total investment in impaired
mortgage loans that were individually evaluated for impairment was $71.2 million and $84.2 million at December 31,
2019 and 2018, 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 $6.9 million and $10.2 million at December 31,
2019 and 2018, respectively.
Originated and Other Loans and Leases Held for
Investment
Oriental’s recorded
investment in commercial and mortgage loans categorized as originated and other
loans and leases held for investment that were individually evaluated for
impairment and the related allowance for loan and lease losses at December 31,
2019 and 2018 are as follows:
|
December 31,
2019
|
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
|
|
(In
thousands)
|
|
|
Impaired loans with specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
33,454
|
|
$
|
28,555
|
|
$
|
8,215
|
|
29%
|
|
|
Residential impaired and
troubled-debt restructuring
|
|
78,666
|
|
|
71,196
|
|
|
6,874
|
|
10%
|
|
|
Impaired loans with no specific
allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
39,109
|
|
|
31,895
|
|
|
N/A
|
|
0%
|
|
|
Total investment in impaired
loans
|
$
|
151,229
|
|
$
|
131,646
|
|
$
|
15,089
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
|
|
(In
thousands)
|
|
|
Impaired loans with specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
54,636
|
|
$
|
49,092
|
|
$
|
8,434
|
|
17%
|
|
|
Residential impaired and
troubled-debt restructuring
|
|
95,659
|
|
|
84,174
|
|
|
10,186
|
|
12%
|
|
|
Impaired loans with no specific
allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
38,241
|
|
|
32,137
|
|
|
N/A
|
|
0%
|
|
|
Total investment in impaired
loans
|
$
|
188,536
|
|
$
|
165,403
|
|
$
|
18,620
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR Loans Accounted for under ASC 310-20
(Loans with revolving feature and/or acquired at a premium)
Oriental’s recorded investment in acquired
BBVAPR commercial loans accounted for under ASC 310-20 that were individually
evaluated for impairment and the related allowance for loan and lease losses at
December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
(In
thousands)
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
926
|
|
$
|
678
|
|
$
|
2
|
|
0%
|
Impaired loans with no specific
allowance
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
-
|
|
$
|
-
|
|
|
N/A
|
|
0%
|
Total investment in impaired
loans
|
$
|
926
|
|
$
|
678
|
|
$
|
2
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
Unpaid
|
|
Recorded
|
|
Specific
|
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Coverage
|
|
(In
thousands)
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
926
|
|
$
|
747
|
|
$
|
14
|
|
2%
|
Impaired loans with no specific
allowance
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
-
|
|
$
|
-
|
|
|
N/A
|
|
0%
|
Total investment in impaired
loans
|
$
|
926
|
|
$
|
747
|
|
$
|
14
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
Acquired BBVAPR Loans Accounted for under ASC 310-30
(including those accounted for under ASC 310-30 by analogy)
Oriental’s recorded
investment in acquired BBVAPR loan pools accounted for under ASC 310-30 that
have recorded impairments and their related allowance for loan and lease losses
at December 31, 2019 and 2018 are as follows:
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
Unpaid
|
|
Recorded
|
|
|
|
to Recorded
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
(In
thousands)
|
Impaired loan pools with specific
allowance:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
400,964
|
|
$
|
411,531
|
|
$
|
9,376
|
|
2%
|
Commercial
|
|
87,103
|
|
|
84,117
|
|
|
6,713
|
|
8%
|
Auto
|
|
3,947
|
|
|
1,790
|
|
|
947
|
|
53%
|
Total investment in impaired
loan pools
|
$
|
492,014
|
|
$
|
497,438
|
|
$
|
17,036
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
Unpaid
|
|
Recorded
|
|
|
|
to Recorded
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
(In
thousands)
|
Impaired loan pools with specific
allowance:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
498,537
|
|
$
|
492,890
|
|
$
|
15,225
|
|
3%
|
Commercial
|
|
188,413
|
|
|
180,790
|
|
|
20,641
|
|
11%
|
Auto
|
|
14,551
|
|
|
14,403
|
|
|
6,144
|
|
43%
|
Total investment in impaired
loan pools
|
$
|
701,501
|
|
$
|
688,083
|
|
$
|
42,010
|
|
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 December 31, 2019 and 2018 are as follows:
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
Unpaid
|
|
Recorded
|
|
|
|
to Recorded
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
(In
thousands)
|
Impaired loan pools with specific
allowance:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
53,090
|
|
$
|
49,366
|
|
$
|
12,278
|
|
25%
|
Commercial
|
|
17,176
|
|
|
17,142
|
|
|
2,180
|
|
13%
|
Total investment in impaired
loan pools
|
$
|
70,266
|
|
$
|
66,508
|
|
$
|
14,458
|
|
22%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Coverage
|
|
Unpaid
|
|
Recorded
|
|
Specific
|
|
to Recorded
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
(In
thousands)
|
Impaired loan pools with specific
allowance
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
$
|
70,153
|
|
$
|
63,406
|
|
$
|
15,382
|
|
24%
|
Commercial
|
|
47,342
|
|
|
47,820
|
|
|
9,585
|
|
20%
|
Consumer
|
|
15
|
|
|
4
|
|
|
4
|
|
100%
|
Total investment in impaired
loan pools
|
$
|
117,510
|
|
$
|
111,230
|
|
$
|
24,971
|
|
22%
|
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.
The
following table presents the interest recognized in commercial and mortgage
loans that were individually evaluated for impairment, which excludes loans
accounted for under ASC 310-30, for the years
ended December 31, 2019, 2018 and 2017:
|
Year Ended
December 31,
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Interest
Income Recognized
|
|
Average
Recorded Investment
|
|
|
Interest
Income Recognized
|
|
Average
Recorded Investment
|
|
|
Interest
Income Recognized
|
Average
Recorded Investment
|
|
(In
thousands)
|
Originated and other loans held for
investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
503
|
|
$
|
41,868
|
|
$
|
1,624
|
|
$
|
44,727
|
|
$
|
1,538
|
|
$
|
25,797
|
Residential troubled-debt
restructuring
|
|
2,661
|
|
|
73,173
|
|
|
2,556
|
|
|
84,494
|
|
|
3,301
|
|
|
87,414
|
Impaired loans with no specific
allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
1,086
|
|
|
32,269
|
|
|
1,091
|
|
|
26,199
|
|
|
875
|
|
|
36,666
|
Total interest income from
impaired loans
|
$
|
4,250
|
|
$
|
147,310
|
|
$
|
5,271
|
|
$
|
155,420
|
|
$
|
5,714
|
|
$
|
149,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired loans accounted for under ASC
310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
-
|
|
$
|
701
|
|
$
|
-
|
|
$
|
747
|
|
$
|
-
|
|
$
|
794
|
Total interest income from
impaired loans
|
$
|
4,250
|
|
$
|
148,011
|
|
$
|
5,271
|
|
$
|
156,167
|
|
$
|
5,714
|
|
$
|
150,671
|
Modifications
The
following tables present the troubled-debt restructurings in all loan
portfolios during the years ended December 31, 2019, 2018 and 2017.
|
Year Ended
December 31, 2019
|
|
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
|
148
|
|
$
|
19,130
|
|
5.85%
|
|
376
|
|
$
|
17,991
|
|
5.09%
|
|
345
|
Commercial
|
5
|
|
|
2,070
|
|
7.23%
|
|
56
|
|
|
2,070
|
|
6.05%
|
|
67
|
Consumer
|
370
|
|
|
5,357
|
|
15.69%
|
|
66
|
|
|
5,398
|
|
11.50%
|
|
74
|
Auto
|
22
|
|
|
319
|
|
7.29%
|
|
70
|
|
|
326
|
|
8.97%
|
|
44
|
|
Year Ended
December 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
|
143
|
|
$
|
19,029
|
|
5.09%
|
|
342
|
|
$
|
18,237
|
|
4.41%
|
|
314
|
Commercial
|
23
|
|
|
26,019
|
|
5.75%
|
|
118
|
|
|
25,973
|
|
5.64%
|
|
136
|
Consumer
|
174
|
|
|
2,313
|
|
13.24%
|
|
51
|
|
|
2,332
|
|
9.86%
|
|
61
|
Auto
|
2
|
|
|
40
|
|
10.42%
|
|
37
|
|
|
40
|
|
10.28%
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Number of
contracts
|
|
Pre-Modification
Outstanding Recorded Investment
|
|
Pre-Modification
Weighted Average Rate
|
|
Pre-Modification
Weighted Average Term (in Months)
|
|
Post-Modification
Outstanding Recorded Investment
|
|
Post-Modification
Weighted Average Rate
|
|
Post-Modification
Weighted Average Term (in Months)
|
|
(Dollars in
thousands)
|
Mortgage
|
85
|
|
$
|
10,441
|
|
6.23%
|
|
390
|
|
$
|
10,343
|
|
4.40%
|
|
384
|
Commercial
|
24
|
|
|
13,828
|
|
6.05%
|
|
57
|
|
|
13,829
|
|
5.73%
|
|
62
|
Consumer
|
107
|
|
|
1,391
|
|
11.68%
|
|
62
|
|
|
1,430
|
|
10.85%
|
|
69
|
Auto
|
9
|
|
|
134
|
|
7.24%
|
|
66
|
|
|
135
|
|
11.75%
|
|
37
|
The following table presents troubled-debt
restructurings for which there was a payment default during the years ended
December 31, 2019, 2018,and 2017:
|
Year Ended
December 31,
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Number of
Contracts
|
|
Recorded
Investment
|
|
|
Number of
Contracts
|
|
Recorded
Investment
|
|
|
Number of
Contracts
|
|
Recorded
Investment
|
|
(Dollars in
thousands)
|
Mortgage
|
29
|
|
$
|
3,597
|
|
|
23
|
|
$
|
3,262
|
|
|
34
|
|
$
|
3,129
|
Commercial
|
-
|
|
$
|
-
|
|
|
4
|
|
$
|
2,141
|
|
|
5
|
|
$
|
452
|
Consumer
|
77
|
|
$
|
1,118
|
|
|
28
|
|
$
|
341
|
|
|
20
|
|
$
|
249
|
Auto
|
3
|
|
$
|
51
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
Credit Quality Indicators
Oriental categorizes
originated and other loans and acquired loans accounted for under ASC 310-20
into loan grades 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 loan grades:
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 loans.
As of December 31, 2019 and 2018, and based
on the most recent analysis performed, the loan grading of gross originated and
other loans, Scotiabank PR & USVI and BBVAPR acquired loans accounted for
under ASC 310-20 subject to loan grade by class of loans is as follows:
|
December 31,
2019
|
|
Loan Grades
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
(In
thousands)
|
Commercial - originated and other loans
held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
$
|
238,643
|
|
$
|
214,474
|
|
$
|
16,905
|
|
$
|
7,264
|
|
$
|
-
|
|
$
|
-
|
Institutional
|
|
137,610
|
|
|
128,169
|
|
|
349
|
|
|
9,092
|
|
|
-
|
|
|
-
|
Middle market
|
|
205,838
|
|
|
153,984
|
|
|
32,624
|
|
|
19,230
|
|
|
-
|
|
|
-
|
Retail
|
|
228,529
|
|
|
212,069
|
|
|
5,957
|
|
|
10,503
|
|
|
-
|
|
|
-
|
Floor plan
|
|
3,337
|
|
|
3,337
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Real estate
|
|
17,083
|
|
|
17,083
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
US Loan Program
|
|
25,459
|
|
|
25,459
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
856,499
|
|
|
754,575
|
|
|
55,835
|
|
|
46,089
|
|
|
-
|
|
|
-
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
137,350
|
|
|
134,982
|
|
|
2,368
|
|
|
-
|
|
|
-
|
|
|
-
|
Institutional
|
|
190,741
|
|
|
190,741
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Middle market
|
|
71,533
|
|
|
63,540
|
|
|
2,518
|
|
|
5,475
|
|
|
-
|
|
|
-
|
Retail
|
|
119,872
|
|
|
115,551
|
|
|
84
|
|
|
4,237
|
|
|
-
|
|
|
-
|
Floor plan
|
|
44,363
|
|
|
42,490
|
|
|
1,664
|
|
|
209
|
|
|
-
|
|
|
-
|
US Loan Program
|
|
247,136
|
|
|
237,286
|
|
|
9,850
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
810,995
|
|
|
784,590
|
|
|
16,484
|
|
|
9,921
|
|
|
-
|
|
|
-
|
Total
|
|
1,667,494
|
|
|
1,539,165
|
|
|
72,319
|
|
|
56,010
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scotiabank PR & USVI Commercial -
acquired loans (under ASC 310-20)
(under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
34,881
|
|
|
33,306
|
|
|
35
|
|
|
1,504
|
|
|
36
|
|
|
-
|
|
|
34,881
|
|
|
33,306
|
|
|
35
|
|
|
1,504
|
|
|
36
|
|
|
-
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
153,909
|
|
|
153,769
|
|
|
-
|
|
|
39
|
|
|
101
|
|
|
-
|
Corporate
|
|
4,402
|
|
|
4,402
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
158,311
|
|
|
158,171
|
|
|
-
|
|
|
39
|
|
|
101
|
|
|
-
|
Total Scotiabank PR & USVI
commercial - acquired loans
|
|
193,192
|
|
|
191,477
|
|
|
35
|
|
|
1,543
|
|
|
137
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBVAPR Commercial - acquired loans
(under ASC 310-20)
(under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan
|
|
785
|
|
|
21
|
|
|
-
|
|
|
764
|
|
|
-
|
|
|
-
|
|
|
785
|
|
|
21
|
|
|
-
|
|
|
764
|
|
|
-
|
|
|
-
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
1,356
|
|
|
1,356
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,356
|
|
|
1,356
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total BBVAPR commercial - acquired
loans
|
|
2,141
|
|
|
1,377
|
|
|
-
|
|
|
764
|
|
|
-
|
|
|
-
|
|
December 31,
2019
|
|
Loan Grades
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
(In
thousands)
|
Retail - originated and other loans held
for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
462,554
|
|
|
452,239
|
|
|
-
|
|
|
10,315
|
|
|
-
|
|
|
-
|
Non-traditional
|
|
9,637
|
|
|
8,665
|
|
|
-
|
|
|
972
|
|
|
-
|
|
|
-
|
Loss mitigation program
|
|
94,197
|
|
|
86,556
|
|
|
-
|
|
|
7,641
|
|
|
-
|
|
|
-
|
Mortgage secured personal loans
|
|
223
|
|
|
223
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
GNMA's buy-back option program
|
|
10,805
|
|
|
-
|
|
|
-
|
|
|
10,805
|
|
|
-
|
|
|
-
|
|
|
577,416
|
|
|
547,683
|
|
|
-
|
|
|
29,733
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
27,614
|
|
|
27,068
|
|
|
-
|
|
|
546
|
|
|
-
|
|
|
-
|
Overdrafts
|
|
216
|
|
|
165
|
|
|
-
|
|
|
51
|
|
|
-
|
|
|
-
|
Unsecured personal lines of credit
|
|
1,778
|
|
|
1,769
|
|
|
-
|
|
|
9
|
|
|
-
|
|
|
-
|
Unsecured personal loans
|
|
314,687
|
|
|
313,425
|
|
|
-
|
|
|
1,262
|
|
|
-
|
|
|
-
|
Cash collateral personal loans
|
|
17,343
|
|
|
17,049
|
|
|
-
|
|
|
294
|
|
|
-
|
|
|
-
|
|
|
361,638
|
|
|
359,476
|
|
|
-
|
|
|
2,162
|
|
|
-
|
|
|
-
|
Auto and Leasing
|
|
1,277,732
|
|
|
1,263,506
|
|
|
-
|
|
|
14,226
|
|
|
-
|
|
|
-
|
Total
|
|
2,216,786
|
|
|
2,170,665
|
|
|
-
|
|
|
46,121
|
|
|
-
|
|
|
-
|
Retail - acquired loans (accounted for
under ASC 310-20) - Scotiabank PR & USVI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
257,803
|
|
|
257,803
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
GNMA's buy-back option program
|
|
64,376
|
|
|
-
|
|
|
-
|
|
|
64,376
|
|
|
-
|
|
|
-
|
|
|
322,179
|
|
|
257,803
|
|
|
-
|
|
|
64,376
|
|
|
-
|
|
|
-
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
28,774
|
|
|
28,774
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Personal lines of credit
|
|
50,836
|
|
|
50,624
|
|
|
-
|
|
|
212
|
|
|
-
|
|
|
-
|
Personal loans
|
|
33,147
|
|
|
33,147
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
112,757
|
|
|
112,545
|
|
|
-
|
|
|
212
|
|
|
-
|
|
|
-
|
Auto
|
|
191,015
|
|
|
191,000
|
|
|
-
|
|
|
15
|
|
|
-
|
|
|
-
|
|
|
303,772
|
|
|
303,545
|
|
|
-
|
|
|
227
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail - acquired loans (accounted for
under ASC 310-20) - BBVPR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
18,814
|
|
|
18,464
|
|
|
-
|
|
|
350
|
|
|
-
|
|
|
-
|
Personal loans
|
|
1,980
|
|
|
1,958
|
|
|
-
|
|
|
22
|
|
|
-
|
|
|
-
|
|
|
20,794
|
|
|
20,422
|
|
|
-
|
|
|
372
|
|
|
-
|
|
|
-
|
Auto
|
|
135
|
|
|
106
|
|
|
-
|
|
|
29
|
|
|
-
|
|
|
-
|
|
|
20,929
|
|
|
20,528
|
|
|
-
|
|
|
401
|
|
|
-
|
|
|
-
|
|
$
|
4,726,493
|
|
$
|
4,484,559
|
|
$
|
72,354
|
|
$
|
169,443
|
|
$
|
137
|
|
$
|
-
|
|
December 31,
2018
|
|
Loan Grades
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
(In
thousands)
|
Commercial - originated and other loans
held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
$
|
289,052
|
|
$
|
246,711
|
|
$
|
26,544
|
|
$
|
15,797
|
|
$
|
-
|
|
$
|
-
|
Institutional
|
|
69,613
|
|
|
59,509
|
|
|
-
|
|
|
10,104
|
|
|
-
|
|
|
-
|
Middle market
|
|
207,463
|
|
|
151,638
|
|
|
32,638
|
|
|
23,187
|
|
|
-
|
|
|
-
|
Retail
|
|
220,925
|
|
|
195,213
|
|
|
3,996
|
|
|
21,716
|
|
|
-
|
|
|
-
|
Floor plan
|
|
4,184
|
|
