T A B L E O F C O N T E N T S
2 0 1 6 F I N A N C I A L H I G H L I G H T S. . . .
L E T T E R F R O M T H E P R E S I D E N T . . . .
B O A R D O F D I R E C T O R S. .. . .. . .. . .. .
E X E C U T I V E S & O F F I C E R S. .. . .. . .. .
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A N N U A L R E P O R T
Live the Difference
Vive la Diferencia
As a pioneer and leader in banking
technology in Puerto Rico, OFG’s Oriental
offers its clients agile, accessible and
convenient new ways to bank, borrow,
save and invest.
Here are some of our 2016 innovations:
Oriental Biz
Oriental is the first and only bank in
Puerto Rico to offer a mobile application for
commercial accounts. It provides access to
the Oriental Cash Management platform
through smartphones and tablets. And it allows
businesses to manage their cash flow and
all their transactions, including mobile check
capture, in real time 24/7.
Cardless Cash
Another Puerto Rico first. This mobile app
enables customers to withdraw cash from ATMs
easier and more conveniently, without having to
use a debit card.
Depósito Rápido
Customers can deposit multiple checks or cash
without slips or envelopes using Oriental’s
ATM network. Cash deposits are available
immediately. Deposits made before 9:00 PM
are credited same day.
2016 FINANCIAL HIGHLIGHTS
OFG Bancorp is becoming Puerto Rico’s premier retail bank. At the same time, we are also
growing our commercial base among small and medium sized businesses and institutions.
Despite the island’s continuing challenging fiscal environment, we were successful again in
2016 in expanding the core Oriental franchise and proactively derisking our balance sheet.
C O N S I S T E N T P E R F O R M A N C E
EPS Diluted
OFG generated consistent quarterly performance in 2016 following the
derisking efforts undertaken in 2015. EPS diluted increased year over
$0.24
$0.25
$0.26
$0.27
year each quarter, for a year total of $1.03. This was primarily due to an
increase in interest income from originated loans and significant reduc-
($0.10)
tions in total interest expense, provision, FDIC shared-loss expense, and
4Q15
1Q16
2Q16
3Q16
4Q16
non-interest expenses.
C U S T O M E R G R O W T H
Retail Customer Accounts
Key to our 2016 performance was retail customer growth at our Orien-
tal Bank. Oriental differentiates itself with superior service delivery and
technology. In 2016, we introduced Cardless Cash, which enables ATM
265,123 267,919 270,442 273,141
277,829
withdrawals using a mobile phone instead of a card. Net new customer
accounts increased 5% for the second year in a row, along with associat-
12/31/15
3/31/16
6/30/16
9/30/16
12/31/16
ed deposits, loans and other assets.
L O A N P R O D U C T I O N
New Loan Originations
As a result of Oriental’s brand reputation and marketing, we maintained
($ in Millions)
our general level of loan production in the $900 million to $1 billion
$1,484
range since 2014, when we began focusing more heavily on higher
$919
$1,014
$948
yielding retail categories (new auto, residential mortgage, and consumer
$461
loans), and away from tax-exempt central government related loans.
2012
2013
2014
2015
2016
L O A N P O R T F O L I O
Total Loans, Net
Loans declined in 2016 due to our last major de-risking, which involved
($ in Billions)
the sale of a Puerto Rico central government related line of credit. 2016
also reflected the continued pay downs of loans from our Eurobank
(2010) and BBVA Puerto Rico (2012) acquisitions. More importantly,
$5.16
$5.02
$4.83
$4.43
$4.15
originated loan balances continued to grow.
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
C R E D I T Q U A L I T Y
All Non-Performing Loans
Credit quality continued to improve in 2016. This chart shows the ledger
($ in Millions)
balances of all Non-Performing Loans, including originated loans and
acquired and covered loans, excluding all allowances, purchase account-
ing discounts, and FDIC loss share. It has steadily declined, with a big
$487
$470
$457
$275
$265
drop in 3Q16 when we sold the PREPA line of credit.
4Q15
1Q16
2Q16
3Q16
4Q16
T A N G I B L E B O O K V A L U E
Tangible Book Value
Tangible Book Value per Common Share increased 3.8% due to our im-
Per Common Share
proved performance. In addition, we ended 2016 once again with cap-
ital ratios well in excess of requirements for a well-capitalized institution.
Point of fact: All major capital ratios were significantly higher at year end
$13.10
$13.60
$15.25 $14.53 $15.08
2016 than they were five years ago.
2012
2013
2014
2015
2016
1
LETTER FROM THE PRESIDENT
To Our Shareholders:
The year 2016 was a very successful one for OFG Bancorp.
• Our performance was consistent, and in line with targets we
set at the beginning of the year.
• We made great strides toward becoming the premier retail
bank in Puerto Rico, while in commercial we grew our client
base, particularly among small and medium sized businesses.
• We lead the market in digital banking capabilities, with a
growing array of advanced technology, providing our cus-
tomers a rich experience without sacrificing the personal
touch that is synonymous with our brand.
• The year, in a nutshell, was full of notable achievements rang-
ing from financial, risk and efficiency perspectives to an ex-
panding client base with high levels of customer satisfaction.
We achieved all this despite the intensely challenging economic environment in Puerto Rico.
Over the years, OFG Bancorp has demonstrated notable resilience due to our disciplined
approach to the business, and we have grown our franchise, while strengthening our
capital base.
Looking ahead, the business climate we face will depend on many factors, including actions
of the Federal Fiscal (PROMESA) Board, charged with bringing economic stability and
financial recovery to Puerto Rico.
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José Rafael Fernández
President, CEO and Vice Chairman of the Board
Over the years, OFG Bancorp has demonstrated
notable resilience due to our disciplined
approach to the business, and we have grown our
franchise, while strengthening our capital base.
3
Regardless, we remain steadfast in our commitment to our core values, and in our drive to
achieve strong business results. 2016 was a case in point. Our strong performance included:
• Solid net income of $45.3 million, or $1.03 per fully diluted share.
• Tangible book value per common share increased to $15.08,
underscoring further enhancement of our strong capital profile.
• Tangible common equity ratio at 10.33%, a new high in the
last five years.
• Originated loan balances, especially the higher yielding con-
sumer categories, and interest income continued to grow.
• New auto loan production increased 9.2%, further consolidat-
ing our significant market share.
• Our proactive credit servicing capabilities reduced delinquency
levels and improved asset quality. In 2016, we assumed
the servicing of our originated mortgages, which had been
outsourced.
• The efficiency ratio declined to a favorable low of 55.36%.
• Return on average assets and core net interest margin in-
creased steadily, ending the year at 0.96% and 4.89%,
respectively.
• The sale of a participation in a utility (PREPA) credit enabled
us to eliminate our major credit exposures related to the
Puerto Rico central government.
• We ended the year with approximately $6 billion in interest
earning assets.
• If any single measure highlights the growth of our franchise
in 2016, it is our second consecutive year of 5%+ growth in
our customer base, increasing deposits by more than $153
million. We thank our customers for recognizing our service
excellence and commitment to our communities in Puerto Rico.
Our goal is to exploit technology to bring the
utmost convenience to our customers, while we use
our team to provide valuable financial advice to
manage their money and wealth.
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The following efforts highlight the innovative customer facing services we deployed to
differentiate ourselves in terms of the value we add to our clients:
• Online account opening, so that a customer need not stand in
a line to do business with us
• Mobile mortgage application tracking, enabling clients to easily
determine where they are in the process
• Retail and business mobile check deposits
• ATM surcharge-free accounts
• Complete retail and business mobile banking apps
• Contigo (Together), a program that facilitates offerings all our
banking services to employees of corporate clients
• Cardless ATM withdrawals and mobile person-to-person
payments
Our goal is to exploit technology to bring the utmost convenience to our customers, while
we use our team to provide valuable financial advice to manage their money and wealth.
We at OFG will remain at the forefront in Puerto Rico as a brand that challenges status quo,
continuously elevating financial services to higher levels. We will also continue to be prudent
in managing our business and maximizeing the value to our stakeholders.
The uncertain economic outlook and the impact of yet to be determined government austerity
measures are future considerations, for sure. However, for more than a decade, we have
demonstrated our ability to grow the business and capital levels; maintain credit strength,
efficiency and profitability; and successfully focus on our goals, despite a complicated eco-
nomic environment.
With the support of our Board of Directors, dedicated employees, customers and you, we are
firmly resolved to maintain our impressive performance and develop opportunities for further
growth as OFG moves forward.
José Rafael Fernández
President, CEO, Vice Chairman of the Board
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B O A R D O F D I R E C T O R S
Julian S. Inclán
Chair Board of Directors
Chair Board Credit Committee
José R. Fernández
President, CEO and Vice Chair of the Board
Juan C. Aguayo
Chair Corporate Governance and Nominating Committee
Jorge Colón Gerena
Chair Compensation Committee
Néstor De Jesús
Chair Credit Committee
Rafael Martínez-Margarida
Chair Risk and Compliance Committee
Pedro Morazzani
Chair Audit Committee
Radamés Peña
Director
Carlos O. Souffront
Secretary
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Seated from left: Juan Carlos Aguayo, Néstor De Jesús, Jorge Colón Gerena
Standing from left: José Rafael Fernández, Julian S. Inclán, Carlos Souffront, Pedro Morazzani, Radamés Peña, Rafael Martínez-Margarida
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E X E C U T I V E S & O F F I C E R S
E X E C U T I V E T E A M :
José Rafael Fernández
President, CEO and Vice Chairman of the Board
Ganesh Kumar
Senior Executive Vice President and Chief Operating Officer
Carlos O. Souffront
Executive Vice President and General Counsel
Maritza Arizmendi
Executive Vice President and Chief Financial Officer
José Rafael Fernández
Ganesh Kumar
Carlos O. Souffront
Maritza Arizmendi
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L E A D E R S H I P T E A M :
Rafael Cruz
Senior Vice President and Chief Compliance Officer
Ada García
Senior Vice President, Retail Channel Business Development
Patrick Haggarty
Executive Vice President, Commercial Banking and Trust
Sean Miles
Senior Vice President, Financial Services
Idalis Montalvo
Vice President, Marketing and Public Relations
Milagros Pérez
Executive Vice President, Auto Loan Division
César Ortiz
Senior Vice President and Chief Risk Officer
Natalia Pérez
General Auditor
Ramón Rosado
Senior Vice President, Treasury
Debbie Sabater
Senior Vice President, Retail Strategy
Félix Silva
Senior Vice President, Retail Operations
Tomás Torres
Senior Vice President, Commercial Credit
Carlos Viña
Senior Vice President, Commercial Credit Administration
Jennifer Zapata Nazario
Senior Vice President, Human Resources
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F O R M 1 0 - K
1 0
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, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to to .
Commission File No. 001-12647
OFG Bancorp
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0538893
Principal Executive Offices:
254 Muñoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone Number: (787) 771-6800
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock ($1.00 par value per share)
7.125% Noncumulative Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share)
7.0% Noncumulative Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share)
8.75% Noncumulative Convertible Perpetual Preferred Stock, Series C ($1,000.00 liquidation preference per share)
7.125% Noncumulative Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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)
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 $364.5 million as of
June 30, 2016 based upon 44,913,719 shares outstanding and the reported closing price of $8.30 on the New York Stock Exchange on that date.
As of February 28, 2017, the Company had 43,914,844 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive proxy statement relating to the 2017 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, 2016
TABLE OF CONTENTS
PART I
Item 1. Business ......................................................................................................................................................................
Item 1A. Risk Factors ................................................................................................................................................................
Item 1B. Unresolved Staff Comments .......................................................................................................................................
4-17
18-24
25
Item 2.
Properties ....................................................................................................................................................................
Item 3. Legal Proceedings .......................................................................................................................................................
Item 4. Mine Safety Disclosures .............................................................................................................................................
25
25
25
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .........................................................................................................................................................
Item 6.
Selected Financial Data ...............................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................................................
Item 8.
Financial Statements and Supplementary Data ...........................................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .....................................
Item 9A. Controls and Procedures .............................................................................................................................................
Item 9B. Other Information .......................................................................................................................................................
25-26
27-29
30-81
82-86
87-194
195
195
195
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...................
196
Item 15. Exhibits and Financial Statement Schedules ..............................................................................................................
197-199
PART IV
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 the “Company”), including, but
not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact
of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new
accounting standards on the Company’s financial condition and results of operations. All statements contained herein that are not
clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,”
“project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,”
or similar expressions are generally intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by
management that are difficult to predict. Various factors, some of which by their nature are beyond the Company’s control, could
cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might
cause such a difference include, but are not limited to:
• additional credit defaults or a restructuring by the Commonwealth of Puerto Rico or any of its agencies, municipalities or
instrumentalities;
• possible legislative, tax or regulatory changes;
•
•
the rate of growth in the economy and employment levels, as well as general business and economic conditions;
the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market in
Puerto Rico;
the fiscal and monetary policies of the federal government and its agencies;
• competition in the financial services industry;
•
• changes in interest rates, as well as the magnitude of such changes;
• changes in federal bank regulatory and supervisory policies, including required levels of capital;
•
•
• additional Federal Deposit Insurance Corporation (“FDIC”) assessments.
the impact of the industry regulations on the Company’s businesses, business practices and cost of operations;
the performance of the securities markets; and
Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-
looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the
job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets,
charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding
sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements
and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial
assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and
interpretations; increased competition; the Company’s ability to grow its core businesses; decisions to downsize, sell or close units or
otherwise change the Company’s business mix; and management’s ability to identify and manage these and other risks.
All forward-looking statements included in this annual report on Form 10-K are based upon information available to the Company as
of the date of this report, and other than as required by law, including the requirements of applicable securities laws, the Company
assumes no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
ITEM 1. BUSINESS
General
The Company 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. The Company 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”).
The Company 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. The Company 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. The Company provides these services through various
subsidiaries including, a commercial bank, Oriental Bank ("the Bank"), a securities broker-dealer, Oriental Financial Services Corp.
(“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), and a retirement plan
administrator, Oriental Pension Consultants, Inc. (“OPC”). All of our subsidiaries are based in San Juan, Puerto Rico, except for OPC
which is based in Boca Raton, Florida. The Company has 48 branches in Puerto Rico. The Company’s long-term goal is to strengthen
its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing
and delivery of banking and financial services, maintaining effective asset-liability management, growing non-interest revenue from
banking and financial services, and improving operating efficiencies.
The Company’s 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, consumer and mortgage 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 the Company’s
determination to effectively serve and advise its customer base in a responsive and professional manner; and
• Matching its portfolio of investment securities with the related funding to achieve favorable spreads, and primarily
investing in U.S. government-sponsored agency obligations.
Together with a highly experienced group of senior and mid-level executives and the benefits from the acquisitions of Eurobank
Puerto Rico and the Puerto Rico operations of Banco Bilbao Vizcaya Argentaria, S.A. (“BBVA”), this strategy has resulted in
sustained growth in the Company’s deposit-taking activities, commercial, consumer and mortgage lending and financial service
activities, allowing the Company to distinguish itself in a highly competitive industry. The Company 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
the Company’s long-term goal.
On December 18, 2012, the Company purchased from 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.”
4
The Company’s principal funding sources are branch deposits, securities sold under agreements to repurchase, Federal Home Loan
Bank (“FHLB”) advances, wholesale deposits, and subordinated capital notes. Through its branch network, Oriental Bank offers
personal non-interest and interest-bearing checking accounts, savings accounts, certificates of deposit, individual retirement accounts
(“IRAs”) and commercial non-interest bearing checking accounts. The FDIC insures the Bank’s deposit accounts up to applicable
limits. Management makes retail deposit pricing decisions periodically, adjusting the rates paid on retail deposits in response to
general market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, the
London Interbank Offered Rate (“LIBOR”), and mainland U.S. market interest rates.
Segment Disclosure
The Company 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
the Company’s organizational structure, nature of products, distribution channels and economic characteristics of the products were
also considered in the determination of the reportable segments. The Company measures the performance of these reportable segments
based on pre-established 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 the Company’s operating segments, please refer to Note 26 in the Company’s
accompanying consolidated financial statements.
Banking Activities
The Bank, the Company’s main subsidiary, is a full-service Puerto Rico commercial bank with its main office located in San Juan,
Puerto Rico. The Bank has 48 branches throughout Puerto Rico and was incorporated in October 1964 as a federal mutual savings and
loan association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings bank in April 1987. Its
conversion from a federally-chartered savings bank to a commercial bank chartered under the banking law of the Commonwealth of
Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and obtain more flexibility in
its businesses. As a Puerto Rico-chartered commercial bank, it is subject to examination by the FDIC and the Office of the
Commissioner of Financial Institutions of Puerto Rico (the “OCFI”). The Bank offers banking services such as commercial, consumer,
and mortgage lending, savings and time deposit products, financial planning, and corporate and individual trust services, and
capitalizes on its retail banking network to provide commercial and mortgage lending products to its clients. The Bank operates two
international banking entities (“IBE”) pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the
“IBE Act”), one is a unit operating within the Bank, named Oriental Overseas (the “IBE Unit”), and the other is a wholly-owned
subsidiary of the Bank, named Oriental International Bank, Inc. (the “IBE Subsidiary”). The IBE Unit and IBE Subsidiary offer the
Bank certain Puerto Rico tax advantages, and their services are limited under Puerto Rico law to persons and assets/liabilities located
outside of Puerto Rico.
Banking activities include the Bank’s branches and mortgage banking activities with traditional retail banking products such as
deposits, commercial loans, consumer loans and mortgage loans. The Bank’s significant lending activities are with consumers located
in Puerto Rico. The Bank’s lending transactions include a diversified number of industries and activities, all of which are
encompassed within four main categories: commercial, consumer, mortgage and auto.
The Company’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include
the origination of mortgage loans for the Bank’s own portfolio, and the sale of loans directly into the secondary market or the
securitization of conforming loans into mortgage-backed securities. The Bank originates Federal Housing Administration (“FHA”)
insured mortgages, Veterans Administration (“VA”) guaranteed mortgages, and Rural Housing Service (“RHS”) guaranteed loans that
are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which
can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting
requirements for sale or exchange under standard Federal National Mortgage Association (the “FNMA”) or the Federal Home Loan
Mortgage Corporation (the “FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of
FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller of FNMA, as well as FHLMC, mortgage loans for
issuance of FNMA and FHLMC mortgage-backed securities. The Bank is also an approved issuer of GNMA mortgage-backed
securities. The Company outsources the servicing of the residential mortgage loan portfolio acquired in the BBVA Acquisition and
services the GNMA, FNMA, and FHLMC pools that issues, and the rest of its residential mortgage loan portfolio.
5
Loan Underwriting
Auto loans: The Company provides financing for the purchase of new or used motor vehicles. These loans are granted mainly through
dealers authorized and approved by the auto credit department committee of the Company. The auto credit department has the
specialized structure and resources to provide the service required for this product according to market demands and trends. The auto
loan credit policy establishes specific guidance and parameters for the underwriting and origination processes. Underwriting
procedures, lending limits, interest rate approval, insurance coverage, and automobile brand restrictions are some parameters and
internal controls implemented to ensure the quality and profitability of the auto loan portfolio. The credit scoring system is a
fundamental part of the decision process.
Consumer loans: Consumer loans include personal loans, credit cards, lines of credit and other loans made by banks to individual
borrowers. All loan originations must be underwritten in accordance with the Company’s underwriting criteria, and include an
assessment of each borrower’s personal financial condition, including verification of income, assets, Fair Isaac Corporation ("FICO")
score, and credit reports.
Residential mortgage loans: All loan originations, regardless of whether originated through the Company’s retail banking network or
purchased from third parties, must be underwritten in accordance with the Company’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. The Company’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. The Company’s underwriting personnel, while operating within the Company’s loan offices, make underwriting decisions
independent of the Company’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, the Company’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.
Wealth Management Activities
Wealth management activities are generated by such businesses as securities brokerage, trust services, retirement planning, insurance,
pension administration, and other financial services.