|
2,890
|
|
|
-
|
|
|
1,294
|
|
|
-
|
|
|
-
|
Real estate
|
|
19,009
|
|
|
19,009
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
US Loan Program
|
|
3,189
|
|
|
3,189
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
813,435
|
|
|
678,159
|
|
|
63,178
|
|
|
72,098
|
|
|
-
|
|
|
-
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
179,885
|
|
|
154,629
|
|
|
25,256
|
|
|
-
|
|
|
-
|
|
|
-
|
Institutional
|
|
156,410
|
|
|
156,410
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Middle market
|
|
87,967
|
|
|
63,876
|
|
|
13,737
|
|
|
10,354
|
|
|
-
|
|
|
-
|
Retail
|
|
89,934
|
|
|
86,882
|
|
|
318
|
|
|
2,734
|
|
|
-
|
|
|
-
|
Floor plan
|
|
49,679
|
|
|
47,092
|
|
|
2,541
|
|
|
46
|
|
|
-
|
|
|
-
|
US Loan Program
|
|
220,278
|
|
|
220,278
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
784,153
|
|
|
729,167
|
|
|
41,852
|
|
|
13,134
|
|
|
-
|
|
|
-
|
Total
|
|
1,597,588
|
|
|
1,407,326
|
|
|
105,030
|
|
|
85,232
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial - acquired loans
(under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
54
|
|
|
-
|
|
|
-
|
|
|
54
|
|
|
-
|
|
|
-
|
Floor plan
|
|
982
|
|
|
94
|
|
|
-
|
|
|
888
|
|
|
-
|
|
|
-
|
|
|
1,036
|
|
|
94
|
|
|
-
|
|
|
942
|
|
|
-
|
|
|
-
|
Other commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
1,510
|
|
|
1,510
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,510
|
|
|
1,510
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
|
2,546
|
|
|
1,604
|
|
|
-
|
|
|
942
|
|
|
-
|
|
|
-
|
|
December 31,
2018
|
|
Loan Grades
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Pass
|
|
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
(In
thousands)
|
Retail - originated and other loans held
for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
527,732
|
|
|
493,952
|
|
|
-
|
|
|
33,780
|
|
|
-
|
|
|
-
|
Non-traditional
|
|
14,273
|
|
|
11,188
|
|
|
-
|
|
|
3,085
|
|
|
-
|
|
|
-
|
Loss mitigation program
|
|
106,833
|
|
|
87,444
|
|
|
-
|
|
|
19,389
|
|
|
-
|
|
|
-
|
Home equity secured personal loans
|
|
250
|
|
|
250
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
GNMA's buy-back option program
|
|
19,721
|
|
|
-
|
|
|
-
|
|
|
19,721
|
|
|
-
|
|
|
-
|
|
|
668,809
|
|
|
592,834
|
|
|
-
|
|
|
75,975
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
28,034
|
|
|
27,623
|
|
|
-
|
|
|
411
|
|
|
-
|
|
|
-
|
Overdrafts
|
|
214
|
|
|
204
|
|
|
-
|
|
|
10
|
|
|
-
|
|
|
-
|
Unsecured personal lines of credit
|
|
1,917
|
|
|
1,895
|
|
|
-
|
|
|
22
|
|
|
-
|
|
|
-
|
Unsecured personal loans
|
|
303,119
|
|
|
301,857
|
|
|
-
|
|
|
1,262
|
|
|
-
|
|
|
-
|
Cash collateral personal loans
|
|
15,696
|
|
|
15,693
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
348,980
|
|
|
347,272
|
|
|
-
|
|
|
1,708
|
|
|
-
|
|
|
-
|
Auto and Leasing
|
|
1,129,695
|
|
|
1,116,201
|
|
|
-
|
|
|
13,494
|
|
|
-
|
|
|
-
|
Total
|
|
2,147,484
|
|
|
2,056,307
|
|
|
-
|
|
|
91,177
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail - acquired loans
(under ASC 310-20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
|
21,822
|
|
|
21,442
|
|
|
-
|
|
|
380
|
|
|
-
|
|
|
-
|
Personal loans
|
|
2,166
|
|
|
2,148
|
|
|
-
|
|
|
18
|
|
|
-
|
|
|
-
|
|
|
23,988
|
|
|
23,590
|
|
|
-
|
|
|
398
|
|
|
-
|
|
|
-
|
Auto
|
|
4,435
|
|
|
4,235
|
|
|
-
|
|
|
200
|
|
|
-
|
|
|
-
|
Total
|
|
28,423
|
|
|
27,825
|
|
|
-
|
|
|
598
|
|
|
-
|
|
|
-
|
|
$
|
3,776,041
|
|
$
|
3,493,062
|
|
$
|
105,030
|
|
$
|
177,949
|
|
$
|
-
|
|
$
|
-
|
NOTE 7 – ALLOWANCE FOR LOAN AND LEASE LOSSES
The
composition of Oriental’s allowance for loan and lease losses at December 31, 2019 and 2018 was as
follows:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Allowance for loans and lease losses:
|
|
|
|
|
|
Originated and other loans and
leases held for investment:
|
|
|
|
|
|
Mortgage
|
$
|
8,727
|
|
$
|
19,783
|
Commercial
|
|
25,989
|
|
|
30,326
|
Consumer
|
|
16,882
|
|
|
15,571
|
Auto and leasing
|
|
31,873
|
|
|
29,508
|
Total allowance for originated and
other loans and lease losses
|
|
83,471
|
|
|
95,188
|
Acquired BBVAPR loans:
|
|
|
|
|
|
Accounted for under ASC 310-20
(Loans with revolving feature and/or
|
|
|
|
|
|
acquired at a premium)
|
|
|
|
|
|
Commercial
|
|
4
|
|
|
22
|
Consumer
|
|
1,564
|
|
|
1,905
|
Auto
|
|
5
|
|
|
135
|
|
|
1,573
|
|
|
2,062
|
Accounted for under ASC 310-30
(Loans acquired with deteriorated
|
|
|
|
|
|
credit quality, including those
by analogy)
|
|
|
|
|
|
Mortgage
|
|
9,376
|
|
|
15,225
|
Commercial
|
|
6,713
|
|
|
20,641
|
Auto
|
|
947
|
|
|
6,144
|
|
|
17,036
|
|
|
42,010
|
Total allowance for acquired
BBVAPR loans and lease losses
|
|
18,609
|
|
|
44,072
|
Acquired Eurobank loans:
|
|
|
|
|
|
Mortgage
|
|
12,279
|
|
|
15,382
|
Commercial
|
|
2,180
|
|
|
9,585
|
Consumer
|
|
-
|
|
|
4
|
Total allowance for acquired
Eurobank loan and lease losses
|
|
14,459
|
|
|
24,971
|
Total allowance for loan and lease
losses
|
$
|
116,539
|
|
$
|
164,231
|
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.
Loans acquired in
the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 were
recognized at fair value as of December 31, 2019, which included the impact of
expected credit losses, and therefore, no allowance for credit losses was
recorded at acquisition date. To the extent credit deterioration occurs after
the date of acquisition, Oriental would record an allowance for loan and lease
losses. Management determined that there was no need to record an allowance for
loan and lease losses on loans acquired in the Scotiabank PR & USVI
Acquisition accounted for under ASC 310-30 as of December 31, 2019. Considering
the short period elapsed from the acquisition date, Oriental does not believe
that the difference between cash flows expected to be collected on the loans
acquired in the Scotiabank PR & USVI Acquisition
accounted for under ASC 310-30 and those anticipated at December 31, 2019 need
further assessment.
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:
|
Year Ended
December 31, 2019
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto and
Leasing
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses for
originated and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
19,783
|
|
$
|
30,326
|
|
$
|
15,571
|
|
$
|
29,508
|
|
$
|
95,188
|
Charge-offs
|
|
(18,564)
|
|
|
(12,073)
|
|
|
(18,910)
|
|
|
(47,278)
|
|
|
(96,825)
|
Recoveries
|
|
1,533
|
|
|
1,104
|
|
|
2,014
|
|
|
18,694
|
|
|
23,345
|
Provision for loan and lease
losses
|
|
5,975
|
|
|
6,632
|
|
|
18,207
|
|
|
30,949
|
|
|
61,763
|
Balance at end of year
|
$
|
8,727
|
|
$
|
25,989
|
|
$
|
16,882
|
|
$
|
31,873
|
|
$
|
83,471
|
|
Year Ended
December 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 year
|
$
|
20,439
|
|
$
|
30,258
|
|
$
|
16,454
|
|
$
|
25,567
|
|
$
|
92,718
|
Charge-offs
|
|
(5,297)
|
|
|
(6,782)
|
|
|
(17,629)
|
|
|
(42,685)
|
|
|
(72,393)
|
Recoveries
|
|
1,047
|
|
|
654
|
|
|
1,757
|
|
|
19,344
|
|
|
22,802
|
Provision for originated and
other loan and lease losses
|
|
3,594
|
|
|
6,196
|
|
|
14,989
|
|
|
27,282
|
|
|
52,061
|
Balance at end of year
|
$
|
19,783
|
|
$
|
30,326
|
|
$
|
15,571
|
|
$
|
29,508
|
|
$
|
95,188
|
|
Year Ended
December 31, 2017
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto and
Leasing
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses for
originated and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
17,344
|
|
$
|
8,995
|
|
$
|
13,067
|
|
$
|
19,463
|
|
$
|
58,869
|
Charge-offs
|
|
(6,623)
|
|
|
(7,684)
|
|
|
(13,641)
|
|
|
(33,908)
|
|
|
(61,856)
|
Recoveries
|
|
585
|
|
|
1,281
|
|
|
1,209
|
|
|
12,314
|
|
|
15,389
|
Provision for originated and
other loan and lease losses
|
|
9,133
|
|
|
27,666
|
|
|
15,819
|
|
|
27,698
|
|
|
80,316
|
Balance at end of year
|
$
|
20,439
|
|
$
|
30,258
|
|
$
|
16,454
|
|
$
|
25,567
|
|
$
|
92,718
|
|
December 31,
2019
|
|
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
|
$
|
6,874
|
|
$
|
8,215
|
|
$
|
-
|
|
$
|
-
|
|
$
|
15,089
|
Collectively evaluated for
impairment
|
|
1,853
|
|
|
17,774
|
|
|
16,882
|
|
|
31,873
|
|
|
68,382
|
Total ending allowance
balance
|
$
|
8,727
|
|
$
|
25,989
|
|
$
|
16,882
|
|
$
|
31,873
|
|
$
|
83,471
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
$
|
71,196
|
|
$
|
60,450
|
|
$
|
-
|
|
$
|
-
|
|
$
|
131,646
|
Collectively evaluated for
impairment
|
|
506,220
|
|
|
1,607,044
|
|
|
361,638
|
|
|
1,277,732
|
|
|
3,752,634
|
Total ending loan
balance
|
$
|
577,416
|
|
$
|
1,667,494
|
|
$
|
361,638
|
|
$
|
1,277,732
|
|
$
|
3,884,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
$
|
10,186
|
|
$
|
8,434
|
|
$
|
-
|
|
$
|
-
|
|
$
|
18,620
|
Collectively evaluated for
impairment
|
|
9,597
|
|
|
21,892
|
|
|
15,571
|
|
|
29,508
|
|
|
76,568
|
Total ending allowance
balance
|
$
|
19,783
|
|
$
|
30,326
|
|
$
|
15,571
|
|
$
|
29,508
|
|
$
|
95,188
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
$
|
84,174
|
|
$
|
81,229
|
|
$
|
-
|
|
$
|
-
|
|
$
|
165,403
|
Collectively evaluated for
impairment
|
|
584,635
|
|
|
1,516,359
|
|
|
348,980
|
|
|
1,129,695
|
|
|
3,579,669
|
Total ending loan
balance
|
$
|
668,809
|
|
$
|
1,597,588
|
|
$
|
348,980
|
|
$
|
1,129,695
|
|
$
|
3,745,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
Year Ended
December 31, 2019
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
22
|
|
$
|
1,905
|
|
$
|
135
|
|
$
|
2,062
|
Charge-offs
|
|
(123)
|
|
|
(1,525)
|
|
|
(220)
|
|
|
(1,868)
|
Recoveries
|
|
6
|
|
|
353
|
|
|
250
|
|
|
609
|
Provision (recapture) for
acquired BBVAPR
loan and lease losses
accounted for
under ASC 310-20
|
|
99
|
|
|
831
|
|
|
(160)
|
|
|
770
|
Balance at end of year
|
$
|
4
|
|
$
|
1,564
|
|
$
|
5
|
|
$
|
1,573
|
|
Year Ended
December 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 year
|
$
|
42
|
|
$
|
3,225
|
|
$
|
595
|
|
$
|
3,862
|
Charge-offs
|
|
(6)
|
|
|
(2,459)
|
|
|
(372)
|
|
|
(2,837)
|
Recoveries
|
|
23
|
|
|
480
|
|
|
831
|
|
|
1,334
|
(Recapture) provision for
acquired
loan and lease losses
accounted for
under ASC 310-20
|
|
(37)
|
|
|
659
|
|
|
(919)
|
|
|
(297)
|
Balance at end of year
|
$
|
22
|
|
$
|
1,905
|
|
$
|
135
|
|
$
|
2,062
|
|
Year Ended
December 31, 2017
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
169
|
|
$
|
3,028
|
|
$
|
1,103
|
|
|
$
|
4,300
|
Charge-offs
|
|
(132)
|
|
|
(3,048)
|
|
|
(976)
|
|
|
|
(4,156)
|
Recoveries
|
|
5
|
|
|
446
|
|
|
1,420
|
|
|
|
1,871
|
Provision (recapture) for
acquired
loan and lease losses
accounted for
under ASC 310-20
|
|
-
|
|
|
2,799
|
|
|
(952)
|
|
|
|
1,847
|
Balance at end of year
|
$
|
42
|
|
$
|
3,225
|
|
$
|
595
|
|
|
$
|
3,862
|
|
December 31,
2019
|
|
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
|
$
|
2
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2
|
Collectively evaluated for
impairment
|
|
2
|
|
|
1,564
|
|
|
5
|
|
|
1,571
|
Total ending allowance
balance
|
$
|
4
|
|
$
|
1,564
|
|
$
|
5
|
|
$
|
1,573
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
$
|
678
|
|
$
|
-
|
|
$
|
-
|
|
$
|
678
|
Collectively evaluated for
impairment
|
|
1,463
|
|
|
20,794
|
|
|
135
|
|
|
22,392
|
Total ending loan
balance
|
$
|
2,141
|
|
$
|
20,794
|
|
$
|
135
|
|
$
|
23,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
$
|
14
|
|
$
|
-
|
|
$
|
-
|
|
$
|
14
|
Collectively evaluated for
impairment
|
|
8
|
|
|
1,905
|
|
|
135
|
|
|
2,048
|
Total ending allowance
balance
|
$
|
22
|
|
$
|
1,905
|
|
$
|
135
|
|
$
|
2,062
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
$
|
747
|
|
$
|
-
|
|
$
|
-
|
|
$
|
747
|
Collectively evaluated for
impairment
|
|
1,799
|
|
|
23,988
|
|
|
4,435
|
|
|
30,222
|
Total ending loan
balance
|
$
|
2,546
|
|
$
|
23,988
|
|
$
|
4,435
|
|
$
|
30,969
|
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 loan gradings, among other assumptions.
Migration and credit quality trends are assessed at the pool level, by
comparing information from the latest evaluation period through the end of the
reporting period.
During the second and third
quarter of 2019, Oriental decided to sell mostly non-performing loans
increasing the provision of acquired BBVAPR loans accounted under ASC 310-30 by
$20.8 million and $8.7 million, respectively.
The
following tables present the activity in our allowance for loan losses and
related recorded investment of the acquired BBVAPR loan portfolio accounted for
under ASC 310-30 for the periods indicated:
|
Year Ended
December 31, 2019
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for
under
ASC 310-30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
15,225
|
|
$
|
20,641
|
|
$
|
-
|
$
|
6,144
|
|
42,010
|
Provision (recapture) for
acquired
BBVAPR
loans
and lease losses accounted for under ASC 310-30
|
|
20,115
|
|
|
14,719
|
|
|
-
|
|
(2,928)
|
|
31,906
|
Allowance de-recognition
|
|
(25,964)
|
|
|
(28,647)
|
|
|
-
|
|
(2,269)
|
|
(56,880)
|
Balance at end of year
|
$
|
9,376
|
|
$
|
6,713
|
|
$
|
-
|
$
|
947
|
|
17,036
|
|
Year Ended
December 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 year
|
$
|
14,085
|
|
$
|
23,691
|
|
$
|
18
|
|
$
|
7,961
|
|
$
|
45,755
|
Provision (recapture) for
acquired BBVAPR
loans
and
lease losses accounted for under ASC 310-30
|
|
1,331
|
|
|
1,360
|
|
|
(18)
|
|
|
(887)
|
|
|
1,786
|
Allowance de-recognition
|
|
(191)
|
|
|
(4,410)
|
|
|
-
|
|
|
(930)
|
|
|
(5,531)
|
Balance at end of year
|
$
|
15,225
|
|
$
|
20,641
|
|
$
|
-
|
|
$
|
6,144
|
|
$
|
42,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Auto
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for
under
ASC 310-30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2,682
|
|
$
|
23,452
|
|
$
|
-
|
|
$
|
4,922
|
|
$
|
31,056
|
Provision for acquired BBVAPR
loans
and
lease losses accounted for under ASC 310-30
|
|
11,497
|
|
|
9,758
|
|
|
18
|
|
|
3,408
|
|
|
24,681
|
Allowance de-recognition
|
|
(94)
|
|
|
(9,519)
|
|
|
-
|
|
|
(369)
|
|
|
(9,982)
|
Balance at end of year
|
$
|
14,085
|
|
$
|
23,691
|
|
$
|
18
|
|
$
|
7,961
|
|
$
|
45,755
|
Allowance
for Acquired Eurobank Loan Losses
The changes in the allowance for loan and lease losses
on acquired Eurobank loans for the years ended December 31, 2019, 2018 and 2017
were as follows:
|
Year Ended
December 31, 2019
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses for
acquired Eurobank loans:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
15,382
|
|
$
|
9,585
|
|
$
|
4
|
|
$
|
24,971
|
Provision (recapture) for loan
and lease losses
|
|
3,588
|
|
|
(1,235)
|
|
|
-
|
|
|
2,353
|
Allowance de-recognition
|
|
(6,691)
|
|
$
|
(6,170)
|
|
$
|
(4)
|
|
|
(12,865)
|
Balance at end of year
|
$
|
12,279
|
|
$
|
2,180
|
|
$
|
-
|
|
$
|
14,459
|
|
Year Ended
December 31, 2018
|
|
Mortgage
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses for
acquired Eurobank loans:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
15,187
|
|
$
|
9,983
|
|
$
|
4
|
|
$
|
25,174
|
Provision for acquired
Eurobank loan and lease losses
|
|
1,806
|
|
|
761
|
|
|
-
|
|
|
2,567
|
Allowance de-recognition
|
|
(1,611)
|
|
|
(1,159)
|
|
|
-
|
|
|
(2,770)
|
Balance at end of year
|
$
|
15,382
|
|
$
|
9,585
|
|
$
|
4
|
|
$
|
24,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Loans secured
by 1-4 Family Residential Properties
|
|
Commercial
|
|
Consumer
|
|
Total
|
|
(In
thousands)
|
Allowance for loan and lease losses for
Eurobank loans:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
11,947
|
|
$
|
9,328
|
|
$
|
6
|
|
$
|
21,281
|
Provision for acquired
Eurobank loan and lease losses
|
|
5,045
|
|
|
1,680
|
|
|
-
|
|
|
6,725
|
Allowance de-recognition
|
|
(1,805)
|
|
|
(1,025)
|
|
|
(2)
|
|
|
(2,832)
|
Balance at end of year
|
$
|
15,187
|
|
$
|
9,983
|
|
$
|
4
|
|
$
|
25,174
|
NOTE 8- FDIC SHARED-LOSS AGREEMENTS
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.