Oriental Financial Services is a Puerto Rico corporation and the Company’s subsidiary engaged in securities brokerage activities in
accordance with the Company’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 the Company’s subsidiary engaged in insurance agency services. It
was established by the Company to take advantage of the cross-marketing opportunities provided by financial modernization
legislation. Oriental Insurance currently earns commissions by acting as a licensed insurance agent in connection with the issuance of
insurance policies by unaffiliated insurance companies and continues to cross market its services to the Company’s existing customer
base.
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OPC, a Florida corporation, is the Company’s subsidiary engaged in the administration of retirement plans in the U.S., Puerto Rico,
and the Caribbean.
Corporate and individual trust services are carried by the Bank’s trust division.
Treasury Activities
Treasury activities encompass all of the Company’s treasury-related functions. The Company’s investment portfolio consists of
mortgage-backed securities, obligations of U.S. government-sponsored agencies, Puerto Rico government and agency obligations and
money market instruments. Agency mortgage-backed securities, the largest component of the investment portfolio, consist principally
of pools of residential mortgage loans that are made to consumers and then resold in the form of pass-through certificates in the
secondary market, the payment of interest and principal of which is guaranteed by GNMA, FNMA or FHLMC.
Market Area and Competition
The main geographic business and service area of the Company 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. The Company 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. The Company encounters intense
competition in attracting and retaining deposits and in its consumer and commercial lending activities. Management believes that the
Company has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans
with competitive terms, by emphasizing the quality of its service, by pricing its products at competitive interest rates, by offering
convenient branch locations, and by offering financial planning and financial services at most of its branch locations. The phase-out
consolidation of three failed Puerto Rico banks in 2010 and the failure of another Puerto Rico bank in 2015 has created an
environment for more rational loan and deposit pricing. The Company’s ability to originate loans depends primarily on the services
that it provides to its borrowers, in making prompt credit decisions, and on the rates and fees that it charges.
Regulation and Supervision
General
The Company 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.”
The Company elected to be treated as a financial holding company as permitted by the Gramm-Leach-Bliley Act. Under the Gramm-
Leach-Bliley Act, if the Company 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 the Company 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.
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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.
The Company is required to file with the Federal Reserve Board and the SEC periodic reports and other information concerning its
own business operations and those of its subsidiaries. In addition, Federal Reserve Board approval must also be obtained before a bank
holding company acquires all or substantially all of the assets of another bank or merges or consolidates with another bank holding
company. The Federal Reserve Board also has the authority to issue cease and desist orders against bank holding companies and their
non-bank subsidiaries.
The Bank is regulated by various agencies in the United States and the Commonwealth of Puerto Rico. Its main regulators are the
OCFI and the FDIC. The Bank is subject to extensive regulation and examination by the OCFI and the FDIC, and is subject to the
Federal Reserve Board’s regulation of transactions between the Bank and its affiliates. The federal and Puerto Rico laws and
regulations which are applicable to the Bank regulate, among other things, the scope of its business, its investments, its reserves
against deposits, the timing of the availability of deposited funds, and the nature and amount of and collateral for certain loans. In
addition to the impact of such regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as
it attempts to control the money supply and credit availability in order to control inflation in the economy.
The Company’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 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. The Company 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.
The Company and its subsidiaries are subject to the rules and regulations of certain other regulatory agencies. Oriental Financial
Services, as a registered broker-dealer, is subject to the supervision, examination and regulation of FINRA, the SEC, and the OCFI in
matters relating to the conduct of its securities business, including record keeping and reporting requirements, supervision and
licensing of employees, and obligations to customers.
Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto
Rico in matters relating to insurance sales, including but not limited to, licensing of employees, sales practices, charging of
commissions and reporting requirements.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act implements a variety of far-reaching changes and has been described as the most sweeping reform of the
financial services industry since the 1930’s. It has a broad impact on the financial services industry, including significant regulatory
and compliance changes, such as: (i) enhanced resolution authority of troubled and failing banks and their holding companies;
(ii) enhanced lending limits strengthening the existing limits on a depository institution’s credit exposure to one borrower;
(iii) increased capital and liquidity requirements; (iv) increased regulatory examination fees; (v) changes to assessments to be paid to
the FDIC for federal deposit insurance; (vi) prohibiting bank holding companies, such as the Company, from including in regulatory
Tier 1 capital future issuances of trust preferred securities or other hybrid debt and equity securities; and (vii) numerous other
provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector.
Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be
distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal
Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Further, the Dodd-Frank Act addresses many corporate
governance and executive compensation matters that affect most U.S. publicly traded companies, including the Company. 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.
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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 the Company), 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 the Company), 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 the Company, 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 the Company.
Since the Company 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 the Company is a creditor with recognized claims against the subsidiary.
Dividend Restrictions
The principal source of funds for the Company 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”).
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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 have adopted capital rules that became effective January 1, 2014 for
advanced approaches banking organizations (i.e., those with consolidated assets greater than $250 billion or consolidated on-balance
sheet foreign exposures of at least $10 billion) and January 1, 2015 for all other covered organizations (subject to certain phase-in
periods through January 1, 2019) and that will replace their general risk-based capital rules, advanced approaches rule, market risk
rule, and leverage rules.
The new capital rules provide certain changes to the prompt corrective action regulations adopted by the agencies under Section 38 of
the FDIA, as amended by FDICIA. These regulations are designed to place restrictions on U.S. insured depository institutions if their
capital levels begin to show signs of weakness. The five capital categories established by the agencies under their prompt corrective
action framework are: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically
undercapitalized”.
The new capital rules expand such categories by introducing a common equity tier 1 capital requirement for all depository institutions,
revising the minimum risk-based capital ratios and, beginning in 2018, the proposed supplementary leverage requirement for advanced
approaches banking organizations. The common equity tier 1 capital ratio is a new minimum requirement designed to ensure that
banking organizations hold sufficient high-quality regulatory capital that is available to absorb losses on a going-concern basis. Under
the new rules, an insured depository institution is:
(i) “well capitalized,” if it has a total risk-based capital ratio of 10% or more, a tier 1 risk-based capital ratio of 8% or more, a common
equity tier 1 capital ratio of 6.5% or more, and a tier 1 leverage capital ratio of 5% or more, and is not subject to any written capital
order or directive;
(ii) “adequately capitalized,” if it has a total risk-based capital ratio of 8% or more, a tier 1 risk-based capital ratio of 6% or more, a
common equity tier 1 capital ratio of 4.5% or more, and a tier 1 leverage capital ratio of 4% or more;
(iii) “undercapitalized,” if it has a total risk-based capital ratio that is less than 8%, a tier 1 risk-based ratio that is less than 6%, a
common equity tier 1 capital ratio that is less than 4.5%, or a tier 1 leverage capital ratio that is less than 4%;
(iv) “significantly undercapitalized,” if it has a total risk-based capital ratio that is less than 6%, a tier 1 risk-based capital ratio that is
less than 4%, a common equity tier 1 capital ratio that is less than 3%, or a tier 1 leverage capital ratio that is less than 3%; and
(v) “critically undercapitalized,” if it has a ratio of tangible equity (defined as tier 1 capital plus non-tier 1 perpetual preferred stock) to
total assets that is equal to or less than 2%.
The new capital rules also include a policy statement by the agencies that all banking organizations should maintain capital
commensurate with their risk profiles, which may entail holding capital significantly above the minimum requirements. They also
provide a reservation of authority permitting examiners to require that such organizations hold additional regulatory capital.
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying
any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized
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depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized
depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s
holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the
time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal
banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution’s capital. Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to the appointment of a receiver or conservator.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance assessments. The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”)
merged the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) into a single Deposit Insurance Fund,
and increased the maximum amount of the insurance coverage for certain retirement accounts, and possible “inflation adjustments” in
the maximum amount of coverage available with respect to other insured accounts. In addition, it granted a one-time initial assessment
credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund. As a result of the merger of the BIF and
the SAIF, all insured institutions are subject to the same assessment rate schedule.
The Dodd-Frank Act contains several important deposit insurance reforms, including the following: (i) the maximum deposit
insurance amount was permanently increased to $250,000; (ii) the deposit insurance assessment is now based on the insured
depository institution’s average consolidated assets minus its average tangible equity, rather than on its deposit base; (iii) the
minimum reserve ratio for the Deposit Insurance Fund was raised from 1.15% to 1.35% of estimated insured deposits by
September 30, 2020; (iv) the FDIC is required to “offset the effect” of increased assessments on insured depository institutions with
total consolidated assets of less than $10 billion; (v) the FDIC is no longer required to pay dividends if the Deposit Insurance Fund’s
reserve ratio is greater than the minimum ratio; and (vi) the FDIC temporarily insured the full amount of qualifying “noninterest-
bearing transaction accounts” until December 31, 2012. As defined in the Dodd-Frank Act, a “noninterest-bearing transaction
account” is a deposit or account maintained at a depository institution with respect to which interest is neither accrued nor paid, on
which the depositor or account holder is permitted to make withdrawals by negotiable or transferrable instrument, payment orders of
withdrawals, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfers to
third parties or others, and on which the insured depository institution does not reserve the right to require advance notice of an
intended withdrawal.
The FDIC amended its regulations under the FDIA, as amended by the Dodd-Frank Act, to modify the definition of a depository
institution’s insurance assessment base; to revise the deposit insurance assessment rate schedules in light of the new assessment base
and altered adjustments; to implement the dividend provisions of the Dodd-Frank Act; and to revise the large insured depository
institution assessment system to better differentiate for risk and better take into account losses from large institution failures that the
FDIC may incur. Since the new assessment base under the Dodd-Frank Act is larger than the current assessment base, the new
assessment rates adopted by the FDIC are lower than the former rates.
In 2016, the FDIC adopted two new rules to require large institutions to bear the burden of raising the reserve ratio from 1.15% to
1.35% and amended the pricing for small institutions after the reserve ratio reaches 1.15%. Once the reserve ratio reaches 1.38%,
small institutions will receive credits to offset their contribution to raising the reserve ratio above 1.35%. Effective June 30, 2016, the
reserve ratio reached 1.15%, and assessment collections decreased for small institutions like the Bank.
Brokered Deposits
FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well capitalized institutions are not
subject to limitations on brokered deposits, while adequately capitalized institutions are able to accept, renew or rollover brokered
deposits only with a waiver from the FDIC and subject to certain restrictions on the interest paid on such deposits. Undercapitalized
institutions are not permitted to accept brokered deposits. As of December 31, 2016, the Bank is a well capitalized institution and is
therefore not subject to these limitations on brokered deposits.
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Regulatory Capital Requirements
Under the Dodd-Frank Act, federal banking regulators are required to establish minimum leverage and risk-based capital
requirements, on a consolidated basis, for insured institutions, depository institution holding companies, and non-bank financial
companies supervised by the Federal Reserve Board. The minimum leverage and risk-based capital requirements are to be determined
based on the minimum ratios established for insured depository institutions under prompt corrective action regulations. In effect, such
provision of the Dodd-Frank Act, which is commonly known as the Collins Amendment, applies to bank holding companies the same
leverage and risk-based capital requirements that apply to insured depository institutions. Because the capital requirements must be the
same for insured depository institutions and their holding companies, the Collins Amendment generally excludes certain debt or equity
instruments, such as cumulative perpetual preferred stock and trust preferred securities, from Tier 1 Capital, subject to a three-year
phase-out from Tier 1 qualification for such instruments issued before May 19, 2010, with the phase-out commencing on January 1,
2014 for advanced approaches banking organizations and January 1, 2015 for other bank holding companies with consolidated assets
of $15 billion or more as of December 31, 2009. However, such instruments issued before May 19, 2010 by a bank holding company,
such as the Company, with a total consolidated assets of less than $15 billion as of December 31, 2009, are not affected by the Collins
Amendments, are “grandfathered” under the new capital rules, and may continue to be included in tier 1 Capital as a restricted core
capital element.
The new capital rules adopted by the federal banking agencies revise the agencies’ risk-based and leverage capital requirements for
banking organizations, and consolidate three separate notices of proposed rulemaking that the OCC, Federal Reserve Board and FDIC
published in the Federal Register on August 30, 2012, with selected changes. In particular, and consistent with the framework of the
Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking
Systems,” the new capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a
common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that apply to all banking organizations. The rules
also raise the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for
all banking organizations. In addition, for the largest, most internationally active banking organizations, the rules include a new
minimum supplementary leverage ratio that takes into account off-balance sheet exposures. The rules incorporate these new
requirements into the agencies’ prompt corrective action framework. In addition, the rules establish limits on a banking organization’s
capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of
common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. Further, the
rules amend the methodologies for determining risk-weighted assets for all banking organizations; introduce disclosure requirements
that would apply to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets; and adopt
changes to the agencies’ regulatory capital requirements that meet the requirements of Section 171 and Section 939A of the Dodd-
Frank Act. These rules also codify the agencies’ current capital rules, which have previously resided in various appendices to their
respective regulations, into a harmonized integrated regulatory framework.
Failure to meet the capital guidelines could subject an institution to a variety of enforcement actions including the termination of
deposit insurance by the FDIC and to certain restrictions on its business. At December 31, 2016, the Company 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 also is 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.
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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 to greater-than-10% shareholders of a bank and certain of their related interests (“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 to 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
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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. The Company
has a Compliance Department that oversees the planning of products and services offered to the community, especially those aimed to
serve low and moderate income communities.
USA Patriot Act
Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001, all financial institutions, including the Company, 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. The Company 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. The Company and its subsidiaries have established policies and procedures to assure the Company’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 the Company
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.
The Company has included in this annual report on Form 10-K management’s assessment regarding the effectiveness of the
Company’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 the Company; management’s assessment as to
the effectiveness of the Company’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 the Company’s internal control over financial reporting.
As of December 31, 2016 the Company’s management concluded that its internal control over financial reporting was effective.
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Puerto Rico Banking Act
As a Puerto Rico-chartered commercial bank, the Bank is subject to regulation and supervision by the OCFI under the Banking Act,
which contains provisions governing the incorporation and organization of the Bank, rights and responsibilities of directors, officers
and stockholders, as well as the corporate powers, savings, lending, capital and investment requirements and other aspects of the Bank
and its affairs. In addition, the OCFI is given extensive rulemaking power and administrative discretion under the Banking Act. The
OCFI generally examines the Bank at least once every year.
The Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such
fund (legal surplus) equals the total paid-in capital on common and preferred stock. At December 31, 2016 and 2015, legal surplus
amounted to $76.3 million and $70.4 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 Presidents of the
Government Development Bank for Puerto Rico, the Economic Development Bank for Puerto Rico and the Planning Board; the
Puerto Rico Secretaries of Commerce and Economic Development, Treasury and Consumer Affairs; the Commissioner of Insurance;
and the President of the Public Corporation for Insurance and Supervision of Puerto Rico Credit Unions. It has the authority to
regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in
the Commonwealth. The current regulations of the Puerto Rico Finance Board provide that the applicable interest rate on loans to
individuals and unincorporated businesses is to be determined by free competition. The Puerto Rico Finance Board also has the
authority to regulate maximum finance charges on retail installment sales contracts and for credit card purchases. There is presently no
maximum rate for retail installment sales contracts and for credit card purchases.
Puerto Rico Internal Revenue Code
On July 2014, the Governor signed into law Act No. 77-2014, known as “Ley de Ajustes al Sistema Contributivo” (Act of
Adjustments to the Tax System). The main purpose of this legislation is to increase government collections in order to alleviate the
structural budget deficit. Its most relevant provisions, as applicable to the Company, and effective for transactions held after June 30,
2014, are as follows: (1) the capital tax rate was increased from 15% to 20% and (2) for an asset to be considered long term capital
asset, the holding period must be over a year, which before was defined with a holding period of over six months.
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On May 29, 2015 the Governor signed Act No. 72 of 2015. The most relevant provisions of the Act No. 72, as applicable to the
Company, for taxable years beginning after December 31, 2014, are as follows: (1) establishes a new definition of “large taxpayers,”
which require them to file their tax return following a special procedure established by the Secretary of the Treasury, (2) net operating
losses carried forward may be deducted up to 70% of the alternative minimum net income for purposes of computing the alternative
minimum tax, and (3) net operating losses carried forward may be deducted up to 80% of the net income for purposes of computing
the regular corporate income tax.
Other amendments to the Puerto Rico Internal Revenue Code applicable during 2015 were the increase of the Sales and Use Tax
(SUT) from 7% to 11.5% which began on July 1st, 2015 and a special SUT to business to business transactions of 4%, which began
on October 1st, 2015. These were implemented as a transitional phase to the enacted Value Added Tax (VAT) of 10.5%, placed on
April 1st, 2016, along with a Municipal SUT of 1% on certain taxable items.
International Banking Center Regulatory Act of Puerto Rico
The business and operations of the Bank’s IBE Unit and IBE Subsidiary are subject to supervision and regulation by the OCFI. Under
the IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an
IBE may be initiated without the prior approval of the OCFI if by such transaction a person would acquire, directly or indirectly,
control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBE Act and the regulations issued
thereunder by the OCFI (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are
limited in part to persons and assets/liabilities located outside of Puerto Rico. The IBE Act provides further that every IBE must have
not less than $300 thousand of unencumbered assets or acceptable financial guarantees.
Pursuant to the IBE Act and the IBE Regulations, the Bank’s IBE Unit and IBE Subsidiary have to maintain books and records of all
their transactions in the ordinary course of business. They are also required to submit quarterly and annual reports of their financial
condition and results of operations to the OCFI, including annual audited financial statements.
The IBE Act empowers the OCFI to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things,
the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of its license, or if the OCFI finds that the business or
affairs of the IBE are conducted in a manner that is not consistent with the public interest.
In 2012, the IBE Act was superseded by a new law that, among other things, prohibits new license applications to organize and
operate an IBE. Any such newly organized entity (now called an “international financial entity”) must be licensed under the new law,
and such entity (as opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE Unit and IBE Subsidiary, which
are “grandfathered”) will generally be subject to a 4% Puerto Rico income tax rate.
Volcker Rule
The so-called “Volcker Rule” adopted by the federal banking regulatory agencies under Section 619 of the Dodd-Frank Act generally
prohibits insured depository institutions and their affiliates from (i) engaging in short-term proprietary trading of securities,
derivatives, commodities futures and options on these instruments for their own account; and (ii) owning, sponsoring or having certain
relationships with hedge funds or private equity funds. However, it exempts certain activities, including market making, underwriting,
hedging, trading in government and municipal obligations, and organizing and offering a hedge fund or private equity fund, among
others. A banking entity that engages in any such covered activity (i.e., proprietary trading or investment activities in hedge funds or
private equity funds) is generally required to establish an internal compliance program reasonably designed to ensure and monitor
compliance with the Volcker Rule.
Employees
At December 31, 2016, the Company had 1,416 employees. None of its employees is represented by a collective bargaining group.
The Company considers its employee relations to be good.
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Internet Access to Reports
The Company’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 the Company’s internet website at www.ofgbancorp.com, as soon as
reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.
The Company’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 the Company’s website at www.ofgbancorp.com under the corporate governance link. The Company’s
code of business conduct and ethics applies to its directors, officers, employees and agents, including its principal executive, financial
and accounting officers.
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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 the Company 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 the Company currently deems immaterial may also adversely affect the Company’s business, financial
condition or results of operations.
ECONOMIC AND MARKET CONDITIONS RISK
Most of our business is conducted in Puerto Rico, which in recent years has been experiencing a deep economic recession, a
downturn in the real estate market, and a government fiscal and liquidity crisis.
Our loan and deposit activities are directly affected by economic conditions within Puerto Rico. Because a significant portion of our
credit risk exposure on our loan portfolio, which is the largest component of our interest-earning assets, is concentrated in Puerto Rico,
our profitability and financial condition may be adversely affected by an extended economic recession, adverse political, fiscal or
economic developments in Puerto Rico, or the effects of a natural disaster, all of which could result in a reduction in loan originations,
an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of our loans and
loan servicing portfolio.