The following table
presents the activity in the FDIC indemnification asset and true-up payment
obligation for the years ended December 31, 2019, 2018, and 2017:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
FDIC indemnification asset:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
-
|
|
$
|
-
|
|
$
|
14,411
|
FDIC indemnification asset benefit
|
|
-
|
|
|
-
|
|
|
1,403
|
Shared-loss termination settlement
|
|
-
|
|
|
-
|
|
|
(15,814)
|
Balance at end of year
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
True-up payment obligation:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
-
|
|
$
|
-
|
|
$
|
26,786
|
Shared-loss termination settlement
|
|
-
|
|
|
-
|
|
|
(26,786)
|
Balance at end of year
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Oriental
recognized an FDIC shared-loss benefit in the consolidated statements of
operations, which consists of the following, for the years ended December 31, 2019, 2018 and 2017:
|
|
Year Ended
December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In
thousands)
|
FDIC indemnification asset benefit
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(1,403)
|
Change in true-up payment obligation
|
|
|
-
|
|
|
-
|
|
|
-
|
Reimbursement to FDIC for recoveries
|
|
|
-
|
|
|
-
|
|
|
-
|
Total FDIC shared-loss benefit
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(1,403)
|
NOTE 9 — FORECLOSED REAL ESTATE
The
following tables present the activity related to foreclosed real estate for the
years ended December 31, 2019, 2018 and
2017:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
33,768
|
|
$
|
44,174
|
|
$
|
47,520
|
Decline in value
|
|
(4,762)
|
|
|
(5,757)
|
|
|
(6,560)
|
Additions
|
|
21,545
|
|
|
20,011
|
|
|
22,812
|
Sales
|
|
(20,642)
|
|
|
(24,660)
|
|
|
(19,598)
|
Balance at end of year
|
$
|
29,909
|
|
$
|
33,768
|
|
$
|
44,174
|
NOTE 10 — PREMISES AND EQUIPMENT
Premises
and equipment at December 31, 2019 and 2018 are stated at cost less accumulated
depreciation and amortization as follows:
|
Useful Life
|
|
|
December 31,
|
|
(Years)
|
|
2019
|
|
2018
|
|
|
|
(In thousands)
|
Land
|
—
|
|
$
|
4,363
|
|
$
|
5,028
|
Buildings
and improvements
|
40
|
|
|
74,840
|
|
|
67,856
|
Leasehold
improvements
|
5 — 10
|
|
|
21,358
|
|
|
18,274
|
Furniture
and fixtures
|
3 — 7
|
|
|
16,686
|
|
|
17,137
|
Information
technology and other
|
3 — 7
|
|
|
29,230
|
|
|
24,855
|
|
|
|
|
146,477
|
|
|
133,150
|
Less:
accumulated depreciation and amortization
|
|
|
|
(65,372)
|
|
|
(64,258)
|
|
|
|
$
|
81,105
|
|
$
|
68,892
|
Premises and equipment recorded from the
Scotiabank PR & USVI Acquisition amounted to $13.0 million.
Depreciation and
amortization of premises and equipment totaled $8.5 million in 2019, $8.9 million in 2018 and $9.0 million in 2017. These are
included in the consolidated statements of operations as part of occupancy and
equipment expenses.
NOTE
11 - SERVICING ASSETS
Oriental periodically sells
or securitizes mortgage loans while retaining the obligation to perform the
servicing of such loans. In addition, Oriental may purchase or assume the right
to service mortgage loans originated by others. Whenever Oriental undertakes an
obligation to service a loan, management assesses
whether a servicing asset and/or liability should be recognized. A servicing
asset is recognized whenever the compensation for servicing is expected to more
than adequately compensate Oriental for servicing the loans and leases.
Likewise, a servicing liability would be recognized in the event that servicing
fees to be received are not expected to adequately compensate Oriental for its
expected cost. On December 31, 2019 Oriental completed the Scotiabank PR &
USVI Acquisition, increasing servicing assets by $40.1 million.
All separately recognized
servicing assets are recognized at fair value using the fair value measurement
method. Under the fair value measurement method, Oriental measures servicing
rights at fair value at each reporting date, reports changes in fair value of
servicing assets in earnings in the period in which the changes occur, and
includes these changes, if any, with mortgage banking activities in the
consolidated statements of operations. The fair value of servicing rights is
subject to fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses.
The fair value of servicing
rights is estimated by using a cash flow valuation model which calculates the
present value of estimated future net servicing cash flows, taking into
consideration actual and expected loan prepayment rates, discount rates,
servicing costs, and other economic factors, which are determined based on
current market conditions.
At December 31, 2019, the servicing
asset amounted to $50.8 million ($10.7 million — December 31, 2018) related to
mortgage servicing rights.
The
following table presents the changes in servicing rights measured using the
fair value method for years ended December 31, 2019, 2018, and 2017:
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
2017
|
|
|
(In thousands)
|
Fair value at beginning of year
|
$
|
10,716
|
|
$
|
9,821
|
|
$
|
9,858
|
Servicing from mortgage
securitizations or asset transfers
|
|
1,174
|
|
|
1,481
|
|
|
1,658
|
Servicing from portfolio acquired
|
|
40,463
|
|
|
-
|
|
|
-
|
Changes due to payments on loans
|
|
(906)
|
|
|
(814)
|
|
|
(590)
|
Changes in fair value due to changes
in valuation model inputs or assumptions
|
|
(668)
|
|
|
228
|
|
|
(1,105)
|
Fair value at end of year
|
$
|
50,779
|
|
$
|
10,716
|
|
$
|
9,821
|
The
following table presents key economic assumption ranges used in measuring the
mortgage-related servicing asset fair value for the years ended 2019, 2018 and
2017:
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Constant
prepayment rate
|
4.47% - 18.81%
|
|
4.30% - 9.02%
|
|
3.94% - 8.49%
|
Discount
rate
|
10.00% - 15.00%
|
|
10.00% - 12.00%
|
|
10.00% - 12.00%
|
The
sensitivity of the current fair value of servicing assets to immediate 10
percent and 20 percent adverse changes in the above key assumptions were as
follows:
|
December 31, 2019
|
|
(In thousands)
|
Mortgage-related
servicing asset
|
|
|
Carrying
value of mortgage servicing asset
|
$
|
50,779
|
Constant
prepayment rate
|
|
|
Decrease
in fair value due to 10% adverse change
|
$
|
(1,085)
|
Decrease
in fair value due to 20% adverse change
|
$
|
(2,131)
|
Discount
rate
|
|
|
Decrease in fair value due to 10%
adverse change
|
$
|
(2,079)
|
Decrease
in fair value due to 20% adverse change
|
$
|
(4,012)
|
These sensitivities are hypothetical and should be
used with caution. As the figures indicate, changes in fair value based on a 10
percent variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be
linear. Also, in this table, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption.
Changes in one factor may
result in changes in another (for example, increases in market interest rates
may result in lower prepayments), which may magnify or offset the
sensitivities. Mortgage banking activities, a component of total banking and
financial service revenue in the consolidated statements of operations, include
the changes from period to period in the fair value of the mortgage loan
servicing rights, which may result from changes in the valuation model inputs
or assumptions (principally reflecting changes in discount rates and prepayment
speed assumptions) and other changes, including changes due to
collection/realization of expected cash flows.
Servicing
fee income is based on a contractual percentage of the outstanding principal
balance and is recorded as income when earned. Servicing fees on mortgage loans
for the years ended 2019, 2018 and 2017 totaled $4.2 million, $4.1 million and $3.9 million, respectively.
NOTE 12 — DERIVATIVES
The following table presents Oriental’s derivative
assets and liabilities at December 31,
2019 and 2018:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Derivative assets:
|
|
|
|
|
|
Interest rate swaps designated as
cash flow hedges
|
$
|
-
|
|
$
|
14
|
Interest rate swaps not designated
as hedges
|
|
-
|
|
|
126
|
Interest rate caps
|
|
6
|
|
|
207
|
|
$
|
6
|
|
$
|
347
|
Derivative liabilities:
|
|
|
|
|
|
Interest rate swaps designated as
cash flow hedges
|
$
|
907
|
|
$
|
-
|
Interest rate swaps not designated
as hedges
|
|
-
|
|
|
126
|
Interest rate caps
|
|
6
|
|
|
207
|
|
$
|
913
|
|
$
|
333
|
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 and are properly documented as such;
therefore, qualify for cash flow hedge accounting. Any gain or loss associated
with the effective portion of the cash flow hedges is recognized in other
comprehensive income (loss) and is subsequently reclassified into operations in
the period during which the hedged forecasted transactions affect earnings.
Changes in the fair value of these derivatives are recorded in accumulated
other comprehensive income to the extent there is no significant
ineffectiveness in the cash flow hedging relationships. Currently, Oriental
does not expect to reclassify any amount included in other comprehensive income
(loss) related to these interest rate swaps to operations in the next twelve
months.
The following table shows a summary of these swaps and
their terms at December 31, 2019:
|
|
Notional
|
|
Fixed
|
|
Variable
|
|
Trade
|
|
Settlement
|
|
Maturity
|
Type
|
|
Amount
|
|
Rate
|
|
Rate Index
|
|
Date
|
|
Date
|
|
Date
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
31,955
|
|
2.4210%
|
|
1-Month LIBOR
|
|
07/03/13
|
|
07/03/13
|
|
08/01/23
|
|
|
$
|
31,955
|
|
|
|
|
|
|
|
|
|
|
An accumulated
unrealized loss of $907 thousand and a gain of $14 thousand were recognized in
accumulated other comprehensive income related to the valuation of these swaps
at December 31, 2019 and 2018, respectively, and the related asset or liability
is being reflected in the consolidated statements of financial condition.
At
December 31, 2018, interest rate swaps not designated as hedging instruments
that were offered to clients represented an asset of $126 thousand and were included
as part of derivative assets in the consolidated statements of financial
position. The credit risk to these clients stemming from these derivatives, if
any, is not material. At December 31, 2018, interest rate swaps not designated
as hedging instruments that are the mirror-images of the derivatives offered to
clients represented a liability of $126 thousand and were included
as part of derivative liabilities in the consolidated statements of financial condition.
No interest rate swaps were offered to clients at December 31, 2019.
Interest Rate Caps
Oriental has entered into interest rate
cap transactions with various clients with floating-rate debt who wish to
protect their financial results against increases in interest rates. In these
cases, Oriental simultaneously enters into mirror-image interest rate cap
transactions with financial counterparties. None of these cap transactions
qualify for hedge accounting, and therefore, they are marked to market through
earnings. As of December 31, 2019 and 2018, the outstanding total notional amount of interest rate caps was $41.5 million and $150.9 million, respectively. At December 31, 2019 and 2018,
the interest rate caps sold to clients represented a liability of $6 thousand
and $207 thousand, respectively, and were included as part of derivative
liabilities in the consolidated statements of financial condition. At December
31, 2019 and 2018, the interest rate caps purchased
as mirror-images represented an asset of $6 thousand and $207 thousand,
respectively, and were included as part of derivative assets in the
consolidated statements of financial condition.
NOTE 13 — CORE DEPOSIT, CUSTOMER RELATIONSHIP AND OTHER
INTANGIBLES
Core deposit, customer
relationship and other intangibles at December
31, 2019 and 2018 consists of the following:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Core deposit
|
$
|
43,185
|
|
$
|
2,481
|
Customer relationship intangibles
|
|
13,213
|
|
|
888
|
Other intangibles
|
|
567
|
|
|
-
|
|
$
|
56,965
|
|
$
|
3,369
|
In connection with the FDIC-assisted acquisition, the BBVAPR Acquisition
and the Scotiabank PR & USVI Acquisition, Oriental recorded a core deposit
intangible representing the value of checking and savings deposits acquired. At
December 31, 2019 this core deposit intangible amounted to $43.2
million, including $41.5 from the Scotiabank PR
& USVI Acquisition. At December 31,
2018 this core deposit
intangible amounted to $2.5 million. 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 and insurance agency in the Scotiabank PR & USVI Acquisitions.
At December 31, 2019 this customer relationship intangible
amounted to $13.2 million, from which $12.7 million corresponded to
the Scotiabank PR & USVI Acquisition. At December 31, 2018 this
customer relationship intangible amounted to $888 thousand. Oriental also recorded
other intangibles from the Scotiabank PR & USVI Acquisition which amounted
to $567 thousand at December 31, 2019.
NOTE 14 — ACCRUED INTEREST RECEIVABLE AND OTHER
ASSETS
Accrued interest receivable
at December 31, 2019 and 2018 consists of
the following:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Loans, excluding acquired loans
|
$
|
32,728
|
|
$
|
30,409
|
Investments
|
|
4,053
|
|
|
3,845
|
|
$
|
36,781
|
|
$
|
34,254
|
|
|
|
|
|
|
Other assets at December 31, 2019 and 2018 consist of
the following:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Prepaid expenses
|
$
|
52,558
|
|
$
|
9,788
|
Other repossessed assets
|
|
3,327
|
|
|
2,986
|
Tax credits
|
|
277
|
|
|
2,277
|
Investment in Statutory Trust
|
|
1,083
|
|
|
1,083
|
Accounts receivable and other assets
|
|
78,594
|
|
|
37,842
|
|
$
|
135,839
|
|
$
|
53,976
|
Prepaid
expenses amounting to $52.6 million at December 31, 2019, include prepaid municipal,
property and income taxes aggregating to $45.3 million from which $31.9 million correspond to the
Scotiabank PR & USVI Acquisition. At December 31, 2018 prepaid expenses
amounted to $9.8 million, including prepaid municipal, property and income taxes
aggregating to $5.5 million.
Other
repossessed assets totaled $3.3 million and $3.0 million at December 31, 2019
and 2018, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.
At
December 31, 2019 and 2018, tax credits for Oriental totaled $277 thousand and
$2.3 million, respectively. These tax credits do not have an expiration date.
NOTE 15— DEPOSITS AND RELATED INTEREST
Total
deposits, including related accrued interest payable, as of December 31, 2019
and 2018 consist of the following:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Non-interest bearing demand deposits
|
$
|
1,675,315
|
|
$
|
1,105,324
|
Interest-bearing savings and demand
deposits
|
|
3,718,846
|
|
|
2,274,423
|
Retail certificates of deposit
|
|
1,781,237
|
|
|
805,712
|
Institutional certificates of deposit
|
|
279,714
|
|
|
197,559
|
Total core deposits
|
|
7,455,112
|
|
|
4,383,018
|
Brokered deposits
|
|
243,498
|
|
|
525,097
|
Total deposits
|
$
|
7,698,610
|
|
$
|
4,908,115
|
|
|
|
|
|
|
At
December 31, 2019, Oriental completed the Scotiabank PR & USVI Acquisition adding
$3.0 billion in core deposits.
Brokered
deposits include $222.1 million in certificates of
deposits and $21.4 million in money market
accounts at December 31, 2019, and $500.8 million in certificates of
deposits and $24.3 million in money market
accounts at December 31, 2018. As part of the sale $672.2 million available-for-sale
mortgage-backed securities during the year ended December 31, 2019, Oriental
reduced $277.7 million brokered deposits.
The
weighted average interest rate of Oriental’s deposits was 0.86% and 0.67%, respectively, at
December 31, 2019 and 2018. Interest expense for the years ended December 31,
2019, 2018 and 2017 was as follows:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In
thousands)
|
Demand and savings deposits
|
$
|
14,925
|
|
$
|
12,478
|
|
$
|
11,426
|
Certificates of deposit
|
|
24,430
|
|
|
20,475
|
|
|
18,872
|
|
$
|
39,355
|
|
$
|
32,953
|
|
$
|
30,298
|
At December 31, 2019 and
2018, time deposits in denominations of $250 thousand
or higher, excluding accrued interest and unamortized discounts, amounted to $692.1 million and $346.0 million, respectively.
Such amounts include public funds time deposits from various Puerto Rico
government municipalities, agencies and corporations of $257.2 million and $19.6 million at a weighted
average rate of 67.0% and 116.4% at December 31,
2019 and 2018, respectively.
At
December 31, 2019 and 2018, total public fund deposits from various Puerto Rico
government municipalities, agencies and corporations amounted to $278.7 million and $207.4 million, respectively.
These public funds were collateralized with commercial loans and securities
amounting to $320.8 million and $281.2 million at December 31,
2019 and 2018, respectively.
Excluding
accrued interest of approximately $11.7
million, the scheduled maturities of certificates of deposit at December
31, 2019 and 2018
are as follows:
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
(In
thousands)
|
Within one year:
|
|
|
|
|
|
Three (3) months or less
|
$
|
314,796
|
|
$
|
305,088
|
Over 3 months through 1 year
|
|
881,183
|
|
|
545,363
|
|
|
1,195,979
|
|
|
850,451
|
Over 1 through 2 years
|
|
732,421
|
|
|
484,197
|
Over 2 through 3 years
|
|
175,032
|
|
|
89,340
|
Over 3 through 4 years
|
|
89,148
|
|
|
34,018
|
Over 4 through 5 years
|
|
78,706
|
|
|
42,998
|
|
$
|
2,271,286
|
|
$
|
1,501,004
|
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 $1.0 million and $1.1 million as of December 31,
2019 and 2018, respectively.
NOTE 16—
BORROWINGS AND RELATED INTEREST
Securities Sold under Agreements to Repurchase
At
December 31, 2019, 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.
The following table shows Oriental’s
repurchase agreements, excluding accrued interest in the amount of $274 thousand and $785 thousand at December 31,
2019 and 2018, respectively:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Short-term fixed-rate repurchase
agreements, interest ranging from 1.85% to 2.70% (December 31, 2018; 2.45%
to 2.95%)
|
$
|
140,000
|
|
$
|
214,723
|
Long-term fixed-rate repurchase
agreements, interest ranging from 1.85% to 2.86% (December 31, 2018; 1.72% to
2.86%)
|
|
50,000
|
|
|
240,000
|
Total assets sold under agreements
to repurchase
|
$
|
190,000
|
|
$
|
454,723
|
|
|
|
|
|
|
Repurchase
agreements mature as follows:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Less than 90 days
|
$
|
140,000
|
|
$
|
214,723
|
Over 90-days
|
|
50,000
|
|
|
240,000
|
Total
|
$
|
190,000
|
|
$
|
454,723
|
During the
year ended December 31, 2019, Oriental terminated before maturity $191.2 million securities sold
under agreements to repurchase as a result of the sale of available-for-sale
securities, at a cost of $7 thousand, included in the
statement of operations of the financial statements. Also, $73.7 million of repurchase
agreements matured and were not renewed.
The following securities
were sold under agreements to repurchase:
|
December 31,
2019
|
|
Amortized
|
|
|
|
Approximate
|
|
Weighted
|
|
Cost of
|
|
|
|
Fair Value
|
|
Average
|
|
Underlying
|
|
Balance of
|
|
of Underlying
|
|
Interest Rate
|
Underlying Securities
|
Securities
|
|
Borrowing
|
|
Securities
|
|
of Security
|
|
(Dollars in
thousands)
|
FNMA and FHLMC Certificates
|
$
|
204,225
|
|
$
|
190,000
|
|
$
|
204,068
|
|
|
2.98%
|
Total
|
$
|
204,225
|
|
$
|
190,000
|
|
$
|
204,068
|
|
|
2.98%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
Amortized
|
|
|
|
Approximate
|
|
Weighted
|
|
Cost of
|
|
|
|
Fair Value
|
|
Average
|
|
Underlying
|
|
Balance of
|
|
of Underlying
|
|
Interest Rate
|
Underlying Securities
|
Securities
|
|
Borrowing
|
|
Securities
|
|
of Security
|
|
(Dollars in
thousands)
|
FNMA and FHLMC Certificates
|
$
|
496,814
|
|
$
|
454,723
|
|
$
|
487,181
|
|
|
3.01%
|
Total
|
$
|
496,814
|
|
$
|
454,723
|
|
$
|
487,181
|
|
|
3.01%
|
The
following summarizes significant data on securities sold under agreements to
repurchase as of December 31, 2019, 2018 and 2017, excluding accrued interest:
|
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Average
daily aggregate balance outstanding
|
$
|
299,842
|
|
$
|
357,086
|
|
$
|
393,133
|
Maximum
outstanding balance at any month-end
|
$
|
461,954
|
|
$
|
457,053
|
|
$
|
606,210
|
Weighted
average interest rate during the year
|
|
2.48%
|
|
|
2.17%
|
|
|
1.80%
|
Weighted
average interest rate at year end
|
|
2.45%
|
|
|
2.49%
|
|
|
1.63%
|
Advances from the
Federal Home Loan Bank of New York
Advances are received from the FHLB-NY under an
agreement whereby Oriental is required to maintain a minimum amount of
qualifying collateral with a fair value of at least 110% of the outstanding
advances. At December 31, 2019
and 2018, these advances were secured by
mortgage and commercial loans amounting to $1.060 billion and $847.3 million, respectively.
Also, at December 31, 2019 and
2018, Oriental had an additional
borrowing capacity with the FHLB-NY of $983 million and $762.0 million, respectively. At December 31, 2019 and 2018, the weighted average remaining maturity of FHLB’s
advances was 22.7 months and 26.6 months, respectively. The original terms of these advances range
between one day and seven years, and the FHLB-NY does not
have the right to exercise put options at par on any advances outstanding as of
December 31, 2019.
The following table shows a summary of the
advances and their terms, excluding accrued interest in the amount of $160 thousand and $176 thousand, at December 31,
2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
thousands)
|
Short-term fixed-rate advances from
FHLB, with a weighted average interest rate of 1.85% (December 31, 2018 -
2.61%)
|
|
$
|
31,955
|
|
$
|
33,572
|
Long-term fixed-rate advances from FHLB,
with a weighted average interest rate of 2.97% (December 31, 2018 - 2.89%)
|
|
|
45,894
|
|
|
43,872
|
|
|
$
|
77,849
|
|
$
|
77,444
|
Advances
from FHLB mature as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
Under 90 days
|
|
$
|
31,955
|
|
$
|
33,572
|
Over one to three years
|
|
|
8,517
|
|
|
8,867
|
Over three to five years
|
|
|
33,018
|
|
|
35,005
|
Over five years
|
|
|
4,359
|
|
|
-
|
|
|
$
|
77,849
|
|
$
|
77,444
|
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 December 31, 2019 and 2018, respectively.
In
August 2003, the Statutory Trust II, a special purpose entity of the Company,
was formed for the purpose of issuing trust redeemable preferred securities. In
September 2003, $35.0 million of trust
redeemable preferred securities were issued by the Statutory Trust II as part
of a pooled underwriting transaction.
The
proceeds from this issuance were used by the Statutory Trust II to purchase a
like amount of a floating rate junior subordinated deferrable interest
debenture issued by Oriental. The subordinated deferrable interest debenture
has a par value of $36.1 million, bears interest
based on 3-month LIBOR plus 295 basis points (4.85% at December 31, 2019; 5.74.% at 2018), is payable
quarterly, and matures on September 17, 2033. It may be called at par after
five years and quarterly thereafter (next call date March 2020). The trust
redeemable preferred securities have the same maturity and call provisions as
the subordinated deferrable interest debenture. The subordinated deferrable
interest debenture issued by Oriental is accounted for as a liability
denominated as a subordinated capital note on the consolidated statements of
financial condition.
The subordinated
capital note is treated as Tier 1 capital for regulatory purposes. Under the
Dodd-Frank Act and the Basel III capital rules issued by the federal banking
regulatory agencies in July 2013, bank holding companies are prohibited from
including in their Tier 1 capital hybrid debt and equity securities, including
trust preferred securities, issued on or after May 19, 2010. Any such
instruments issued before May 19, 2010 by a bank holding company, such as
Oriental, with total consolidated assets of less than $15 billion as of
December 31, 2009, may continue to be included as Tier 1 capital. Therefore,
Oriental is permitted to continue to include its existing trust preferred securities as Tier 1 capital.
NOTE 17 – 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 December 31, 2019 and 2018:
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
6
|
|
$
|
-
|
|
$
|
6
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
|
$
|
347
|
|
$
|
-
|
|
$
|
347
|
|
$
|
2,037
|
|
$
|
-
|
|
$
|
(1,690)
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
913
|
|
$
|
-
|
|
$
|
913
|
|
$
|
-
|
|
$
|
-
|
|
$
|
913
|
Securities sold under agreements to
repurchase
|
|
|
190,000
|
|
|
-
|
|
|
190,000
|
|
|
204,068
|
|
|
-
|
|
|
(14,068)
|
Total
|
|
$
|
190,913
|
|
$
|
-
|
|
$
|
190,913
|
|
$
|
204,068
|
|
$
|
-
|
|
$
|
(13,155)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
|
$
|
333
|
|
$
|
-
|
|
$
|
333
|
|
$
|
-
|
|
|
1,980
|
|
$
|
(1,647)
|
Securities sold under agreements to
repurchase
|
|
|
454,723
|
|
|
-
|
|
|
454,723
|
|
|
487,181
|
|
|
-
|
|
|
(32,458)
|
Total
|
|
$
|
455,056
|
|
$
|
-
|
|
$
|
455,056
|
|
$
|
487,181
|
|
$
|
1,980
|
|
$
|
(34,105)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 18 — EMPLOYEE
BENEFIT PLAN
Oriental
has a profit sharing plan containing a cash or deferred arrangement qualified
under Sections 1081.01(a) and 1081.01(d) of the Puerto Rico Internal
Revenue Code of 2011, as amended, (the "PR Code"), and
Sections 401(a) and 401(k) of the United States Internal Revenue Code
of 1986, as amended. This plan is subject to the provisions of Title I of
the Employee Retirement Income Security Act of 1976, as amended (“ERISA”). This
plan covers all full-time employees of Oriental who are age 21 or older. Under
this plan, participants may contribute each year up to $19,000. Oriental's matching
contribution is 50 cents for each dollar contributed by an employee, up to 4% of such employee’s base
salary. It is invested in accordance with the employee’s decision among the
available investment alternatives provided by the plan. This plan is entitled
to acquire and hold qualified employer securities as part of its investment of
the trust assets pursuant to ERISA Section 407. Oriental contributed $923 thousand, $856 thousand and $836 thousand in cash during 2019,
2018 and 2017, respectively. Oriental’s contribution becomes 100% vested once
the employee completes three years of service.
Also, Oriental offers to its senior management a
non-qualified deferred compensation plan, where executives can defer taxable
income. Both the employer and the employee have flexibility because
non-qualified plans are not subject to ERISA contribution limits nor are they
subject to discrimination tests in terms of who must be included in the plan.
Under this plan, the employee’s current taxable income is reduced by the amount
being deferred. Funds deposited in a deferred compensation plan can accumulate
without current income tax to the individual. Income taxes are due when the
funds are withdrawn.
The
Retirement Plan for Scotiabank de Puerto Rico employees (1081.01(a)) was part
of the acquisition. The Plan is a “tax-qualified” “profit-sharing plan”, as
defined in section 401(a) of the Internal Revenue Code of 1986, as amended (the
“U.S. Code”) and section 1081.01(a) of the Internal Revenue Code for a New
Puerto Rico (the “P.R. Code”), with a “qualified cash-or-deferred arrangement,”
as defined in section 401(k) of the U.S. Code and section 1081.01(d) of the P.R
Code. The employee can participate up to 75% of salary before taxes with a
matching of 100% of the first 3% deferred and 50% of the next 3% up to 6% of
salary; with a maximum annual contribution of $19,000 in 2019. They receive a
non-elective contribution of 2% up to a maximum of $2,000 in the year.
NOTE 19
— RELATED PARTY
TRANSACTIONS
Oriental grants
loans to its directors, executive officers and to certain related individuals
or organizations in the ordinary course of business. These loans are offered at
the same terms as loans to unrelated third parties. The activity and balance of
these loans for the years December 31, 2019, 2018, and 2017 was as follows:
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
|
|
Balance
at the beginning of year
|
$
|
28,520
|
|
$
|
28,138
|
|
$
|
29,020
|
New loans and disbursements
|
|
203
|
|
|
10,388
|
|
|
2,875
|
Repayments
|
|
(6,411)
|
|
|
(10,006)
|
|
|
(3,757)
|
Balance
at the end of year
|
$
|
22,312
|
|
$
|
28,520
|
|
$
|
28,138
|
Oriental also
hires professional services amounting to $3.7 million from a related party.
NOTE 20
— INCOME TAXES
Oriental
is subject to the dispositions of the 2011 Puerto Rico Internal Revenue Code,
as amended (the “Puerto Rico Code”). For 2019, the Puerto Rico Code imposed a
maximum statutory corporate
tax rate of 37.5%. 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.
Under the Puerto
Rico Code, all companies are treated as separate taxable entities and are not
entitled to file consolidated tax returns. OFG Bancorp and its subsidiaries are
subject to Puerto Rico regular income tax or the alternative minimum tax
(“AMT”) on income earned from all sources. The AMT is payable if it exceeds regular
income tax. The excess of AMT over regular income tax paid in any one year may
be used to offset regular income tax in future years, subject to certain
limitations.
The components of
income tax expense for the years ended December 31, 2019, 2018, and 2017
are as follows:
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
Current
income tax expense
|
$
|
25,477
|
|
$
|
33,618
|
|
$
|
19,101
|
Deferred
income tax (benefit) expense
|
|
(4,068)
|
|
|
14,772
|
|
|
(3,658)
|
Total
income tax expense (benefit)
|
$
|
21,409
|
|
$
|
48,390
|
|
$
|
15,443
|
In relation to the exempt income level, the Bank’s
investment securities portfolio and loans portfolio generated net tax-exempt
interest income of $11.8 million at 2019, $11.0 million at 2018 and $10.0 million at 2017. OIB
generated exempt income of $10.3 million, $5.3 million and $9.6 million for 2019, 2018,
and 2017, respectively.
Oriental maintained an
effective tax rate lower than statutory rate for the year ended December 31,
2019, mainly by investing in tax-exempt obligations, doing business through its
international banking entity Oriental International Bank and by expanding its
subsidiary operations in the U.S., which are taxed at a lower rate.
Oriental’s income tax expense differs from
amounts computed by applying the applicable statutory rate to income before
income taxes as follow:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
Rate
|
|
(Dollars in
thousands)
|
Income tax expense at statutory rates
|
$
|
28,219
|
|
37.50%
|
|
$
|
51,792
|
|
39.00%
|
|
$
|
26,555
|
|
39.00%
|
Tax effect of exempt and excluded
income, net
|
|
(8,728)
|
|
-11.60%
|
|
|
(6,645)
|
|
-5.01%
|
|
|
(9,506)
|
|
-13.96%
|
Disallowed net operating loss carryover
|
|
384
|
|
0.51%
|
|
|
269
|
|
0.20%
|
|
|
281
|
|
0.41%
|
Change in valuation allowance
|
|
1,217
|
|
1.62%
|
|
|
1,504
|
|
1.13%
|
|
|
(305)
|
|
-0.45%
|
Unrecognized tax benefits, net
|
|
1,794
|
|
2.38%
|
|
|
(386)
|
|
-0.29%
|
|
|
(775)
|
|
-1.14%
|
Capital gain at preferential rate
|
|
(265)
|
|
-0.35%
|
|
|
(20)
|
|
-0.02%
|
|
|
(279)
|
|
-0.41%
|
Effect of change in tax rate
|
|
-
|
|
0.00%
|
|
|
4,069
|
|
3.06%
|
|
|
-
|
|
0.00%
|
Bargain purchase gain
|
|
(118)
|
|
-0.16%
|
|
|
-
|
|
0.00%
|
|
|
-
|
|
0.00%
|
Other items, net
|
|
(1,094)
|
|
-1.44%
|
|
|
(2,193)
|
|
-1.63%
|
|
|
(528)
|
|
-0.79%
|
Income tax expense
|
$
|
21,409
|
|
28.46%
|
|
$
|
48,390
|
|
36.44%
|
|
$
|
15,443
|
|
22.66%
|
Oriental’s effective tax rate for the year ended
December 31, 2019 was 28.46%, and it was mainly
affected by changes to the proportion of exempt income to total income. For the
years ended December 31, 2018 and 2017, the effective tax rate was 36.44% and 22.7%,
respectively. On December 10, 2018, the Puerto Rico government enacted Act
257-2018 introducing several amendments to the Puerto Rico Code. Some of the
most relevant income tax changes include: a reduction of the maximum corporate
income tax rate to 37.5%, from 39%, and a restriction of the
use of partnership gains to offset current and accumulated operating losses
generated by a corporate partner.
Oriental classifies
unrecognized tax benefits in other liabilities. These gross unrecognized tax
benefits would affect the effective tax rate if realized. At December 31, 2019,
the amount of unrecognized tax benefits was $2.7 million (December 31, 2018
- $875 thousand). Oriental had
accrued $51 thousand at December 31,
2019 (December 31, 2018 - $81 thousand) for the payment
of interest and penalties relating to unrecognized tax benefits and released $439 thousand due to expiration
of statute of limitation.
The
following table presents a reconciliation of unrecognized tax benefits:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
In thousands)
|
Balance at beginning of year
|
$
|
875
|
|
|
$
|
1,260
|
|
|
$
|
2,040
|
|
Additions for tax positions of prior
years
|
|
51
|
|
|
|
81
|
|
|
|
97
|
|
Additions due to new tax positions
|
|
2,181
|
|
|
|
-
|
|
|
|
-
|
|
Reduction for tax positions as a result
of lapse of statute of limitations
|
|
(439)
|
|
|
|
(466)
|
|
|
|
(877)
|
|
Balance at end of year
|
$
|
2,668
|
|
|
$
|
875
|
|
|
$
|
1,260
|
|
Oriental follows a two-step approach for recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that
it is more likely than not that the position will be sustained on audit,
including resolution of related appeals of litigation processes, if any. The
second step is to measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement. The amount of
unrecognized tax benefits may increase or decrease in the future due to new or
current tax year positions, expiration of open income tax returns, changes in
management’s judgment about the level of uncertainty, status of examinations,
litigations and legislative activity. For the year 2019 there was a net
increase in unrecognized tax benefit of $1.8 million.
The statute of
limitations under the Puerto Rico Code is four years and the statute of
limitations for federal tax purposes is three years, after a tax return is due
or filed, whichever is later. Oriental is potentially subject to income tax
audits in the Commonwealth of Puerto Rico for taxable years 2015 to 2018, until
the applicable statute of limitations expires. In addition, Oriental’s US
subsidiaries are potentially subject to income tax audits by the IRS for
taxable years 2016 to 2018. Tax audits by their nature are often complex and
can require several years to complete.