The Puerto Rico economy has been in a recession since 2006, and the Commonwealth government currently faces a severe fiscal and
liquidity crisis as a result of many years of significant budget deficits, among other factors. Puerto Rico also faces high
unemployment, unprecedented population decline, and high levels of government debt and pension obligations. In anticipation of a
widespread default on the Puerto Rico government’s debt, the United States federal government enacted the Puerto Rico Oversight,
Management, and Economic Stability Act to create a Fiscal Oversight Board with broad powers over the Puerto Rico government’s
finances, to create a legal process to restructure the Puerto Rico government’s debts, and to temporarily stay the enforcement of debts.
Economic activity is expected to be constrained as a result of anticipated severe austerity measures and continued increasing migration
trends. A further deterioration in local economic conditions or in the financial condition of an industry on which the local market
depends could adversely affect factors such as unemployment rates and real estate vacancy and values. This could result in, among
other things, a reduction of creditworthy borrowers seeking loans, an increase in loan delinquencies, defaults and foreclosures, an
increase in classified and non-accrual loans, a decrease in the value of collateral for loans, and a decrease in core deposits. Any of
these factors could materially impact our business.
For a discussion of the impact of the economy on our loan portfolios, see “—A continuing decline in the real estate market would
likely result in an increase in delinquencies, defaults and foreclosures and in a reduction in loan origination activity, which would
adversely affect our financial results.”
Changes in interest rates could reduce the Company’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.
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CREDIT RISK
We are exposed to credit risk in connection with our loans to certain municipalities of Puerto Rico, and the restructuring of the
government could adversely affect the value of such loans.
At December 31, 2016, we had approximately $197.9 million of credit exposure to five Puerto Rico municipalities. This credit
exposure consists of collateralized loans or obligations that have special additional property tax revenues pledged for their repayment.
The Puerto Rico government faces a number of severe economic and fiscal challenges that are expected to require a significant
restructuring of the government as well as severe austerity measures to close the significant deficit.
If the government restructuring affects the ability of the municipalities to pay their obligations to us as they become due, or under
certain other circumstances, we may be required to adversely classify such loans and increase the provision for loan losses in
connection therewith. Such provision may significantly impact our earnings.
Heightened credit risk could require us to increase our provision for credit losses, which could have a material adverse effect on
our results of operations and financial condition.
Making loans is an essential element of our business, and there is a risk that the loans will not be repaid. This default risk is affected
by a number of factors, including:
•
•
•
•
the duration of the loan;
credit risks of a particular borrower;
changes in economic or industry conditions; and
in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.
Our customers might not repay their loans according to the original terms, and the collateral securing the payment of those loans might
be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a materially
adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment
of loans. In determining the amount of the allowance for loan losses, we rely on loan quality reviews, past loss experience, and an
evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan losses may
not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the
allowance would materially decrease our net income.
Our emphasis on the origination of business and retail loans is one of the more significant factors in evaluating our allowance for loan
losses. As we continue to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and
as a result would decrease our earnings.
We strive to maintain an appropriate allowance for loan and lease losses to provide for probable losses inherent in the loan portfolio.
We periodically determine the amount of the allowance based on consideration of several factors such as default frequency, internal
risk ratings, expected future cash collections, loss recovery rates and general economic factors, among others. Our methodology for
measuring the adequacy of the allowance relies on several key elements, which include a specific allowance for identified problem
loans and a general systematic allowance.
We believe our allowance for loan and lease losses is currently sufficient given the constant monitoring of the risk inherent in the loan
portfolio. However, there is no precise method of predicting loan losses and therefore we always face the risk that charge-offs in
future periods will exceed the allowance for loan and lease losses and that additional increases in the allowance for loan and lease
losses will be required. In addition, the FDIC as well as the OCFI may require us to establish additional reserves. Additions to the
allowance for loan and lease losses would result in a decrease of net earnings and capital, and could hinder our ability to pay
dividends.
Given the severe economic conditions in Puerto Rico, we may continue to experience increased credit costs or need to take greater
than anticipated markdowns and make greater than anticipated provisions to increase the allowances for loan losses that could
adversely affect our financial condition and results of operations in the future.
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Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for credit losses or loan
charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a
materially adverse effect on our results of operations and/or financial condition.
We are subject to default and other risks in connection with mortgage loan originations.
From the time that we fund the mortgage loans originated to the time that they are sold, we are generally at risk for any mortgage loan
defaults. Once we sell the mortgage loans, the risk of loss from mortgage loan defaults and foreclosures passes to the purchaser or
insurer of the mortgage loans. However, in the ordinary course of business, we make representations and warranties to the purchasers
and insurers of mortgage loans relating to the validity of such loans. If there is a breach of any of these representations or warranties,
we may be required to repurchase the mortgage loan and bear any subsequent loss on the mortgage loan. We also may be required to
repurchase mortgage loans in the event that there was improper underwriting or fraud or in the event that the loans become delinquent
shortly after they are originated. For the year ended December 31, 2016, we repurchased $4.2 million of loans from GNMA and
FNMA. Any such repurchases in the future may negatively impact our liquidity and operating results. Termination of our ability to
sell mortgage products to the 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 representations and warranties and in various other circumstances, including securities fraud claims, and the amount of
such losses could exceed the purchase amount of the related loans. Consequently, we may be exposed to credit risk associated with
sold loans. In addition, we incur higher liquidity risk with respect to mortgage loans not eligible to be purchased or insured by FNMA,
GNMA or FHLMC, due to a lack of secondary market in which to sell these loans.
We have established reserves in our consolidated financial statements for potential losses that are considered to be both probable and
reasonably estimable related to the mortgage loans sold by us. The adequacy of the reserve and the ultimate amount of losses incurred
will depend on, among other things, the actual future mortgage loan performance, the actual level of future repurchase and
indemnification requests, the actual success rate of claimants, developments in litigation related to us and the industry, actual
recoveries on the collateral and macroeconomic conditions (including unemployment levels and housing prices). Due to uncertainties
relating to these factors, there can be no assurance that our reserves will be adequate or that the total amount of losses incurred will not
have a material adverse effect upon our financial condition or results of operations. For additional information related to our allowance
for loan and lease losses, see “Note 6—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 has also been noted. There is a risk that a reduction in housing values could negatively impact our loss levels on the
mortgage loan portfolio because the value of the homes underlying the loans is a primary source of repayment in the event of
foreclosure.
The decline in Puerto Rico’s economy has had an adverse effect in the credit quality of our loan portfolios. Among other things,
during the ongoing recession, we have experienced an increase in the level of non-performing assets and loan loss provision, which
adversely affected our profitability. Although the delinquency rates have decreased recently, they may increase if the recession
continues or worsen. If there is another decline in economic activity, additional increases in the allowance for loan and lease losses
could be necessary with further adverse effects on our profitability.
Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to sell loans, the price received on the
sale of such loans, and the value of the mortgage loan portfolio, all of which could have a negative impact on our results of operations
and financial condition. In addition, any material decline in real estate values would weaken our collateral loan-to-value ratios and
increase the possibility of loss if a borrower defaults. For a discussion of the impact of the Puerto Rico economy on our business
operations, see “Most of our business is conducted in Puerto Rico, which is experiencing a deep economic recession, downturn in the
real estate market, and a government fiscal and liquidity crisis.”
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OPERATIONS AND BUSINESS RISK
Non-Compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
Financial institutions are required under the USA Patriot Act and Bank Secrecy Acts to develop programs to prevent financial
institutions from being used for money-laundering and terrorist activities. Financial institutions are obligated to file suspicious activity
reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network 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. 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 controls and systems.
We are subject to security and operational risk related to our use of technology, including the risk of cyber-attack or cyber theft.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and
networks regarding our customers and their accounts. To provide these products and services, we use information systems and
infrastructure that we and third party service providers operate. As a financial institution, we also are subject to and examined for
compliance with an array of data protection laws, regulations and guidance, as well as to our own internal privacy and information
security policies and programs.
Such incidents may include unauthorized access to our digital systems for purposes of misappropriation of assets, gaining access to
sensitive information, corrupting data, or causing operational disruption. Although our information technology structure continue to
be subject to cyber attacks, we have not 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 effect of the possible security breach of our information
systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our
proprietary information, it could result in significant legal and financial exposure, damage to our reputation or a loss of confidence in
the security of our systems that could adversely affect our business. Though we have insurance against some cyber-risks and attacks, it
may not be sufficient to offset the impact of a material loss event.
We rely on third parties to provide services and systems essential to the operation of our business, and any failure, interruption or
termination of such services or systems could have a material adverse affect on our financial condition and results of operations.
Our business relies on the secure, successful and uninterrupted functioning of our core banking platform, information technology,
telecommunications, and loan servicing. We outsource some of our major systems, such as customer data and deposit processing, part
of our mortgage loan servicing, internet and mobile banking, and electronic fund transfer systems. The failure or interruption of such
systems, or the termination of a third-party software license or any service agreement on which any of these systems or services is
based, could interrupt our operations. Because our information technology and telecommunications systems interface with and
depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such systems fail
or experience interruptions. In addition, replacing third party service providers could also entail significant delay and expense.
If sustained or repeated, a failure, denial or termination of such systems or services could result in a deterioration of our ability to
process new loans, service existing loans, gather deposits and/or provide customer service. It could also compromise our ability to
operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and
possible financial liability. Any of the foregoing could have a material adverse effect on our financial condition and results of
operations.
Our risk management policies, procedures and systems may be inadequate to mitigate all risks inherent in our various businesses.
A comprehensive risk management function is essential to the financial and operational success of our business. The types of risk we
monitor and seek to manage include, but are not limited to, operational risk, technological and organizational risk, market risk,
fiduciary risk, legal and compliance risk, liquidity risk and credit risk. 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
21
evolving. If we fail to fully understand the implications of changes in our business or the financial markets and to adequately or timely
enhance the risk framework to address those changes, we could incur losses. In addition, in a difficult or less liquid market
environment, our risk management strategies may not be effective because other market participants may be attempting to use the
same or similar strategies to deal with the challenging market conditions. In such circumstances, it may be difficult for us to reduce
our risk positions due to the activity of such other market participants.
LIQUIDITY RISK
Our business could be adversely affected if we cannot maintain access to stable funding sources.