The determination of the deferred tax expense or benefit is
generally based on changes in the carrying amounts of assets and liabilities
that generate temporary differences. The carrying value of Oriental’s net
deferred tax assets assumes that Oriental will be able to generate sufficient
future taxable income based on estimates and assumptions. If these estimates
and related assumptions change in the future, Oriental may be required to record
valuation allowances against its deferred tax assets resulting in additional
income tax expense in the consolidated statements of operations. Significant
components of Oriental’s deferred tax assets and liabilities as of December 31,
2019, and 2018 were as follows:
|
December 31,
|
|
2019
|
|
2018
|
|
(In thousands)
|
Deferred
tax asset:
|
|
|
|
|
|
Allowance
for loan and lease losses and other reserves
|
$
|
60,248
|
|
$
|
85,227
|
Scotiabank
PR discount
|
|
15,499
|
|
$
|
-
|
Loans
and other real estate valuation adjustment
|
|
6,874
|
|
|
7,842
|
Deferred
loan charge-offs
|
|
144,799
|
|
|
-
|
Net operating loss carry forwards
|
|
7,785
|
|
|
5,466
|
Alternative
minimum tax
|
|
25,123
|
|
|
14,631
|
Unrealized
net loss included in other comprehensive income
|
|
340
|
|
|
-
|
Deferred
loan origination income, net
|
|
11,303
|
|
|
-
|
Goodwill
|
|
30,408
|
|
|
-
|
Acquired
portfolio
|
|
51,079
|
|
|
35,753
|
Other
assets allowances
|
|
457
|
|
|
966
|
Other
deferred tax assets
|
|
23,506
|
|
|
5,298
|
Total gross deferred tax asset
|
|
377,421
|
|
|
155,183
|
Less: valuation allowance
|
|
(6,585)
|
|
|
(4,629)
|
Net gross deferred tax assets
|
|
370,836
|
|
|
150,554
|
Deferred
tax liability:
|
|
|
|
|
|
Acquired
loans tax basis
|
|
(130,997)
|
|
|
-
|
FDIC-assisted
Eurobank acquisition, net
|
|
(14,004)
|
|
|
(22,825)
|
Customer
deposit and customer relationship intangibles
|
|
(17,838)
|
|
|
(1,263)
|
Building
valuation adjustment
|
|
(7,848)
|
|
|
(8,284)
|
Unrealized
net gain on available-for-sale securities
|
|
(82)
|
|
|
-
|
Servicing
asset
|
|
(15,988)
|
|
|
(4,018)
|
Other
deferred tax liabilities
|
|
(7,339)
|
|
|
(401)
|
Total gross deferred tax liabilities
|
|
(194,096)
|
|
|
(36,791)
|
Net
deferred tax asset
|
$
|
176,740
|
|
$
|
113,763
|
As of December 31, 2019 and 2018, Oriental's net
deferred tax asset, net of a valuation allowance of $6.6 million and $4.6
million, respectively, amounted to $176.7 million and $113.8 million,
respectively. The deferred tax assets as of December 31, 2019 include
acquisition related deferred tax assets of $59.9 million. The acquisition
of SBPR is a nontaxable transaction where the historical tax bases of the
acquired business carries over to the acquirer, the historical tax bases
include a tax-deductible goodwill from prior acquisitions of SBPR with a
deferred tax asset of $30.4 million. The increase in
valuation allowance of $2.0 million was mainly related
to the realizability of the Holding company’s deferred tax assets ($1.2 million) and the remaining
$737 thousand was related to
the SBPR acquisition deferred tax asset. 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 income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future income, and tax planning strategies in making
this assessment. Based upon the assessment of positive and negative evidence,
the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax asset are deductible,
management believes it is more likely than not that Oriental will realize the
benefits of these deductible differences, net of the existing valuation
allowances, at December 31, 2019. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carry-forward period are reduced.
NOTE 21 — 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 based on the framework of the
Basel Committee on Banking Supervision in “Basel III: A Global Regulatory
Framework for More Resilient Banks and Banking Systems” (“Basel III”), which
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 Basel III 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 Basel III 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 Basel III capital
rules, the minimum capital ratios requirements are as follows:
4.5% CET1 to
risk-weighted assets;
6.0% Tier 1 capital
(that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital
(that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets;
and
4.0% Tier 1 capital to
average consolidated assets as reported on consolidated financial statements
(known
as the “leverage ratio”).
As of December 31, 2019 and 2018, OFG Bancorp and the Bank met all capital adequacy
requirements to which they are subject. As of December 31, 2019 and 2018, the Bank is “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well
capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1
risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the
tables presented below.
OFG
Bancorp’s and the Bank’s actual capital amounts and ratios as of December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
Minimum
Capital
|
|
Minimum to be
Well
|
|
Actual
|
|
Requirement
|
|
Capitalized
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
(Dollars in
thousands)
|
OFG Bancorp Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
938,994
|
|
13.76%
|
|
$
|
545,953
|
|
8.00%
|
|
$
|
682,441
|
|
10.00%
|
Tier 1 capital to risk-weighted assets
|
$
|
852,311
|
|
12.49%
|
|
$
|
409,465
|
|
6.00%
|
|
$
|
545,953
|
|
8.00%
|
Common equity tier 1 capital to
risk-weighted assets
|
$
|
735,441
|
|
10.78%
|
|
$
|
307,099
|
|
4.50%
|
|
$
|
443,587
|
|
6.50%
|
Tier 1 capital to average total assets
|
$
|
852,311
|
|
9.24%
|
|
$
|
369,151
|
|
4.00%
|
|
$
|
461,438
|
|
5.00%
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
990,499
|
|
20.48%
|
|
$
|
386,977
|
|
8.00%
|
|
$
|
483,721
|
|
10.00%
|
Tier 1 capital to risk-weighted assets
|
$
|
928,577
|
|
19.20%
|
|
$
|
290,233
|
|
6.00%
|
|
$
|
386,977
|
|
8.00%
|
Common equity tier 1 capital to
risk-weighted assets
|
$
|
811,707
|
|
16.78%
|
|
$
|
217,675
|
|
4.50%
|
|
$
|
314,419
|
|
6.50%
|
Tier 1 capital to average total assets
|
$
|
928,577
|
|
14.22%
|
|
$
|
261,125
|
|
4.00%
|
|
$
|
326,406
|
|
5.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Capital
|
|
Minimum to be
Well
|
|
Actual
|
|
Requirement
|
|
Capitalized
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
(Dollars in
thousands)
|
Bank Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
899,844
|
|
13.21%
|
|
$
|
544,964
|
|
8.00%
|
|
$
|
681,205
|
|
10.00%
|
Tier 1 capital to risk-weighted assets
|
$
|
813,444
|
|
11.94%
|
|
$
|
408,723
|
|
6.00%
|
|
$
|
544,964
|
|
8.00%
|
Common equity tier 1 capital to
risk-weighted assets
|
$
|
813,444
|
|
11.94%
|
|
$
|
306,542
|
|
4.50%
|
|
$
|
442,783
|
|
6.50%
|
Tier 1 capital to average total assets
|
$
|
813,444
|
|
8.85%
|
|
$
|
367,537
|
|
4.00%
|
|
$
|
459,421
|
|
5.00%
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
$
|
949,596
|
|
19.68%
|
|
$
|
385,992
|
|
8.00%
|
|
$
|
482,490
|
|
10.00%
|
Tier 1 capital to risk-weighted assets
|
$
|
887,918
|
|
18.40%
|
|
$
|
289,494
|
|
6.00%
|
|
$
|
385,992
|
|
8.00%
|
Common equity tier 1 capital to
risk-weighted assets
|
$
|
887,918
|
|
18.40%
|
|
$
|
217,120
|
|
4.50%
|
|
$
|
313,618
|
|
6.50%
|
Tier 1 capital to average total assets
|
$
|
887,918
|
|
13.68%
|
|
$
|
259,547
|
|
4.00%
|
|
$
|
324,434
|
|
5.00%
|
NOTE 22 – EQUITY-BASED COMPENSATION PLAN
The Omnibus Plan
provides for equity-based compensation incentives through the grant of stock
options, stock appreciation rights, restricted stock, restricted stock units,
and dividend equivalents, as well as equity-based performance awards.
The activity in
outstanding options for the years ended December 31, 2019, 2018, and 2017 is
set forth below:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
Number
|
|
Average
|
|
Number
|
|
Average
|
|
Number
|
|
Average
|
|
Of
|
|
Exercise
|
|
Of
|
|
Exercise
|
|
Of
|
|
Exercise
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
Beginning of year
|
739,326
|
|
$
|
14.28
|
|
845,619
|
|
$
|
14.14
|
|
917,269
|
|
$
|
14.08
|
Options granted
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
Options exercised
|
(105,032)
|
|
|
12.32
|
|
(101,268)
|
|
|
13.41
|
|
(71,150)
|
|
|
12.96
|
Options forfeited
|
-
|
|
|
-
|
|
(5,025)
|
|
|
17.08
|
|
(500)
|
|
|
15.23
|
End of year
|
634,294
|
|
$
|
14.60
|
|
739,326
|
|
$
|
14.28
|
|
845,619
|
|
$
|
14.14
|
The following table summarizes the range of
exercise prices and the weighted average remaining contractual life of the
options outstanding
at December 31, 2019:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Contract Life
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average
|
|
Remaining
|
|
Number of
|
|
Average
|
Range of Exercise Prices
|
|
Options
|
|
Exercise Price
|
|
(Years)
|
|
Options
|
|
Exercise Price
|
$5.63 to $8.45
|
|
|
-
|
|
|
-
|
|
-
|
|
|
3,532
|
|
|
8.28
|
11.27 to 14.08
|
|
|
233,994
|
|
|
11.88
|
|
1.5
|
|
|
313,394
|
|
|
11.81
|
14.09 to 16.90
|
|
|
244,625
|
|
|
15.39
|
|
3.7
|
|
|
228,625
|
|
|
15.29
|
16.91 to 19.71
|
|
|
155,675
|
|
|
17.00
|
|
5.2
|
|
|
78,362
|
|
|
17.44
|
|
|
|
634,294
|
|
$
|
14.60
|
|
3.9
|
|
|
623,913
|
|
$
|
13.77
|
Aggregate Intrinsic Value
|
|
$
|
5,714,603
|
|
|
|
|
|
|
$
|
1,754,258
|
|
|
|
There were no options granted during 2019, 2018 and 2017. The
average fair value of each option granted would have been estimated at the date
of the grant using the Black-Scholes option pricing model. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
traded options that have no restrictions and are fully transferable and
negotiable in a free trading market. Black-Scholes does not consider the
employment, transfer or vesting restrictions that are inherent in Oriental’s
stock options. Use of an option valuation model, as required by GAAP, includes
highly subjective assumptions based on long-term predictions, including the
expected stock price volatility and average life of each option grant.
The following table summarizes the activity
in restricted units under the Omnibus Plan for the years ended December 31,
2019, 2018 and 2017:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
Restricted
|
|
Grant Date
|
|
Restricted
|
|
Grant Date
|
|
Restricted
|
|
Grant Date
|
|
Units
|
|
Fair Value
|
|
Units
|
|
Fair Value
|
|
Units
|
|
Fair Value
|
Beginning of year
|
254,050
|
|
$
|
12.50
|
|
105,800
|
|
$
|
14.19
|
|
59,800
|
|
$
|
16.64
|
Restricted units granted
|
125,100
|
|
|
21.36
|
|
176,250
|
|
|
12.12
|
|
83,000
|
|
|
13.31
|
Restricted units lapsed
|
-
|
|
|
-
|
|
(24,017)
|
|
|
17.12
|
|
(33,100)
|
|
|
16.10
|
Restricted units forfeited
|
-
|
|
|
-
|
|
(3,983)
|
|
|
12.48
|
|
(3,900)
|
|
|
16.79
|
End of year
|
379,150
|
|
$
|
15.32
|
|
254,050
|
|
$
|
12.50
|
|
105,800
|
|
$
|
14.19
|
The total unrecognized
compensation cost related to non-vested restricted units to members of
management at December 31, 2019 was $2.8 million and is expected to
be recognized over a weighted-average period of 1.8 years.
NOTE 23 – STOCKHOLDERS’ EQUITY
Preferred Stock and Common Stock
On October 22,
2018, Oriental completed the conversion of all of its 84,000 shares of Series C
preferred stock into common stock. Each share of Series C preferred stock was
converted into 86.4225 shares of common stock.
Upon conversion, the Series C preferred stock is no longer outstanding and all
rights with respect to the Series C preferred stock have ceased and terminated,
except the right to receive the number of whole shares of common stock issuable
upon conversion of the Series C preferred stock and any required cash-in-lieu
of fractional shares. At both December 31, 2019 and 2018, preferred and common
stock paid-in capital amounted $92.0 million and $59.9 million, respectively.
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 December 31, 2019 and
2018, accumulated issuance costs charged against additional paid-in capital
amounted to $13.6 million and $10.1 million for common and
preferred stock, respectively.
Legal Surplus
The Puerto Rico Banking Act requires that a minimum of
10% of the Bank’s net income for the year be transferred to a reserve fund
until such fund (legal surplus) equals the total paid in capital on common and preferred
stock. At December 31, 2019
and 2018, the Bank’s legal surplus
amounted to $95.8 million and $90.2 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 years ended December
31, 2019, 2018 and 2017, Oriental did not
repurchase any shares under the program.
At December 31, 2019 the number of shares that may yet be purchased
under the $70 million program is
estimated at 327,440,
and was calculated by dividing the remaining balance of $7.7 million by $23.61 (closing price of Oriental's common stock at
December 31, 2019).
The activity in connection with common
shares held in treasury by Oriental for the years ended December 31, 2019, 2018
and 2017 is set forth below:
|
|
Year Ended
December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
Dollar
|
|
|
|
Dollar
|
|
|
|
Dollar
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
(In
thousands, except shares data)
|
Beginning of year
|
$
|
8,591,310
|
|
$
|
103,633
|
|
8,678,427
|
|
$
|
104,502
|
|
8,711,025
|
|
$
|
104,860
|
Common shares used upon lapse of
restricted stock units and options
|
|
(105,032)
|
|
|
(1,294)
|
|
(87,117)
|
|
|
(869)
|
|
(32,598)
|
|
|
(358)
|
End of year
|
$
|
8,486,278
|
|
$
|
102,339
|
|
8,591,310
|
|
$
|
103,633
|
|
8,678,427
|
|
$
|
104,502
|
NOTE 24
- ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other
comprehensive income, net of income taxes, as of December 31, 2019 and 2018 consisted of:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Unrealized loss on securities
available-for-sale which are not
other-than-temporarily impaired
|
$
|
(306)
|
|
$
|
(12,654)
|
Income tax effect of unrealized loss on
securities available-for-sale
|
|
(135)
|
|
|
1,682
|
Net unrealized gain on securities
available-for-sale which are not
other-than-temporarily impaired
|
|
(441)
|
|
|
(10,972)
|
Unrealized (loss) gain on cash flow
hedges
|
|
(907)
|
|
|
14
|
Income tax effect of unrealized (loss)
gain on cash flow hedges
|
|
340
|
|
|
(5)
|
Net unrealized (loss) gain on cash
flow hedges
|
|
(567)
|
|
|
9
|
Accumulated other comprehensive (loss),
net of income taxes
|
$
|
(1,008)
|
|
$
|
(10,963)
|
Unrealized losses on available-for-sale securities includes $12.0 million, net of tax effect
of the adoption of ASU No. 2017-12 from reclassification of all of its mortgage
backed securities with carrying value of $424.7 million, from the
held-to-maturity portfolio into the available-for-sale portfolio.
The following table presents changes in
accumulated other comprehensive income by component, net of taxes, for the years
ended December 31, 2019, 2018 and 2017:
|
Year Ended
December 31,
|
|
2019
|
|
Net
unrealized
|
|
Net
unrealized
|
|
Accumulated
|
|
gains on
|
|
loss on
|
|
other
|
|
securities
|
|
cash flow
|
|
comprehensive
|
|
available-for-sale
|
|
hedges
|
|
(loss) income
|
|
(In
thousands)
|
Beginning balance
|
$
|
(10,972)
|
|
$
|
9
|
|
$
|
(10,963)
|
Transfer of securities held to maturity
to available-for-sale
|
|
(12,041)
|
|
|
-
|
|
|
(12,041)
|
Other comprehensive income (loss)
before reclassifications
|
|
14,335
|
|
|
(2,442)
|
|
|
11,893
|
Amounts reclassified out of
accumulated other comprehensive income (loss)
|
|
8,237
|
|
|
1,866
|
|
|
10,103
|
Other comprehensive income (loss)
|
|
10,531
|
|
|
(576)
|
|
|
9,955
|
Ending balance
|
$
|
(441)
|
|
$
|
(567)
|
|
$
|
(1,008)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 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
|
|
(8,104)
|
|
|
(1,555)
|
|
|
(9,659)
|
Amounts reclassified out of accumulated
other comprehensive income (loss)
|
|
(230)
|
|
|
1,875
|
|
|
1,645
|
Other comprehensive income (loss)
|
|
(8,334)
|
|
|
320
|
|
|
(8,014)
|
Ending balance
|
$
|
(10,972)
|
|
$
|
9
|
|
$
|
(10,963)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2017
|
|
Net
unrealized
|
|
Net
unrealized
|
|
Accumulated
|
|
gains on
|
|
loss on
|
|
other
|
|
securities
|
|
cash flow
|
|
comprehensive
|
|
available-for-sale
|
|
hedges
|
|
(loss) income
|
|
(In
thousands)
|
Beginning balance
|
$
|
2,209
|
|
|
(613)
|
|
|
1,596
|
Other comprehensive loss before
reclassifications
|
|
(11,563)
|
|
|
(186)
|
|
|
(11,749)
|
Amounts reclassified out of accumulated
other comprehensive income (loss)
|
|
6,716
|
|
|
488
|
|
|
7,204
|
Other comprehensive (loss) income
|
|
(4,847)
|
|
|
302
|
|
|
(4,545)
|
Ending balance
|
$
|
(2,638)
|
|
$
|
(311)
|
|
$
|
(2,949)
|
The following
table presents reclassifications out of accumulated other comprehensive income
for the years ended December 31, 2019, 2018 and 2017:
|
Amount
reclassified out of accumulated other comprehensive income
|
Affected Line
Item in Consolidated Statement of Operations
|
|
|
Year Ended
December 31,
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
(In
thousands)
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Interest-rate contracts
|
$
|
1,866
|
|
$
|
1,875
|
|
$
|
488
|
Net interest expense
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Gain on sale of investments
|
|
8,274
|
|
|
-
|
|
|
6,896
|
Net gain on sale of securities
|
Residual tax effect from OIB's change in
applicable tax rate
|
|
-
|
|
|
5
|
|
|
104
|
Income tax expense
|
Tax effect from changes in tax rates
|
|
(37)
|
|
|
(235)
|
|
|
(284)
|
Income tax expense
|
|
$
|
10,103
|
|
$
|
1,645
|
|
$
|
7,204
|
|
NOTE
25 – EARNINGS PER COMMON SHARE
The calculation of earnings per common
share for the years ended December 31, 2019, 2018 and 2017 is as follows:
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In
thousands, except per share data)
|
Net income
|
$
|
53,841
|
|
$
|
84,410
|
|
$
|
52,646
|
Less: Dividends on preferred stock
|
|
|
|
|
|
|
|
|
Non-convertible preferred stock
(Series A, B, and D)
|
|
(6,512)
|
|
|
(6,511)
|
|
|
(6,512)
|
Convertible preferred stock
(Series C)
|
|
-
|
|
|
(5,513)
|
|
|
(7,350)
|
Income available to common shareholders
|
$
|
47,329
|
|
$
|
72,386
|
|
$
|
38,784
|
Effect of assumed conversion of the
convertible preferred stock
|
|
-
|
|
|
5,513
|
|
|
7,350
|
Income available to common shareholders
assuming conversion
|
$
|
47,329
|
|
$
|
77,899
|
|
$
|
46,134
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and share
equivalents:
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
51,335
|
|
|
45,400
|
|
|
43,939
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Average potential common
shares-options
|
|
384
|
|
|
142
|
|
|
19
|
Average potential common
shares-assuming conversion of convertible preferred stock
|
|
-
|
|
|
5,807
|
|
|
7,138
|
Total weighted average common shares
outstanding and equivalents
|
|
51,719
|
|
|
51,349
|
|
|
51,096
|
Earnings per common share - basic
|
$
|
0.92
|
|
$
|
1.59
|
|
$
|
0.88
|
Earnings per common share - diluted
|
$
|
0.92
|
|
$
|
1.52
|
|
$
|
0.88
|
During the last quarter of 2018, Oriental
converted all of its 84,000 outstanding shares of
Series C Preferred Stock into common stock. Each Series C Preferred Stock share
was converted into 86.4225 shares of common stock. In
computing diluted earnings per common share during the first nine months of
2018, the 84,000 shares of Series C Preferred Stock that remained outstanding,
with a conversion rate, subject to certain conditions, of 86.4225 shares of
common stock per share, were included as average potential common shares from
the date they were issued and outstanding. Moreover, in computing diluted
earnings per common share, the dividends declared during the years ended
December 31, 2018 and 2017 on the convertible preferred stock were added back
as income available to common shareholders.