Our business requires continuous access to various funding sources. We are able to fund our operations through deposits as well as
through advances from the FHLB-NY and FRB-NY; however, our business is significantly dependent upon other wholesale funding
sources, such as repurchase agreements and brokered deposits, which consisted of approximately 23% of our total interest-bearing
liabilities as of December 31, 2016.
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 the 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 of 1913 and Regulation W of the Federal Reserve Board governing
transactions between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent
unsafe or unsound practices. Further, under the new capital rules adopted by the federal banking regulatory agencies, a banking
organization will need to hold a capital conservation buffer (composed of common equity tier 1 capital) greater than 2.5% of total risk-
weighted assets to avoid limitations on capital distributions and discretionary bonus payments. Compliance with the capital
conservation buffer is determined as of the end of the calendar quarter prior to any such capital distribution or discretionary bonus
payment, and is subject to a three-year transition period beginning in 2016.
If our subsidiaries’ earnings are not sufficient to make dividend payments while maintaining adequate capital levels, our liquidity may
be affected, and we may not be able to make dividend payments to our holders of common and preferred stock or payments on
outstanding corporate debt securities or meet other obligations, each of which could have a material adverse impact on our results of
operations, financial position or perception of financial health.
22
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 part or all of our operations. Because our business is
highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. For example, the
Dodd-Frank Act has a broad impact on the financial services industry, including significant regulatory and compliance changes, as
discussed under the subheading “Dodd-Frank Wall Street Reform and Consumer Protection Act” in Item 1of this annual report. The
changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our
business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our
business.
We may be required to invest significant management attention and resources to evaluate and make necessary changes in order to
comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our
results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the
laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.
Competition in attracting talented people could adversely affect our operations.
We depend on our ability to attract and retain key personnel and we rely heavily on our management team. The inability to recruit and
retain key personnel or the unexpected loss of key managers may adversely affect our operations. Our success to date has been
influenced strongly by the ability to attract and retain senior management experienced in banking and financial services. Retention of
senior managers and appropriate succession planning will continue to be critical to the successful implementation of our strategies.
Reputational risk and social factors may impact our results.
Our ability to originate loans and to attract deposits and assets is highly dependent upon the perceptions of consumer, commercial and
funding markets of our business practices and our financial health. Negative public opinion could result from actual or alleged conduct
in any number of activities or circumstances, including lending practices, regulatory compliance, inadequate protection of customer
information, or sales and marketing, and from actions taken by regulators in response to such conduct. Adverse perceptions regarding
us could lead to difficulties in originating loans and generating and maintaining accounts as well as in financing them.
In addition, a variety of social factors may cause changes in borrowing activity, including credit card use, payment patterns and the
rate of defaults by account holders and borrowers. If consumers develop or maintain negative attitudes about incurring debt, or if
consumption trends decline, our business and financial results will be negatively affected.
ACCOUNTING AND TAX RISK
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies
may adversely affect our financial statements.
Our financial statements are subject to the application of GAAP, which are periodically revised and/or expanded. Accordingly, from
time to time we are required to adopt new or revised accounting standards issued by FASB. Market conditions have prompted
accounting standard setters to promulgate new guidance which further interprets or seeks to revise accounting pronouncements related
23
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 the Company’s
earnings.
We are required to test our goodwill, core deposit and customer relationship intangible assets for impairment on a periodic basis. The
impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net
present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository
institutions. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible
assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the
tangible book value of our common shares or our regulatory capital levels, but such an impairment loss could significantly restrict the
Company’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, 2016,
we had on our consolidated balance sheet $86.1 million of goodwill in connection with the BBVAPR Acquisition and the FDIC-
assisted Eurobank acquisition, $4.3 million of core deposit intangible in connection with the FDIC-assisted Eurobank acquisition and
the BBVAPR Acquisition, and $1.9 million of customer relationship intangible in connection with the BBVAPR Acquisition. There
can be no assurance that future evaluations of such goodwill or intangibles will not result in any impairment charges. Among other
factors, further declines in our common stock as a result of macroeconomic conditions and the general weakness of the Puerto Rico
economy, could lead to an impairment of such assets. If such assets become impaired, it could have a negative impact on our results
of operations.
Legislative and other measures that may be taken by Puerto Rico governmental authorities could materially increase our tax
burden or otherwise adversely affect our financial condition, results of operations or cash flows.
In an effort to address the Commonwealth’s ongoing fiscal problems, the Government has enacted tax reform in the past and is
expected to do so in the future. In 2014, the Government of Puerto Rico approved an amendment to the Internal Revenue Code, which,
among other things, changed the income tax rate for capital gains from 15% to 20%. In addition, in May 2015, the Government
approved an increase in the state sales and use tax rate, effective July 1, 2015, from 6% to 10.5% (the municipal sales and use tax
remained at a 1% rate), expanded the sales and use tax to certain business-to-business services that were previously exempt, and
provided for a transition to a value-added tax that became effective on June 1, 2016. Legislative changes, particularly changes in tax
laws, could adversely impact our results of operations.
We operate the IBE Unit and IBE Subsidiary pursuant to the IBE Act that provide us with significant tax advantages. An IBE has the
benefits of exemptions from Puerto Rico income taxes on interest earned on, or gain realized from the sale of, non-Puerto Rico assets,
including U.S. government obligations and certain mortgage-backed securities. This exemption has allowed us to have effective tax
rates significantly below the maximum statutory tax rates. In the past, the Legislature of Puerto Rico has considered proposals to curb
the tax benefits afforded to IBEs. In 2012, a new Puerto Rico law was enacted in this area. Although it did not repeal the IBE Act, the
new law does not allow new license applications under the IBE Act to organize and operate an IBE. Any newly organized entity (now
called an “international financial entity”) must be licensed under the new law and such entity (as opposed to existing IBEs organized
under the IBE Act, including the Bank’s IBE Unit and IBE Subsidiary, which are “grandfathered”) will generally be subject to a 4%
Puerto Rico income tax rate. In the event other legislation is passed in Puerto Rico to eliminate or modify the tax exemption enjoyed
by IBEs, the consequences could have a materially adverse impact on us, including increasing the tax burden or otherwise adversely
affecting our financial condition, results of operations or cash flows.
24
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company owns a fifteen-story office building located at 254 Muñoz Rivera Avenue, San Juan Puerto Rico, known as Oriental
Center. The Company operates a full service branch at the plaza level and our centralized units and subsidiaries occupy approximately
64% of the office floor space. Approximately 29% of the office space is leased to outside tenants and 7% is available for lease.
The Bank owns ten branch premises and leases thirty eight branch commercial offices throughout Puerto Rico. The Bank’s
management believes that each of its facilities is well maintained and suitable for its purpose and can readily obtain appropriate
additional space as may be required at competitive rates by extending expiring leases or finding alternative space.
At December 31, 2016, the aggregate future rental commitments under the terms of the leases, exclusive of taxes, insurance and
maintenance expenses payable by the Company, was $38.7 million.
The Company’s investment in premises and equipment, exclusive of leasehold improvements at December 31, 2016, was $110.2
million, gross of accumulated depreciation.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Company is
vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is
of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the
Company’s financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’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 the Company’s common stock for each quarter in the years ended December 31,
2016 and 2015, 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 the Company and the Bank is contained under
the sub-heading “Dividend Restrictions” in Item 1 of this report.
As of December 31, 2016, the Company had approximately 3,662 holders of record of its common stock, including all directors and
officers of the Company, and beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees.
25
Stock Performance Graph
The graph below compares the percentage change in the Company’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 the sum of (i) the cumulative amount of dividends per share,
assuming dividend reinvestment, for the measurement period beginning December 31, 2011, and (ii) the difference between the share
price at the beginning and the end of the measurement period, by the share price at the beginning of the measurement period.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
Index
OFG Bancorp
Russell 2000
SNL Bank
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016
100.00
100.00
100.00
112.55
116.35
134.95
148.47
161.52
185.28
145.47
169.43
207.12
66.03
161.95
210.65
121.33
196.45
266.16
26
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 report.