For the years ended
December 31, 2019, 2018 and 2017, weighted-average stock options with an
anti-dilutive effect on earnings per share not included in the calculation
amounted to 2,575, 432,532 and 932,306, respectively.
NOTE
26 – GUARANTEES
At December 31, 2019 and 2018, the
unamortized balance of the obligations undertaken in issuing the guarantees
under standby letters of credit represented a liability of $47.3 million and $23.9 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 December 31,
2019 and 2018, the unpaid principal balance of residential mortgage loans sold
subject to credit recourse was $147.4
million and $5.4 million, respectively, $142.5 million related to the
Scotiabank PR & USVI Acquisition.
The following table shows the
changes in Oriental’s liability for estimated losses from these credit recourse
agreements, included in the consolidated statements of financial condition
during the years ended December 31, 2019, 2018 and 2017.
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In
thousands)
|
Balance at beginning of year
|
$
|
346
|
|
$
|
358
|
|
$
|
710
|
Additions from Scotiabank PR &
USVI Acquisition
|
|
710
|
|
|
-
|
|
|
-
|
Net (charge-offs/terminations)
recoveries
|
|
(71)
|
|
|
(12)
|
|
|
(352)
|
Balance at end of year
|
$
|
985
|
|
$
|
346
|
|
$
|
358
|
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 2019, Oriental did not repurchase any mortgage
loans subject to the credit recourse provision. During 2018, Oriental
repurchased approximately $705 thousand of unpaid
principal balance in mortgage loans subject to the credit recourse provisions. During
2017, Oriental repurchased approximately $107 thousand of unpaid
principal balance in mortgage loans subject to the credit recourse provisions. If
a borrower defaults, Oriental has rights to the underlying collateral securing
the mortgage loan. Oriental suffers losses on these mortgage loans when the
proceeds from a foreclosure sale of the collateral property are less than the
outstanding principal balance of the loan, any uncollected interest advanced,
and the costs of holding and disposing the related property. At December 31,
2019, Oriental’s liability for estimated credit losses related to loans sold
with credit recourse amounted to $985 thousand (December 31,
2018– $346 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 years
ended December 31, 2019, Oriental repurchased $12 million (December
31, 2018 – $7.7 million) of unpaid principal balance in mortgage loans,
excluding mortgage loans subject to credit recourse provision referred above. At December 31, 2019, Oriental had $4.6 million liability for the
estimated credit losses related to these loans.
During the years ended December 31, 2019, 2018, 2017,
Oriental recognized $17 thousand, $556 thousand and $260 thousand, respectively, in losses from the repurchase of residential mortgage loans
sold subject to credit recourse, and $123 thousand, $160 thousand and $477 thousand, respectively, in
losses from the repurchase of residential mortgage loans as a result of
breaches of customary representations and warranties.
Servicing
agreements relating to the mortgage-backed securities programs of FNMA and
GNMA, and to mortgage loans sold or serviced to certain other investors,
including the FHLMC, require Oriental to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such payments have not
been received from the borrowers. At December 31, 2019, Oriental serviced $4.4 billion (December 31, 2018
- $895.6 million) in mortgage loans
for third parties. Oriental generally recovers funds advanced pursuant to these
arrangements from the mortgage owner, from liquidation proceeds when the
mortgage loan is foreclosed or, in the case of FHA/VA loans, under the
applicable FHA and VA insurance and guarantees programs. However, in the
meantime, Oriental must absorb the cost of the funds it advances during the
time the advance is outstanding. Oriental must also bear the costs of
attempting to collect on delinquent and defaulted mortgage loans. In addition,
if a defaulted loan is not cured, the mortgage loan would be canceled as part
of the foreclosure proceedings and Oriental would not receive any future
servicing income with respect to that loan. At December 31, 2019, the outstanding balance of funds advanced by Oriental
under such mortgage loan servicing agreements was approximately $3.6 million (December
31, 2018 - $706 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 27— COMMITMENTS AND CONTINGENCIES
Loan Commitments
In the normal course of business, Oriental becomes a party to
credit-related financial instruments with off-balance-sheet risk to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby and commercial letters of credit, and
financial guarantees. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the
consolidated statements of financial condition. The contract or notional amount
of those instruments reflects the extent of Oriental’s involvement in
particular types of financial instruments.
Oriental’s exposure to credit losses in the event of
nonperformance by the counterparty to the financial instrument for commitments
to extend credit, including commitments under credit card arrangements, and
commercial letters of credit is represented by the contractual notional amounts
of those instruments, which do not necessarily represent the amounts
potentially subject to risk. In addition, the measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are identified. Oriental uses the same credit policies
in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Credit-related financial instruments at December 31, 2019 and 2018
were as follows:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Commitments to extend credit
|
$
|
853,148
|
|
$
|
541,423
|
Commercial letters of credit
|
|
2,178
|
|
|
340
|
Commitments to extend credit represent agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Oriental evaluates each
customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by Oriental upon the extension of credit,
is based on management’s credit evaluation of the counterparty.
At
December 31, 2019 and 2018, 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 $2.7 million and $627 thousand, at December 31, 2019 and 2018, respectively.
Commercial letters of credit are issued or confirmed to
guarantee payment of customers’ payables or receivables in short-term
international trade transactions. Generally, drafts will be drawn when the
underlying transaction is consummated as intended. However, the short-term
nature of this instrument serves to mitigate the risk associated with these
contracts.
The
summary of instruments that are considered financial guarantees in accordance
with the authoritative guidance related to guarantor’s accounting and
disclosure requirements for guarantees, including indirect guarantees of
indebtedness of others, at December 31, 2019 and 2018, is as follows:
|
December 31,
|
|
2019
|
|
2018
|
|
(In
thousands)
|
Standby letters of credit and financial
guarantees
|
$
|
47,251
|
|
$
|
23,889
|
Loans sold with recourse
|
|
147,399
|
|
|
5,414
|
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
non-performance 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.
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 arbitration,
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 arbitration, litigation and regulatory
matters where the likelihood of a potential loss is deemed reasonably possible.
Oriental has determined that the estimate of the reasonably possible loss is
not significant.
NOTE
28— OPERATING LEASES
A lease is defined
as a contract, or part of a contract, that conveys the right to control the use
of identified property, plant or equipment for a period of time in exchange for
consideration. On January 1, 2019, Oriental adopted ASU No. 2016-02 “Leases”
(Topic 842) and all subsequent ASUs that modified Topic 842. For Oriental,
Topic 842 primarily affected the accounting treatment for operating lease
agreements in which Oriental is the lessee. Oriental elected the hindsight
practical expedient, which allows entities to use hindsight when determining
lease term and impairment of right-of-use assets. As a result of the changes to
the lease terms, Oriental reduced its retained earnings by $736 thousand on the effective
date, January 1, 2019.
Lessee
Accounting
Right of use assets and lease
liabilities are recognized at the commencement of an arrangement where it is
determined at inception that a lease exists. Lease assets represent the
right to use an underlying asset for the lease term, and lease liabilities represent
the obligation to make lease payments arising from the lease. These assets and
liabilities are initially recognized based on the present value of lease
payments over the lease term calculated using our incremental borrowing
rate. Lease terms include options to extend or terminate the lease when it
is reasonably certain that those options will be exercised. The right-of-use
asset is measured at the amount of the lease liability adjusted for the
remaining balance of any lease incentives received, any cumulative prepaid or
accrued rent if the lease payments are uneven throughout the lease term, any
unamortized initial direct costs, and any impairment of the right-of-use-asset.
Operating lease expense consists of a
single lease cost calculated so that the remaining cost of the lease is
allocated over the remaining lease term on a straight-line basis, and any
impairment of the right-of-use asset. Variable lease payments are generally
expensed as incurred and include certain nonlease components, such as maintenance
and other services provided by the lessor, and other charges included in the
lease. Leases with an initial term of 12 months or less are not recorded on the
balance sheet, and the expense for these short-term leases and for operating
leases is recognized on a straight-line basis over the lease term.
Oriental’s leases do not contain residual
value guarantees or material variable lease payments. All leases were
classified as operating leases.
Substantially all
of the leases in which Oriental is the lessee are comprised of real estate
property for branches, ATM locations, and office space with terms extending
through 2032. All of our leases are classified as operating leases, and
therefore, were previously not recognized on Oriental’s consolidated statements
of financial condition. With the adoption of Topic 842, operating lease
agreements are required to be recognized on the consolidated statements of
financial condition as a right-of-use asset and a corresponding lease
liability. Oriental leases to others certain space in its principal offices for
terms extending through 2023; all are operating leases.
Operating Lease
Cost
|
|
Year Ended
December 31, 2019
|
|
|
|
|
|
Statement of
Operations Classification
|
|
|
|
|
|
|
Lease costs
|
|
$
|
6,571
|
|
Occupancy and
equipment
|
Variable lease costs
|
|
|
2,324
|
|
Occupancy and
equipment
|
Short-term lease cost
|
|
|
180
|
|
Occupancy and
equipment
|
Lease income
|
|
|
(554)
|
|
Occupancy and
equipment
|
Total lease cost
|
|
$
|
8,521
|
|
|
Rent expense for the years ended December 31, 2018 and 2017, prior
to adoption of ASU 2016-02 (Topic 842), was $9.0 million and $9.9 million, respectively, included
in the "occupancy and equipment" caption in the unaudited
consolidated statements of operations.
Operating
Lease Assets and Liabilities
|
|
|
December 31
2019
|
|
|
|
|
|
|
Statement of
Financial Condition Classification
|
|
|
|
(In
thousands)
|
|
|
Right-of-use assets
|
|
$
|
39,112
|
|
Operating lease
right-of-use assets
|
Lease Liabilities
|
|
$
|
39,840
|
|
Operating leases
liabilities
|
|
December 31,
2019
|
|
|
(In
thousands)
|
Weighted-average remaining lease term
|
|
6.5 years
|
Weighted-average discount rate
|
|
6.8%
|
Future minimum payments for operating
leases with initial or remaining terms of one year or more as of December 31,
2019 were as follows:
|
Minimum Rent
|
Year Ending December 31,
|
(In
thousands)
|
2020
|
$
|
10,823
|
2021
|
|
8,544
|
2022
|
|
7,225
|
2023
|
|
6,082
|
2024
|
|
4,077
|
Thereafter
|
|
13,358
|
Total lease payments
|
$
|
50,109
|
Less imputed interest
|
|
10,269
|
Present value of lease liabilities
|
$
|
39,840
|
Future minimum payments for operating leases with initial or remaining
terms of one year or more as of December 31, 2018 were as follows:
|
Minimum Rent
|
Year Ending December 31,
|
(In
thousands)
|
2019
|
$
|
5,618
|
2020
|
|
4,293
|
2021
|
|
3,360
|
2022
|
|
2,494
|
2023
|
|
1,968
|
Thereafter
|
|
6,679
|
Total future minimum lease payments
|
$
|
24,412
|
NOTE 29 - 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 valuations obtained from an independent pricing
provider, ICE Data Pricing (formerly known as IDC). ICE is a well-recognized
pricing company and an established leader in financial information. Such
securities are classified as Level 1 or Level 2 depending on the basis for
determining fair value. If listed prices or quotes are not available, fair
value is based upon externally developed models that use both observable and
unobservable inputs depending on the market activity of the instrument, and
such securities are classified as Level 3. At December 31, 2019 and 2018,
Oriental did not have investment securities classified as Level 3.
Derivative instruments
The fair value of the
interest rate swaps is largely a function of the financial market’s expectations
regarding the future direction of interest rates. Accordingly, current market
values are not necessarily indicative of the future impact of derivative
instruments on earnings. This will depend, for the most part, on the shape of
the yield curve, the level of interest rates, as well as the expectations for
rates in the future. The fair value of most of these derivative instruments is
based on observable market parameters, which include discounting the
instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and
also applying yield curves that account for the industry sector and the credit
rating of the counterparty and/or Oriental. Certain other derivative
instruments with limited market activity are valued using externally developed
models that consider unobservable market parameters. Based on their valuation
methodology, derivative instruments are classified as Level 2 or Level 3.
Servicing assets
Servicing assets do not trade
in an active market with readily observable prices. Servicing assets are priced
using a discounted cash flow model. The valuation model considers servicing
fees, portfolio characteristics, prepayment assumptions, delinquency rates,
late charges, other ancillary revenues, cost to service and other economic factors.
Due to the unobservable nature of certain valuation inputs, the servicing
rights are classified as Level 3.
Impaired Loans
Impaired loans are carried at
the present value of expected future cash flows using the loan’s existing rate
in a discounted cash flow calculation, or the fair value of the collateral if
the loan is collateral-dependent. Expected cash flows are based on internal
inputs reflecting expected default rates on contractual cash flows. This method
of estimating fair value does not incorporate the exit-price concept of fair
value described in ASC 820-10 and would generally result in a higher value than
the exit-price approach. For loans measured using the estimated fair value of
collateral less costs to sell, fair value is generally determined based on the
fair value of the collateral, which is derived from appraisals that take into
consideration prices in observed transactions involving similar assets in
similar locations, in accordance with the provisions of ASC 310-10-35 less disposition
costs. Currently, the associated loans considered impaired are classified as
Level 3.
Foreclosed real
estate
Foreclosed
real estate includes real estate properties securing residential mortgage and
commercial loans. The fair value of foreclosed real estate may be determined
using an external appraisal, broker price option or an internal valuation.
These foreclosed assets are classified as Level 3 given certain internal
adjustments that may be made to external appraisals.
Other repossessed assets
Other repossessed
assets include repossessed automobiles. The fair value of the repossessed
automobiles may be determined using internal valuation and an external
appraisal. These repossessed assets are classified as Level 3 given certain
internal adjustments that may be made to external appraisals.
Assets and liabilities measured at fair value on a
recurring and non-recurring basis are summarized below:
|
December 31,
2019
|
|
Fair Value
Measurements
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In
thousands)
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale
|
$
|
397,183
|
|
$
|
676,986
|
|
$
|
-
|
|
$
|
1,074,169
|
Trading securities
|
|
-
|
|
|
37
|
|
|
-
|
|
|
37
|
Money market investments
|
|
6,775
|
|
|
-
|
|
|
-
|
|
|
6,775
|
Derivative assets
|
|
-
|
|
|
6
|
|
|
-
|
|
|
6
|
Servicing assets
|
|
-
|
|
|
-
|
|
|
50,779
|
|
|
50,779
|
Derivative liabilities
|
|
-
|
|
|
(913)
|
|
|
-
|
|
|
(913)
|
|
$
|
403,958
|
|
$
|
676,116
|
|
$
|
50,779
|
|
$
|
1,130,853
|
Non-recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
Impaired commercial loans
|
$
|
-
|
|
$
|
-
|
|
$
|
61,128
|
|
$
|
61,128
|
Foreclosed real estate
|
|
-
|
|
|
-
|
|
|
29,909
|
|
|
29,909
|
Other repossessed assets
|
|
-
|
|
|
-
|
|
|
3,327
|
|
|
3,327
|
|
$
|
-
|
|
$
|
-
|
|
$
|
94,364
|
|
$
|
94,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
Fair Value
Measurements
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In
thousands)
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale
|
$
|
10,805
|
|
$
|
831,052
|
|
$
|
-
|
|
$
|
841,857
|
Trading securities
|
|
-
|
|
|
360
|
|
|
-
|
|
|
360
|
Money market investments
|
|
4,930
|
|
|
-
|
|
|
-
|
|
|
4,930
|
Derivative assets
|
|
-
|
|
|
347
|
|
|
-
|
|
|
347
|
Servicing assets
|
|
-
|
|
|
-
|
|
|
10,716
|
|
|
10,716
|
Derivative liabilities
|
|
-
|
|
|
(333)
|
|
|
-
|
|
|
(333)
|
|
$
|
15,735
|
|
$
|
831,426
|
|
$
|
10,716
|
|
$
|
857,877
|
Non-recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
Impaired commercial loans
|
$
|
-
|
|
$
|
-
|
|
$
|
81,976
|
|
$
|
81,976
|
Foreclosed real estate
|
|
-
|
|
|
-
|
|
|
33,768
|
|
|
33,768
|
Other repossessed assets
|
|
-
|
|
|
-
|
|
|
2,986
|
|
|
2,986
|
|
$
|
-
|
|
$
|
-
|
|
$
|
118,730
|
|
$
|
118,730
|
The
table below presents a reconciliation of all assets and liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the years ended December 31, 2019, 2018 and 2017:
Level 3 Instruments Only
|
Servicing Assets
|
|
(In
thousands)
|
|
Year Ended
December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
10,716
|
|
$
|
9,821
|
|
$
|
9,858
|
New instruments acquired
|
|
41,637
|
|
|
1,481
|
|
|
1,658
|
Principal repayments
|
|
(906)
|
|
|
(814)
|
|
|
(590)
|
Changes in fair value of servicing
assets
|
|
(668)
|
|
|
228
|
|
|
(1,105)
|
Balance at end of year
|
$
|
50,779
|
|
$
|
10,716
|
|
$
|
9,821
|
During the years ended December 31, 2019, 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.