OFG Bancorp
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 2016, 2015, 2014, 2013, AND 2012
EARNINGS DATA:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
2016
Year Ended December 31,
2015
2013
2014
(In thousands, except per share data)
$
356,592 $
57,165
406,568 $
69,196
485,257 $
76,782
493,632 $
83,960
299,427
65,076
337,372
161,501
408,475
409,672
60,640
72,894
Net interest income after provision for loan and
leases losess
Non-interest income
Non-interest expenses
Income (loss) before taxes
Income tax (benefit) expense
Net income (loss)
Less: dividends on preferred stock
Income (loss) available to common shareholders
PER SHARE DATA:
Basic
Diluted
Average common shares outstanding
Average common shares outstanding and equivalents
Book value per common share
Tangible book value per common share
Market price at end of period
Cash dividends declared per common share
Cash dividends declared on common shares
PERFORMANCE RATIOS:
Return on average assets (ROA)
$
$
$
$
$
$
$
$
234,351
175,871
347,835
336,778
66,819
215,990
85,180
25,994
59,186
(13,862)
45,324 $
52,472
248,401
(20,058)
(17,554)
(2,504)
(13,862)
(16,366) $
17,323
242,725
122,433
37,252
85,181
(13,862)
71,319 $
17,095
264,136
89,737
(8,709)
98,446
(13,862)
84,584 $
1.03 $
1.03 $
43,913
51,088
17.18 $
15.08
13.10
0.24
10,544
(0.37) $
(0.37) $
51,455
44,231
16.67 $
14.53
7.32
0.36
15,932
1.58 $
1.50 $
45,024
52,326
17.40 $
15.25
16.65
0.34
15,286
1.85 $
1.73 $
45,706
53,033
15.74 $
13.60
17.34
0.26
11,875
2012
260,808
103,518
157,290
23,681
133,609
26,057
131,810
27,856
3,301
24,555
(9,939)
14,616
0.35
0.35
41,626
45,304
15.31
13.10
13.35
0.24
10,067
0.88%
-0.03%
1.10%
1.15%
0.37%
Return on average tangible common stockholders' equity
Return on average common equity (ROE)
Equity-to-assets ratio
Efficiency ratio
Interest rate spread
Interest rate margin
6.94%
6.08%
14.16%
57.82%
4.74%
4.82%
-2.47%
-2.16%
12.64%
60.00%
4.95%
5.03%
10.91%
9.50%
12.65%
49.90%
5.79%
5.84%
14.01%
12.03%
10.85%
53.45%
5.46%
5.46%
2.32%
2.29%
9.38%
64.05%
2.59%
2.67%
27
PERIOD END BALANCES AND CAPITAL RATIOS:
2016
December 31,
2015
2013
2014
(In thousands, except per share data)
2012
Investments and loans
Investment securities
Loans and leases, net
Total investments and loans
Deposits and borrowings
Deposits
Securities sold under agreements to repurchase
Other borrowings
Total deposits and borrowings
Stockholders’ equity
Preferred stock
Common stock
Additional paid-in capital
Legal surplus
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income
Total stockholders' equity
Per share data
Book value per common share
Tangible book value per common share
Market price at end of period
Capital ratios
Leverage capital
Tier 1 common equity to risk-weighted assets
Common equity Tier 1 capital ratio
Tier 1 risk-based capital
Total risk-based capital
Financial assets managed
Trust assets managed
Broker-dealer assets gathered
Total assets managed
$ 1,362,511 $ 1,615,872 $ 1,402,056 $ 1,614,809 $ 2,233,265
5,157,637
$ 5,510,203 $ 6,050,085 $ 6,228,702 $ 6,634,228 $ 7,390,902
4,147,692
5,019,419
4,826,646
4,434,213
$ 4,664,487 $ 4,717,751 $ 4,924,406 $ 5,383,265 $ 5,690,579
1,695,247
791,417
$ 5,459,841 $ 6,089,285 $ 6,344,412 $ 7,090,699 $ 8,177,243
1,267,618
439,816
980,087
439,919
653,756
141,598
934,691
436,843
$
$
$
$
$
176,000 $
52,626
540,948
76,293
177,808
(104,860)
1,596
920,411 $
176,000 $
52,626
540,512
70,435
148,886
(105,379)
13,997
897,077 $
176,000 $
52,626
539,311
70,435
181,184
(97,070)
19,711
942,197 $
176,000 $
52,707
538,071
61,957
133,629
(80,642)
3,191
884,913 $
17.18 $
15.08 $
13.10 $
16.67 $
14.53 $
7.32 $
17.40 $
15.25 $
16.65 $
15.74 $
13.60 $
17.34 $
12.99%
N/A
14.05%
18.35%
19.62%
11.18%
N/A
12.14%
15.99%
17.29%
10.61%
11.88%
N/A
16.02%
17.57%
9.06%
10.46%
N/A
14.38%
16.16%
176,000
52,671
537,453
52,143
70,734
(81,275)
55,880
863,606
15.31
13.10
13.35
6.55%
8.76%
N/A
13.18%
15.40%
$ 2,850,494 $ 2,691,423 $ 2,841,111 $ 2,796,923 $ 2,514,401
2,722,197
$ 5,201,212 $ 5,066,132 $ 5,463,112 $ 5,290,247 $ 5,236,598
2,350,718
2,622,001
2,493,324
2,374,709
28
The ratios shown below demonstrate the Company’s ability to generate sufficient earnings to pay the fixed charges or expenses of its
debt and preferred stock dividends. The Company’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:
2016
Year Ended December 31,
2014
2015
2013
2012
Consolidated Ratios of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
Excluding interests on deposits
Including interests on deposits
2.60x
1.97x
(A)
(A)
2.81x
2.16x
2.26x
1.75x
1.21x
1.15x
(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 the Company’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 the Company’s outstanding preferred stock. As of the dates
presented above, the Company had noncumulative perpetual preferred stock issued and outstanding amounting to $176.0 million, as
follows: (i) Series A amounting to $33.5 million or 1,340,000 shares at a $25 liquidation value; (ii) Series B amounting to
$34.5 million or 1,380,000 shares at a $25 liquidation value; (iii) Series C amounting to $84.0 million or 84,000 shares at a $1,000
liquidation value; and (iv) Series D amounting to $24.0 million or 960,000 shares at a $25 liquidation value.
29
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, 2016
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies followed by the Company conform with GAAP and general practices within the financial
services industry. The Company’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 the Company’s critical accounting policies.
Loans and Leases
Originated and Other Loans and Leases Held in Portfolio
Loans the Company 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. The
Company discontinues accrual of interest on originated loans after payments become more than 90 days past due or earlier if the
Company 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.
The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to
provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as economic conditions,
portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The provision for loan
and lease losses charged to current operations is based on such methodology. Loan and lease losses are charged and recoveries are
credited to the allowance for loan and lease losses on originated and other loans.
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where
appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow, and legal options available to the Company.
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 the Company 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. The Company measures for impairment all commercial loans over $250 thousand (i) that are either
30
over 90 days past due or adversely classified, or (ii) when deemed necessary by management and TDR’s. The portfolios of mortgage
loans, auto and leasing, and consumer loans are considered homogeneous and are evaluated collectively for impairment.
The Company 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 the Company over a determined look back period for each segment. The actual
loss factor is adjusted by the appropriate loss emergence period as calculated for each portfolio. Then, the adjusted loss experience is
supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include
consideration of the following: the credit grading assigned to commercial loans; levels of and trends in delinquencies and impaired
loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection
and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff, including the bank’s loan review system as graded by regulatory agencies in their last
examination; local economic trends and conditions; industry conditions; effects of external factors such as competition and regulatory
requirements on the level of estimated credit losses in the current portfolio; and effects of changes in credit concentrations and
collateral value. An additional impact from the historical loss experience is applied based on levels of delinquency, loan
classification, FICO score and/or origination date, depending on the portfolio.
At origination, a determination is made whether a loan will be held in our portfolio or is intended for sale in the secondary market.
Loans that will be held in the Company’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 the Company acquire 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.
The Company has acquired loans in two separate acquisitions, the BBVAPR Acquisition in December 2012 and the FDIC-assisted
Eurobank acquisition in April 2010. For each acquisition, the Company considered the following factors as indicators that an acquired
loan had evidence of deterioration in credit quality and was therefore in the scope of ASC 310-30:
• Loans that were 90 days or more past due,
• Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is
defined as having a well-defined weakness that jeopardizes liquidation of the loan,
• Loans that were classified as nonaccrual by the acquired bank at the time of acquisition, and
• Loans that had been previously modified in a troubled debt restructuring.
Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i)
pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30
by analogy or (ii) accounted for under ASC 310-20 (Non-refundable fees and other costs).
Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium)
Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out
of ASC 310-30 are accounted for under the provisions of ASC 310-20. Also, performing auto loans with FICO scores over 660
acquired at a premium in the BBVAPR Acquisition are accounted for under this guidance. Auto loans with FICO scores below 660
were acquired at a discount and are accounted for under the provisions of ASC 310-30. The provisions of ASC 310-20 require that
any differences between the contractually required loan payments in excess of the Company’s initial investment in the loans be
accreted into interest income on a level-yield basis over the life of the loan. Loans 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 the Company’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.
31
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)
The Company performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. The Company
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 the Company 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, the Company 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 the Company 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 the Company then
reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method.
The Company’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 the Company’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. The Company 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 the Company has a reasonable expectation about the timing and amount of
cash flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection
efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly
basis. For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated based on a model that
incorporates a projected probability of default and loss. For commercial loans, lifetime loss rates are assigned to each pool with
consideration given for pool make-up, including risk rating profile. Lifetime loss rates are developed from internally generated
historical loss data and are applied to each pool.
To the extent that the Company 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 the Company 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 the Company’s financial statement
disclosures, regardless of whether or not the Company expects any principal or interest cash flows on an individual loan 90 days or
more past due.
The Company writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans
that exit the acquired pools.
Effective February 6, 2017, the Company and the FDIC agreed to terminate the loss and recovery sharing agreements in connection
with a portfolio of loans acquired in an FDIC assisted transaction. As of December 31, 2016, these agreements continued in effect,
and therefore, their terms and conditions are considered in the accounting of these loans referred to herein as “covered loans.”
Because of the loss protection provided by the FDIC under these agreements, the risk of these covered loans are significantly different
from other loans. Covered loans are accounted for under ASC 310-30. To the extent credit deterioration occurs after the date of
32
acquisition, the Company increases both the allowance for loan and lease losses and the FDIC shared-loss indemnification asset for
the expected reimbursement from the FDIC under the shared-loss agreement. As of December 31, 2016 and 2015, covered loans are
no longer a material amount. Therefore, the Company changed its current and prior year disclosures to group together covered loans
with other acquired loans.
Allowance for Loan and Lease Losses
The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to
provide for inherent losses in its loan portfolio. This methodology includes the consideration of factors such as economic conditions,
portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans.
The loss factor used for the general reserve of these loans is established considering the Bank's historical loss experience adjusted for
an estimated loss emergence period and the consideration of environmental factors. Environmental factors considered are: changes 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 the Company’s loan review system; national and local
economic trends and industry conditions; and effect of external factors such as competition and regulatory requirements on the level of
estimated credit losses. The sum of the adjusted loss experience factors and the environmental factors will be the general valuation
reserve (“GVA”) factor to be used for the determination of the allowance for loan and lease losses in each category.
As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the year 2016 the
following assumptions were reviewed:
- An assessment of the look-back period and historical loss factor was performed for all portfolio segments. The analysis was
based on the trends observed and their relation with the economic cycle as of the period of the analysis. As a result of the
assessment, the commercial portfolio look-back period was maintained at 36 months. Also, for the auto, leasing and
consumer portfolios, a look-back period of 24 months was maintained. For the residential mortgages portfolio a 12-month
look-back period was maintained as management concluded that, given the charge off evolution, a shorter period of losses is
more representative of the recent trends and more accurate in predicting future losses
- During the third quarter of 2016, an assessment of environmental factors was performed for commercial, auto, and consumer
portfolios. As a result, the environmental factors continue to reflect our assessment of their impact to our portfolio, taking
into consideration the current evolution of the portfolios and expected impact, due to recent economic developments, changes
in values of collateral and delinquencies, among others.
- During the third quarter of 2016 the loss realization period was revised to 2.10 years from 1.60 in 2015 for commercial real
estate portfolio, other portfolios remained at one year.