The table below presents quantitative information for
all assets and liabilities measured at fair value on a recurring and
non-recurring basis using significant unobservable inputs (Level 3) at December
31, 2019:
|
|
December 31,
2019
|
|
|
Fair Value
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing assets
|
|
$
|
50,779
|
|
Cash flow valuation
|
|
Constant prepayment rate
|
|
4.47% -18.81%
|
|
|
|
|
|
|
|
Discount rate
|
|
10.00% - 15.00%
|
Collateral dependent
impaired loans
|
|
$
|
33,645
|
|
Fair value of property
or collateral
|
|
Appraised value less disposition costs
|
|
14.20% - 42.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-collateral dependent impaired
loans
|
|
$
|
27,483
|
|
Cash flow valuation
|
|
Discount rate
|
|
4.75% - 10.25%
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
$
|
29,909
|
|
Fair value of property
or collateral
|
|
Appraised value less disposition costs
|
|
14.20% - 47.20%
|
|
|
|
|
|
|
|
|
|
|
Other repossessed assets
|
|
$
|
3,327
|
|
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.
The estimated fair value and carrying value of
Oriental’s financial instruments at December 31, 2019 and 2018 is as follows:
|
December 31,
|
|
2019
|
|
2018
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
(In
thousands)
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
851,307
|
|
$
|
851,307
|
|
$
|
447,033
|
|
$
|
447,033
|
Restricted cash
|
$
|
1,450
|
|
$
|
1,450
|
|
$
|
3,030
|
|
$
|
3,030
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
$
|
37
|
|
$
|
37
|
|
$
|
360
|
|
$
|
360
|
Investment securities
available-for-sale
|
$
|
1,074,169
|
|
$
|
1,074,169
|
|
$
|
841,857
|
|
$
|
841,857
|
Investment securities
held-to-maturity
|
$
|
-
|
|
$
|
-
|
|
$
|
410,353
|
|
$
|
424,740
|
Federal Home Loan Bank (FHLB) stock
|
$
|
13,048
|
|
$
|
13,048
|
|
$
|
12,644
|
|
$
|
12,644
|
Other investments
|
$
|
560
|
|
$
|
560
|
|
$
|
3
|
|
$
|
3
|
Derivative assets
|
$
|
6
|
|
$
|
6
|
|
$
|
347
|
|
$
|
347
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
913
|
|
$
|
913
|
|
$
|
333
|
|
$
|
333
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (including loans
held-for-sale)
|
$
|
5,894,745
|
|
$
|
6,641,847
|
|
$
|
4,106,628
|
|
$
|
4,431,594
|
Accrued interest receivable
|
$
|
36,781
|
|
$
|
36,781
|
|
$
|
34,254
|
|
$
|
34,254
|
Servicing assets
|
$
|
50,779
|
|
$
|
50,779
|
|
$
|
10,716
|
|
$
|
10,716
|
Accounts receivable and other assets
|
$
|
78,595
|
|
$
|
78,595
|
|
$
|
37,842
|
|
$
|
37,842
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
7,679,685
|
|
$
|
7,698,610
|
|
$
|
4,881,903
|
|
$
|
4,908,115
|
Securities sold under agreements to
repurchase
|
$
|
190,345
|
|
$
|
190,274
|
|
$
|
453,135
|
|
$
|
455,508
|
Advances from FHLB
|
$
|
79,620
|
|
$
|
78,009
|
|
$
|
78,503
|
|
$
|
77,620
|
Other borrowings
|
$
|
1,195
|
|
$
|
1,195
|
|
$
|
1,214
|
|
$
|
1,214
|
Subordinated capital notes
|
$
|
35,886
|
|
$
|
36,083
|
|
$
|
36,184
|
|
$
|
36,083
|
Accrued expenses and other
liabilities
|
$
|
185,660
|
|
$
|
185,660
|
|
$
|
87,665
|
|
$
|
87,665
|
The following methods and assumptions
were used to estimate the fair values of significant financial instruments at
December 31, 2019 and 2018:
• Cash and cash equivalents
(including money market investments and time deposits with other banks),
restricted cash, accrued interest receivable, accounts receivable and other
assets, accrued expenses and other liabilities, and other borrowings 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 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, 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.
NOTE 30 –
BANKING AND FINANCIAL SERVICE REVENUES
The following
table presents the major categories of banking and financial service revenues
for the years ended December 31, 2019,
2018 and 2017:
|
|
Year Ended
December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In
thousands)
|
Banking service revenues:
|
|
|
|
|
|
|
|
|
|
Checking accounts fees
|
|
$
|
6,003
|
|
$
|
5,878
|
|
$
|
6,903
|
Savings accounts fees
|
|
|
658
|
|
|
635
|
|
|
601
|
Electronic banking fees
|
|
|
32,282
|
|
|
32,431
|
|
|
28,174
|
Credit life commissions
|
|
|
531
|
|
|
541
|
|
|
492
|
Branch service commissions
|
|
|
1,491
|
|
|
1,581
|
|
|
811
|
Servicing and other loan fees
|
|
|
1,367
|
|
|
1,844
|
|
|
1,758
|
International fees
|
|
|
521
|
|
|
718
|
|
|
712
|
Miscellaneous income
|
|
|
13
|
|
|
10
|
|
|
17
|
Total banking service revenues
|
|
|
42,866
|
|
|
43,638
|
|
|
39,468
|
|
|
|
|
|
|
|
|
|
|
Wealth management revenue:
|
|
|
|
|
|
|
|
|
|
Insurance income
|
|
|
6,826
|
|
|
6,956
|
|
|
6,652
|
Broker fees
|
|
|
7,544
|
|
|
6,996
|
|
|
7,131
|
Trust fees
|
|
|
10,922
|
|
|
10,878
|
|
|
10,930
|
Retirement plan and administration fees
|
|
|
932
|
|
|
1,095
|
|
|
1,048
|
Investment banking fees
|
|
|
-
|
|
|
9
|
|
|
29
|
Total wealth management revenue
|
|
|
26,224
|
|
|
25,934
|
|
|
25,790
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking activities:
|
|
|
|
|
|
|
|
|
|
Net servicing fees
|
|
|
3,854
|
|
|
5,024
|
|
|
3,865
|
Net gains on sale of mortgage loans and
valuation
|
|
|
527
|
|
|
305
|
|
|
923
|
Other
|
|
|
(106)
|
|
|
(562)
|
|
|
(738)
|
Total mortgage banking activities
|
|
|
4,275
|
|
|
4,767
|
|
|
4,050
|
Total banking and financial service
revenues
|
|
$
|
73,365
|
|
$
|
74,339
|
|
$
|
69,308
|
Oriental recognizes the revenue from banking services,
wealth management and mortgage banking based on the nature and timing of
revenue streams from contracts with customer:
Banking
Service Revenues
Electronic
banking fees are credit and debit card processing services, use of the Bank’s
ATMs by non-customers, debit card interchange income and service charges on
deposit accounts. Revenue is recorded once the contracted service has been provided.
Service
charges on checking and saving accounts as consumer periodic maintenance
revenue is recognized once the service is rendered, while overdraft and late
charges revenue are recorded after the contracted service has been provided.
Other
income as credit life commissions, servicing and other loan fees, international
fees, and miscellaneous fees recognized as banking services revenue are out of
the scope of the 606 guidelines.
Wealth Management Revenue
Insurance income from commissions and sale of
annuities are recorded once the sale has been completed.
Brokers
fees consist of two categories:
·
Sales commissions generated by
advisors for their clients’ purchases and sales of securities and other
investment products, which are collected once the stand-alone transactions are
completed at trade date or as earned, and managed account fees which are fees
charged to advisors’ clients’ accounts on the Company corporate advisory
platform. These revenues do not cover future services, as a result there is no need
to allocate the amount received to any other service.
·
Fees for providing distribution
services related to mutual funds, net of compensation paid to a service
provider who provides such services, as well as trailer fees (also known as 12b-1
fees). These fees are considered variable and are recognized over time, as the
uncertainty of the fees to be received is resolved as the net asset value of
the mutual fund is determined and investor activity occurs. Fees do not cover
future services, as a result there is no need to allocate the amount received
to any other service.
Retirement
plan and administration fees are revenues related to the payment received from
the clients of OPC for assistance with the planning, design and administration
of retirement plans, acting as third-party administrator for such plans, and
daily record keeping services of retirement plans. Fees are collected once the
stand-alone transaction was completed at trade date. Fees do not cover future
services, as a result there is no need to allocate the amount received to any
other service.
Trust
fees are revenues related to fiduciary services provided to 401K retirement
plans, a unit investment trust, and retirement plans, which include investment
management, payment of distributions, if any, safekeeping, custodial services
of plan assets, servicing of Trust officers, on-going due diligence of the
Trust, and recordkeeping of transactions. Fees are billed based on services
contracted. Negotiated fees are detailed in the contract. Fees collected in
advance, are amortized over the term of the contract. Fees are collected on a
monthly basis once the administrative service has been completed. Monthly fee
does not include future services.
Investment
banking fees as compensation fees are out of the scope of the 606 guidelines.
Mortgage
Banking Activities
Mortgage
banking activities as servicing fees, gain on sale of mortgage loans valuation
and other are out of the scope of the 606 guidelines.
NOTE 31 – 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.
Following are the results of operations and the
selected financial information by operating segment for the years ended December 31, 2019, 2018, and 2017:
|
Year Ended
December 31, 2019
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
(In
thousands)
|
Interest income
|
$
|
337,448
|
|
$
|
69
|
|
$
|
36,278
|
|
$
|
373,795
|
|
$
|
-
|
|
$
|
373,795
|
Interest expense
|
|
(36,023)
|
|
|
-
|
|
|
(14,979)
|
|
|
(51,002)
|
|
|
-
|
|
|
(51,002)
|
Net interest income
|
|
301,425
|
|
|
69
|
|
|
21,299
|
|
|
322,793
|
|
|
-
|
|
|
322,793
|
Provision for loan and lease losses,
net
|
|
(96,504)
|
|
|
-
|
|
|
(288)
|
|
|
(96,792)
|
|
|
-
|
|
|
(96,792)
|
Non-interest income
|
|
47,517
|
|
|
26,649
|
|
|
8,327
|
|
|
82,493
|
|
|
-
|
|
|
82,493
|
Non-interest expenses
|
|
(211,755)
|
|
|
(17,163)
|
|
|
(4,326)
|
|
|
(233,244)
|
|
|
-
|
|
|
(233,244)
|
Intersegment revenue
|
|
2,207
|
|
|
-
|
|
|
-
|
|
|
2,207
|
|
|
(2,207)
|
|
|
-
|
Intersegment expenses
|
|
-
|
|
|
(652)
|
|
|
(1,555)
|
|
|
(2,207)
|
|
|
2,207
|
|
|
-
|
Income before income taxes
|
$
|
42,890
|
|
$
|
8,903
|
|
$
|
23,457
|
|
$
|
75,250
|
|
$
|
-
|
|
$
|
75,250
|
Income tax expense
|
|
16,084
|
|
|
3,339
|
|
|
1,986
|
|
|
21,409
|
|
|
-
|
|
|
21,409
|
Net income
|
$
|
26,806
|
|
$
|
5,564
|
|
$
|
21,471
|
|
$
|
53,841
|
|
$
|
-
|
|
$
|
53,841
|
Total assets
|
$
|
7,486,314
|
|
$
|
33,369
|
|
$
|
2,865,186
|
|
$
|
10,384,869
|
|
$
|
(1,087,208)
|
|
$
|
9,297,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2018
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
(In
thousands)
|
Interest income
|
$
|
320,084
|
|
$
|
46
|
|
$
|
40,289
|
|
$
|
360,419
|
|
$
|
-
|
|
$
|
360,419
|
Interest expense
|
|
(29,746)
|
|
|
-
|
|
|
(14,779)
|
|
|
(44,525)
|
|
|
-
|
|
|
(44,525)
|
Net interest income
|
|
290,338
|
|
|
46
|
|
|
25,510
|
|
|
315,894
|
|
|
-
|
|
|
315,894
|
Provision for loan and lease losses,
net
|
|
(55,885)
|
|
|
-
|
|
|
(223)
|
|
|
(56,108)
|
|
|
-
|
|
|
(56,108)
|
Non-interest income
|
|
53,592
|
|
|
26,457
|
|
|
46
|
|
|
80,095
|
|
|
-
|
|
|
80,095
|
Non-interest expenses
|
|
(186,460)
|
|
|
(16,440)
|
|
|
(4,181)
|
|
|
(207,081)
|
|
|
-
|
|
|
(207,081)
|
Intersegment revenue
|
|
2,126
|
|
|
-
|
|
|
-
|
|
|
2,126
|
|
|
(2,126)
|
|
|
-
|
Intersegment expenses
|
|
-
|
|
|
(788)
|
|
|
(1,338)
|
|
|
(2,126)
|
|
|
2,126
|
|
|
-
|
Income before income taxes
|
$
|
103,711
|
|
$
|
9,275
|
|
$
|
19,814
|
|
$
|
132,800
|
|
$
|
-
|
|
$
|
132,800
|
Income tax expense
|
|
40,447
|
|
|
3,617
|
|
|
4,326
|
|
|
48,390
|
|
|
-
|
|
|
48,390
|
Net income
|
$
|
63,264
|
|
$
|
5,658
|
|
$
|
15,488
|
|
$
|
84,410
|
|
$
|
-
|
|
$
|
84,410
|
Total assets
|
$
|
5,863,067
|
|
$
|
25,757
|
|
$
|
1,708,455
|
|
$
|
7,597,279
|
|
$
|
(1,013,927)
|
|
$
|
6,583,352
|
|
Year Ended
December 31, 2017
|
|
|
|
|
Wealth
|
|
|
|
|
Total Major
|
|
|
|
|
Consolidated
|
|
Banking
|
|
Management
|
|
Treasury
|
|
Segments
|
|
Eliminations
|
|
Total
|
|
(In
thousands)
|
Interest income
|
$
|
311,503
|
|
$
|
53
|
|
$
|
34,091
|
|
$
|
345,647
|
|
$
|
-
|
|
$
|
345,647
|
Interest expense
|
|
(26,308)
|
|
|
-
|
|
|
(15,167)
|
|
|
(41,475)
|
|
|
-
|
|
|
(41,475)
|
Net interest income
|
|
285,195
|
|
|
53
|
|
|
18,924
|
|
|
304,172
|
|
|
-
|
|
|
304,172
|
Provision for loan and lease losses,
net
|
|
(113,108)
|
|
|
-
|
|
|
(31)
|
|
|
(113,139)
|
|
|
-
|
|
|
(113,139)
|
Non-interest income
|
|
45,102
|
|
|
26,069
|
|
|
7,516
|
|
|
78,687
|
|
|
-
|
|
|
78,687
|
Non-interest expenses
|
|
(184,567)
|
|
|
(13,486)
|
|
|
(3,578)
|
|
|
(201,631)
|
|
|
-
|
|
|
(201,631)
|
Intersegment revenue
|
|
1,604
|
|
|
-
|
|
|
748
|
|
|
2,352
|
|
|
(2,352)
|
|
|
-
|
Intersegment expenses
|
|
(748)
|
|
|
(1,137)
|
|
|
(467)
|
|
|
(2,352)
|
|
|
2,352
|
|
|
-
|
Income before income taxes
|
$
|
33,478
|
|
$
|
11,499
|
|
$
|
23,112
|
|
$
|
68,089
|
|
$
|
-
|
|
$
|
68,089
|
Income tax expense
|
|
13,057
|
|
|
4,485
|
|
|
(2,099)
|
|
|
15,443
|
|
|
-
|
|
|
15,443
|
Net income
|
$
|
20,421
|
|
$
|
7,014
|
|
$
|
25,211
|
|
$
|
52,646
|
|
$
|
-
|
|
$
|
52,646
|
Total assets
|
$
|
5,597,077
|
|
$
|
25,980
|
|
$
|
1,536,417
|
|
$
|
7,159,474
|
|
$
|
(970,421)
|
|
$
|
6,189,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 32
– OFG BANCORP (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
As
a bank holding company subject to the regulations and supervisory guidance of
the Federal Reserve Board, Oriental generally should inform the Federal Reserve
Board and eliminate, defer or significantly reduce its dividends if: (i) its
net income available to shareholders for the past four quarters, net of
dividends previously paid during that period, is not sufficient to fully fund
the dividends; (ii) its prospective rate of earnings retention is not
consistent with its capital needs and overall current and prospective financial
condition; or (iii) it will not meet, or is in danger of not meeting, its
minimum regulatory capital adequacy ratios. The payment of dividends by the Bank to Oriental may
also be affected by other regulatory requirements and policies, such as the
maintenance of certain regulatory capital levels. During 2019, 2018, and 2017,
Oriental Insurance paid $4.0 million, respectively, in
dividends to Oriental. Oriental Financial Services did not pay any dividends during
2019, 2018, and 2017.
The following condensed financial information presents
the financial position of the holding company only as of December 31, 2019 and
2018, and the results of its operations and its cash flows for the years ended December
31, 2019, 2018 and 2017:
OFG BANCORP
CONDENSED STATEMENTS OF FINANCIAL POSITION INFORMATION
(Holding Company Only)
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(In
thousands)
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,932
|
|
$
|
39,207
|
Investment in bank subsidiary, equity
method
|
|
|
1,027,633
|
|
|
983,718
|
Investment in nonbank subsidiaries,
equity method
|
|
|
32,803
|
|
|
19,341
|
Due from bank subsidiary, net
|
|
|
40
|
|
|
40
|
Deferred tax asset, net
|
|
|
-
|
|
|
(1)
|
Other assets
|
|
|
676
|
|
|
1,123
|
Total assets
|
|
$
|
1,089,084
|
|
$
|
1,043,428
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Dividend payable
|
|
|
5,222
|
|
|
5,219
|
Due to affiliates
|
|
|
-
|
|
|
14
|
Accrued expenses and other liabilities
|
|
|
2,301
|
|
|
2,235
|
Subordinated capital notes
|
|
|
36,083
|
|
|
36,083
|
Total liabilities
|
|
|
43,606
|
|
|
43,551
|
Stockholders’ equity
|
|
|
1,045,478
|
|
|
999,877
|
Total liabilities and
stockholders’ equity
|
|
$
|
1,089,084
|
|
$
|
1,043,428
|
OFG BANCORP
CONDENSED STATEMENTS OF OPERATIONS INFORMATION
(Holding Company Only)
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
Income:
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
828
|
|
$
|
477
|
|
$
|
188
|
Investment
trading activities, net and other
|
|
5,308
|
|
|
6,003
|
|
|
4,511
|
Total income
|
|
6,136
|
|
|
6,480
|
|
|
4,699
|
Expenses:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
2,012
|
|
|
1,905
|
|
|
1,556
|
Operating
expenses
|
|
7,516
|
|
|
7,980
|
|
|
6,700
|
Total expenses
|
|
9,528
|
|
|
9,885
|
|
|
8,256
|
Loss
before income taxes
|
|
(3,392)
|
|
|
(3,405)
|
|
|
(3,557)
|
Income
tax expense
|
|
1,705
|
|
|
2,400
|
|
|
403
|
Loss
before changes in undistributed earnings of subsidiaries
|
|
(5,097)
|
|
|
(5,805)
|
|
|
(3,960)
|
Equity
in undistributed earnings from:
|
|
|
|
|
|
|
|
|
Bank
subsidiary
|
|
56,114
|
|
|
87,128
|
|
|
51,612
|
Nonbank
subsidiaries
|
|
2,824
|
|
|
3,087
|
|
|
4,994
|
Net
income
|
$
|
53,841
|
|
$
|
84,410
|
|
$
|
52,646
|
OFG BANCORP
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
INFORMATION
(Holding Company Only)
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Net
income
|
$
|
53,841
|
|
$
|
84,410
|
|
$
|
52,646
|
Other
comprehensive loss before tax:
|
|
|
|
|
|
|
|
|
Other comprehensive income from bank subsidiary
|
|
9,955
|
|
|
(8,014)
|
|
|
(4,545)
|
Other
comprehensive loss before taxes
|
|
9,955
|
|
|
(8,014)
|
|
|
(4,545)
|
Income tax effect
|
|
-
|
|
|
-
|
|
|
-
|
Other
comprehensive loss after taxes
|
|
9,955
|
|
|
(8,014)
|
|
|
(4,545)
|
Comprehensive
income
|
$
|
63,796
|
|
$
|
76,396
|
|
$
|
48,101
|
OFG BANCORP
CONDENSED STATEMENTS OF CASH FLOWS INFORMATION
(Holding Company Only)
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(In thousands)
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
53,841
|
|
$
|
84,410
|
|
$
|
52,646
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings from banking subsidiary
|
|
(56,114)
|
|
|
(87,128)
|
|
|
(51,612)
|
Equity in undistributed earnings from nonbanking subsidiaries
|
|
(2,824)
|
|
|
(3,087)
|
|
|
(4,994)
|
Stock-based compensation
|
|
2,134
|
|
|
1,401
|
|
|
1,109
|
Employee benefit adjustment
|
|
-
|
|
|
-
|
|
|
(99)
|
Deferred income tax, net
|
|
-
|
|
|
2,230
|
|
|
414
|
Net decrease (increase) in other assets
|
|
458
|
|
|
372
|
|
|
(205)
|
Net (decrease) increase in accrued expenses and other liabilities
|
|
64
|
|
|
203
|
|
|
(1,185)
|
Dividends from banking subsidiary
|
|
20,000
|
|
|
37,700
|
|
|
26,743
|
Dividends from non-banking subsidiary
|
|
6,017
|
|
|
4,000
|
|
|
4,002
|
Net cash provided by operating activities
|
|
23,576
|
|
|
40,101
|
|
|
26,819
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Net decrease in due from bank subsidiary, net
|
|
-
|
|
|
-
|
|
|
307
|
Net decrease in due to non-bank subsidiary, net
|
|
(14)
|
|
|
14
|
|
|
-
|
Proceeds from sales of premises and equipment
|
|
310
|
|
|
200
|
|
|
-
|
Capital contribution to banking subsidiary
|
|
(1,720)
|
|
|
(1,105)
|
|
|
(788)
|
Capital contribution to non-banking subsidiary
|
|
(13,518)
|
|
|
(24)
|
|
|
(50)
|
Additions to premises and equipment
|
|
(319)
|
|
|
(97)
|
|
|
(19)
|
Net cash (used in) provided by investing activities
|
|
(15,261)
|
|
|
(1,012)
|
|
|
(550)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments to) exercise of stock options and lapsed restricted
units, net
|
|
1,294
|
|
|
508
|
|
|
-
|
Dividends paid
|
|
(20,884)
|
|
|
(24,820)
|
|
|
(24,412)
|
Net cash used in financing activities
|
|
(19,590)
|
|
|
(24,312)
|
|
|
(24,412)
|
Net
change in cash and cash equivalents
|
|
(11,275)
|
|
|
14,777
|
|
|
1,857
|
Cash
and cash equivalents at beginning of year
|
|
39,207
|
|
|
24,430
|
|
|
22,573
|
Cash
and cash equivalents at end of year
|
$
|
27,932
|
|
$
|
39,207
|
|
$
|
24,430
|
NOTE 33 – SUBSEQUENT EVENTS
On January 6 and 7 of 2020, significant
earthquakes struck the island of Puerto Rico with significant damages in the
southwestern part of the island. Oriental’s digital channels, core
banking and electronic funds transfer systems and branches continued to
function uninterrupted during and after the earthquakes. There were no structural damages to the Oriental’s
facilities. Oriental maintains insurance for its properties, including business
interruption. Oriental made an assessment with information available for the
impact of recent earthquakes on its credit portfolio and determined that they
were not significant. The
documentation for the assessment considers all information available at the
moment; gathered through visits or interviews with our clients, inspections of
collaterals, identification of most affected areas. Oriental will continue to
assess the impact to our customers as more information becomes available.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Oriental’s
management is responsible for establishing and maintaining effective disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934. As of December 31, 2019, an evaluation was
carried out under the supervision and with the participation of Oriental’s
management, including the Chief Executive Officer (“CEO”) and the Chief
Financial Officer (“CFO”), of the effectiveness of the design and operation of
Oriental’s disclosure controls and procedures. Based upon such evaluation, the
CEO and CFO have concluded that, as of the end of the period covered by this
annual report on Form 10-K, Oriental’s disclosure controls and procedures
provided reasonable assurance of effectiveness in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by Oriental in the reports that it files or submits under the
Securities Exchange Act of 1934. Notwithstanding the foregoing, a control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will detect or uncover failures within Oriental
to disclose material information otherwise required to be set forth in
Oriental’s periodic reports.
Management’s Annual Report on Internal Control over
Financial Reporting
The
Management’s Annual Report on Internal Control over Financial Reporting is
included in Item 8 of this report.
Report of the Registered Public Accounting Firm
The
registered public accounting firm’s report on Oriental’s internal control over
financial reporting is included in Item 8 of this report.
Changes in Internal Control over Financial Reporting
The internal control over financial reporting of the
acquired Scotiabank PR & USVI was excluded from the evaluation of
effectiveness of Oriental’s disclosure controls and procedures as of the period
end covered by this report because of the timing of the acquisition. As a
result of the Scotiabank PR & USVI Acquisition, Oriental will be evaluating
changes to processes, information technology systems, and other components of
internal controls in financial reporting as part of its integration process.
There have not been any changes in Oriental’s internal
control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last
quarter of the year ended December 31, 2019, that has materially affected, or
is reasonably likely to materially affect, Oriental’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART
III
Items 10
through 14 are incorporated herein by reference to Oriental’s definitive proxy
statement to be filed with the SEC no later than 120 days after the end of
the fiscal year covered by this report, except with respect to the information
set forth below under Item 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Oriental’s 2007
Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus
Plan”), provides for equity-based compensation incentives through the grant of
stock options, stock appreciation rights, restricted stock, restricted units
and dividend equivalents, as well as equity-based performance awards. The
Omnibus Plan was adopted in 2007, amended and restated in 2008, and further
amended in 2010.
The following
table shows certain information pertaining to the awards under the Omnibus Plan
as of December 31, 2019:
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
Number of Securities
|
|
Number of Securities to be
|
|
Weighted-Average
|
|
Remaining Available for
|
|
Issued Upon Exercise of
|
|
Exercise Price of
|
|
Future Issuance Under Equity
|
|
Outstanding Options,
|
|
Outstanding Options,
|
|
Compensation Plans (excluding
|
|
Warrants and Rights
|
|
Warrants and Rights
|
|
those reflected in column
(a))
|
|
|
|
|
|
|
|
|
|
Plan
Category
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by shareholders:
|
|
|
|
|
|
|
|
|
Omnibus Plan
|
|
1,013,444
|
(1)
|
$
|
9.14
|
(2)
|
$
|
707,046
|
|
|
1,013,444
|
|
$
|
9.14
|
|
|
707,046
|
|
|
|
|
|
|
|
|
|
(1)
Includes 634,294 stock options and 379,150 restricted stock units.
|
(2)
Exercise price related to stock options.
|
Oriental
recorded $2.134 million, $1.401 million and $1.109 million related to
stock-based compensation expense during the years ended December 31, 2019, 2018
and 2017, respectively.
Other
information required by this Item is incorporated herein by reference to Oriental’s
definitive proxy statement to be filed with the SEC no later than 120 days
after the end of the fiscal year covered by this report.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements are filed as part
of this report under Item 8 — Financial Statements and Supplementary
Data.
Management’s
Report on Internal Control Over Financial Reporting
|
|
Financial Statements:
|
|
Reports of Independent Registered Public Accounting
Firm
|
|
Report of Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting
|
|
Consolidated Statements of Financial Condition as of
December 31, 2019 and 2018
|
|
Consolidated Statements of Operations for the years
ended December 31, 2019, 2018 and 2017
|
|
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2019, 2018 and 2017
|
|
Consolidated Statements of Changes in Stockholders’
Equity for the years ended December 31, 2019, 2018 and 2017
|
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2019, 2018 and 2017
|
|
Notes to the Consolidated Financial Statements
|
|
Financial Statement Schedules
No schedules are
presented because the information is not applicable or is included in the
accompanying consolidated financial statements or in the notes thereto
described above.
ITEM 16. FORM 10-K
SUMMARY
Not
applicable.
Exhibits
|
|
Exhibit No.:
|
Description Of
Document:
|
|
|
|
|
2.1
|
Stock Purchase Agreement
dated June 26, 2019, between The Bank of Nova Scotia and Oriental Bank, and,
solely for the purposes expressly provided therein, OFG Bancorp. (1)
|
|
|
|
|
2.2
|
Sale and Purchase Agreement
(USVI) dated June 26, 2019, between The Bank of Nova Scotia and Oriental
Bank, and, solely for the purposes expressly provided therein, OFG Bancorp. (2)
|
2.3
|
Sale and Purchase Agreement
(PR) dated June 26, 2019, between The Bank of Nova Scotia and Oriental Bank,
and, solely for the purposes expressly provided therein, OFG Bancorp. (3)
|
3.1
|
Composite Certificate of Incorporation. (4)
|
|
|
3.2
|
By-Laws.(5)
|
|
|
4.1
|
Certificate of Designation of the 7.125%
Noncumulative Monthly Income Preferred Stock, Series A. (6)
|
|
|
4.2
|
Certificate of Designation of the 7.0% Noncumulative
Monthly Income Preferred Stock, Series B. (7)
|
|
|
4.3
|
Certificate of Designations of 7.125% Non-Cumulative
Perpetual Preferred Stock, Series D.(8)
|
|
|
4.4
|
Form of Certificate for the 7.125% Noncumulative
Monthly Income Preferred Stock, Series A.(9)
|
|
|
4.5
|
Form of Certificate for the 7.0% Noncumulative
Monthly Income Preferred Stock, Series B. (10)
|
|
|
4.6
|
Form of Certificate for the 7.125% Non-Cumulative
Perpetual Preferred Stock, Series D.(8)
|
|
|
|
|
10.1
|
Change in Control Compensation Agreement between
Oriental and José R. Fernández.(11)
|
|
|
10.2
|
Change in Control Compensation Agreement between
Oriental and Ganesh Kumar (12)
|
|
|
10.3
|
Technology Outsourcing Agreement dated as of January
26, 2007, between Oriental and Metavante Corporation.(13)
|
|
|
10.4
|
OFG Bancorp
2007 Omnibus Performance Incentive Polan, as amended and restated. (14)
|
|
|
10.5
|
Form of qualified stock option award and agreement (15)
|
|
|
10.6
|
Form of restricted stock award and agreement (16)
|
|
|
10.7
|
Form of restricted unit award and agreement (17)
|
10.8
|
Form of performance shares award and agreement (18)
|
|
|
10.9
|
Employment Agreement dated as of February 28, 2018
between Oriental and José R. Fernández
(19)
|
|
|
10.10
|
Amendment dated as of May 31, 2018 to Technology
Outsourcing Agreement between Oriental and Metavante Corporation (20)
|
|
|
12.1
|
Computation of Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividends (included in Item 6 hereof )
|
|
|
21.1
|
List of subsidiaries
|
|
|
23.1
|
Consent of KPMG LLP
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
(1)
Incorporated herein by reference to
Exhibit 2.1 of Oriental’s current report on Form 8-K filed with the SEC on July
2, 2019. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(2)
Incorporated herein by reference to
Exhibit 2.2 of Oriental’s current report on Form 8-K filed with the SEC on July
2, 2019. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(3)
Incorporated herein by reference to
Exhibit 2.3 of Oriental’s current report on Form 8-K filed with the SEC on July
2, 2019. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(4) Incorporated herein by reference to
Exhibit 3.1 of Oriental’s annual report on Form 10-K filed with the
SEC on March 14, 2016.
(5) Incorporated herein by reference to
Exhibit 3.1 of Oriental’s current report on Form 8-K filed with the
SEC on January 30, 2018.
(6) Incorporated herein by reference to
Exhibit 4.1 of Oriental’s registration statement on Form 8-A filed
with the SEC on April 30, 1999.
(7) Incorporated herein by reference to
Exhibit 4.1 of Oriental’s registration statement on Form 8-A filed
with the SEC on September 26, 2003.
(8) Incorporated herein by reference
to Exhibit 3.1 of Oriental’s current report on Form 8-K filed with
the SEC on November 8, 2012.
(9) Incorporated herein by reference
to Exhibit 4.2 of Oriental’s registration statement on Form S-3 filed with the
SEC on April 2, 1999.
(10) Incorporated herein by reference
to Exhibit 4.2 of Oriental’s registration statement on Form S-3, as amended,
filed with the SEC on September 23, 2003.
(11) Incorporated herein by reference to
Exhibit 10.12 of Oriental’s annual report on Form 10-K filed with the
SEC on September 13, 2005.
(12) Incorporated herein by reference to
Exhibit 10.14 of Oriental’s annual report on Form 10-K filed with the
SEC on September 13, 2005.
(13) Incorporated herein by reference to
Exhibit 10.23 of Oriental’s annual report on Form 10-K filed with the
SEC on March 28, 2007. Portions of this exhibit have been omitted pursuant
to a request for confidential treatment.
(14) Incorporated herein by reference to
Exhibit 4.1 of Oriental’s registration statement on Form S-8 filed
with the SEC on October 7, 2013.
(15) Incorporated herein by reference to
Exhibit 10.1 of Oriental’s registration statement on Form S-8 filed
with the SEC on November 30, 2007.
(16) Incorporated herein by reference to
Exhibit 10.2 of Oriental’s registration statement on Form S-8 filed
with the SEC on November 30, 2007.
(17) Incorporated herein by reference to
Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with
the SEC on May 8, 2015.
(18) Incorporated herein by reference to Exhibit 10.1
of Oriental’s quarterly report on Form 10-Q filed with the SEC on November 2,
2018.
(19) Incorporated herein by reference to
Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with
the SEC on May 4, 2018.
(20) Incorporated herein by reference to
Exhibit 10.1 of Oriental’s quarterly report on Form 10-Q filed with
the SEC on August 3, 2018. Portions of this exhibit have been
omitted pursuant to a request for confidential
treatment.
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
|
|
|
|
|
By:
|
/s/ José Rafael
Fernández
|
|
|
Dated: March 2, 2020
|
José Rafael Fernández
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
By:
|
/s/ Maritza
Arizmendi Díaz
|
|
|
Dated: March 2, 2020
|
Maritza Arizmendi Díaz
|
|
|
|
Executive Vice President and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Krisen
Aguirre Torres
|
|
|
Dated: March 2, 2020
|
Krisen Aguirre Torres
|
|
|
|
Vice President Financial Reporting and
Accounting Control
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated.
|
|
|
|
|
By:
|
/s/ Julian Inclán
|
|
|
Dated: March 2, 2020
|
Julian Inclán
|
|
|
|
Chairman of the Board
|
|
|
|
|
|
|
|
|
By:
|
/s/ José Rafael
Fernández
|
|
|
Dated: March 2, 2020
|
José Rafael Fernández
|
|
|
|
Vice Chairman of the Board
|
|
|
|
|
|
|
|
|
By:
|
/s/ Juan Carlos
Aguayo
|
|
|
Dated: March 2, 2020
|
Juan Carlos Aguayo
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
By:
|
/s/ Jorge Colón
Gerena
|
|
|
Dated: March 2, 2020
|
Jorge Colón Gerena
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
By:
|
/s/ Pedro
Morazzani
|
|
|
Dated: March 2, 2020
|
Pedro Morazzani
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
By:
|
/s/ Edwin Pérez
Hernández
|
|
|
Dated: March 2, 2020
|
Edwin Pérez Hernández
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
By:
|
/s/ Néstor de
Jesús
|
|
|
Dated: March 2, 2020
|
Néstor de Jesús
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
Dated:
March 2, 2020
|
By:
|
/s/ Susan
S. Harnett
|
Susan s. Harnett
|
Director
|
|
|
|
|
|
|
|
|
|
|
Dated:
March 2, 2020
|
By:
|
/s/ Christa
Steele
|
|
Christa Steele
|
|
|
|
Director
|
|
|
|