This change in the allowance for loan and lease losses’ loss realization period for the commercial portfolio is considered a change in
accounting estimate as per ASC 250-10 provisions, where adjustments are made prospectively.
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)
The Company determines the allowance for loan and lease losses by portfolio segments, which consist of mortgage loans, commercial
loans, consumer loans, and auto and leasing, as follows:
Mortgage loans: These loans are divided into four classes: traditional mortgages, non-traditional mortgages, loans in loan
modification programs and home equity secured personal loans. Traditional mortgage loans include loans secured by a dwelling,
fixed coupons and regular amortization schedules. Non-traditional mortgages include loans with interest-first amortization schedules
and loans with balloon considerations as part of their terms. Mortgages in loan modification programs are loans that are being
serviced under such programs. Home equity loans are mainly equity lines of credit. The allowance factor on mortgage loans is
impacted by the adjusted historical loss factors on the sub-segments and the environmental risk factors described above and by
delinquency buckets. The traditional mortgage loan portfolio is further segregated by vintages and then by delinquency buckets.
33
Commercial loans: The commercial portfolio is segmented by business line (corporate, institutional, middle market, corporate retail,
floor plan, and real estate) and by collateral type (secured by real estate and other commercial and industrial assets). The loss factor
used for the GVA of these loans is established considering the Bank's past 36 month historical loss experience of each segment
adjusted for the loss realization period and the consideration of environmental factors. The sum of the adjusted loss experience and
the environmental factors is the GVA factor used for the determination of the allowance for loan and lease losses on each segment.
Consumer loans: The consumer portfolio consists of smaller retail loans such as retail credit cards, overdrafts, unsecured personal
lines of credit, and personal unsecured loans. The allowance factor, consisting of the adjusted historical loss factor and the
environmental risk factors, will be calculated for each sub-class of loans by delinquency bucket.
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. These loans are granted mainly through dealers authorized and approved by the auto department credit committee of the
Bank. In addition, this segment includes personal loans guaranteed by vehicles in the form of lease financing. The allowance factor
on the auto and leasing portfolio is impacted by the adjusted historical loss factor and the environmental risk factors. For the
determination of the allowance factor, the portfolio is segmented by FICO score, which is updated on a quarterly basis and then by
delinquency bucket.
The Company 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. The Company continues to
monitor and modify the level of the allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio.
Our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on
specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with
similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective
loan types.
When current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest
due under the original terms of a business or commercial real estate loan greater than $250 thousand, such loan will be classified as
impaired. Additionally, all loans modified in a troubled debt restructuring ("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. Prior to a loan becoming impaired, we typically would obtain an appraisal through our internal loan grading
process to use as the basis for the fair value of the underlying collateral.
Loan loss ratios and credit risk categories are updated at least quarterly and are applied in the context of GAAP and taking into
consideration the importance of depository institutions having prudent, conservative, but not excessive loan allowances that fall within
an acceptable range of estimated losses. While management uses current available information in estimating possible loan and lease
losses, factors beyond the Company’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 Subtopic 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 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.
34
Covered loans are accounted for under ASC 310-30 and our policy is consistent with our policy for non-covered acquired loans. For
covered loans, the portion of the loss reimbursable from the FDIC is recorded as an offset to the provision for credit losses and
increases the FDIC shared-loss indemnification asset.
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 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 well as time value
and yield curve or volatility factors underlying the positions.
The Company 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, as well as certain
U.S. Treasury and other U.S. government agency securities that are traded by dealers or brokers in active markets. 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.
35
OVERVIEW OF FINANCIAL PERFORMANCE
OFG Bancorp generated consistent results in 2016 despite the challenging economic environment.
Fully diluted earnings per share (EPS) grew to $0.27 in the fourth quarter and to $1.03 for the year, a notable turnaround from prior
periods. This was accomplished by growing interest income from originated loans and non-interest income, while reducing both
interest and non-interest expenses.
In 2016, we introduced the Oriental Biz mobile app, adding mobile check capture for small business customers, and cardless cash, for
making retail ATM withdrawals even faster.
Proactive credit servicing capabilities significantly improved asset quality, reducing the early and total delinquency rates, allowance
for loan and lease losses, and the non-performing loan rate.
At the end of the year, our tangible book value per common share grew to $15.08.
Other highlights of 2016 are:
• Net income available to shareholders was $45.3 million, or $1.03 per share fully diluted, compared to a loss of $16.4 million, or
($0.37) per share, in 2015.
•
8.4% increase in interest income from originated loans to $199.2 million as average balances expanded to $3.1 billion, an increase
of 5.4%, due to growth in higher yielding retail loans.
•
17.4% decrease in total interest expense to $57.2 million and a 32.0% decline in average borrowings.
• Sale of the Bank’s last major Puerto Rico government related loan, a participation in a Puerto Rico Electric Power Authority
(PREPA) line of credit, eliminating $183.0 million of non-performing assets and requiring an additional provision of only $2.9
million during 2016.
• A $5.0 million recovery from a claim of losses suffered from an investment in a private label collateralized mortgage obligation.
• Capital continued to grow as tangible book value per common share expanded 3.8% to $15.08 and book value per common share
grew 3.1% to $17.18.
36
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 2016 and
2015:
TABLE 1 - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Interest
Average rate
Average balance
December December December December December
December
2016
2015
2016
2015
2016
2015
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets
Tax equivalent adjustment
Interest-earning assets - tax equivalent
Interest-bearing liabilities
Tax equivalent net interest income / spread
Tax equivalent interest rate margin
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities
Trading securities
Interest bearing cash and money market investments
Total investments
Non-acquired loans
Mortgage
Commercial
Consumer
Auto and leasing
Total non-acquired loans
Acquired loans:
Acquired BBVAPR
Mortgage
Commercial
Consumer
Auto
Total acquired BBVAPR loans
Acquired Eurobank
Total loans
Total interest earning assets
5.74%
0.08%
5.82%
1.00%
4.82%
4.90%
2.39%
11.04%
0.52%
1.89%
5.33%
4.56%
10.75%
9.65%
6.43%
5.60%
8.70%
18.09%
11.34%
8.09%
21.84%
7.35%
5.74%
6.06% $ 6,210,003 $ 6,704,995
-
0.10%
6,704,995
6.16%
1.11%
6,226,042
5.05%
478,953
-
6,210,003
5,703,927
506,076
5.13%
2.49%
8.25%
0.26%
1.95%
1,345,926
335
484,586
1,830,847
1,508,819
848
491,051
2,000,718
5.16%
4.56%
10.35%
9.86%
6.25%
743,838
1,385,421
253,069
716,373
3,098,701
771,322
1,336,510
202,971
629,910
2,940,713
5.55%
10.65%
16.35%
9.03%
8.47%
24.58%
7.81%
6.06%
586,100
302,323
67,082
185,280
1,140,785
139,670
4,379,156
6,210,003
628,340
457,767
80,666
383,583
1,550,356
213,208
4,704,277
6,704,995
$
356,592 $
4,724
361,316
57,165
304,151
406,568
6,891
413,459
69,196
344,263
32,109
37
2,501
34,647
39,621
63,186
27,214
69,152
199,173
32,833
26,288
12,136
21,016
92,273
30,499
321,945
356,592
37,596
70
1,280
38,946
39,778
60,931
21,003
62,108
183,820
34,842
48,730
13,187
34,633
131,392
52,410
367,622
406,568
37
Interest
Average rate
Average balance
December December December December December
2016
2015
2016
2016
2015
December
2015
Interest-bearing liabilities:
Deposits:
NOW Accounts
Savings and money market
Individual retirement accounts
Retail certificates of deposits
Total core deposits
Institutional deposits
Brokered deposits
Total wholesale deposits
Non-interest bearing deposits
Deposits fair value premium amortization
Core deposit intangible amortization
Total deposits
Borrowings:
Securities sold under agreements to repurchase
Advances from FHLB and other borrowings
Subordinated capital notes
Total borrowings
Total interest bearing liabilities
Net interest income / spread
Interest rate margin
Excess of average interest-earning assets
over average interest-bearing liabilities
Average interest-earning assets to average
interest-bearing liabilities ratio
(Dollars in thousands)
5,086
5,441
1,914
6,115
18,556
2,553
7,450
10,003
28,559
-
(340)
1,034
29,253
4,451
6,504
2,482
5,397
18,834
2,790
4,900
7,690
26,524
-
(660)
1,170
27,034
18,805
6,186
2,921
27,912
57,165
299,427 $
29,567
9,072
3,523
42,162
69,196
337,372
$
0.42%
0.49%
0.71%
1.28%
0.61%
1.00%
1.20%
1.14%
0.73%
0.00%
0.00%
0.00%
0.62%
2.83%
2.60%
3.41%
2.83%
1.00%
4.74%
4.82%
1,200,394
1,114,931
267,969
476,035
3,059,329
255,227
619,569
874,796
3,934,125
781,877
-
-
4,716,002
663,845
238,366
85,714
987,925
5,703,927
1,163,424
1,256,909
281,197
409,038
3,110,568
268,678
624,210
892,888
4,003,456
769,460
-
-
4,772,916
1,012,756
338,299
102,071
1,453,126
6,226,042
0.38%
0.52%
0.88%
1.32%
0.61%
1.04%
0.78%
0.86%
0.66%
0.00%
0.00%
0.00%
0.57%
2.92%
2.68%
3.45%
2.90%
1.11%
4.95%
5.03%
$
506,077 $
478,953
108.87%
107.69%
C - CHANGES IN NET INTEREST INCOME DUE TO:
Interest Income:
Investments
Loans
Total interest income
Interest Expense:
Deposits
Repurchase agreements
Other borrowings
Total interest expense
Net Interest Income
Volume
Rate
(In thousands)
Total
$
(3,307) $
(35,735)
(39,042)
(992) $
(9,942)
(10,934)
(4,299)
(45,677)
(49,976)
(322)
(10,186)
(3,327)
(13,835)
(25,207) $
2,541
(576)
(161)
1,804
(12,738) $
2,219
(10,762)
(3,488)
(12,031)
(37,945)
$
38
TABLE 1A - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
A - TAX EQUIVALENT SPREAD
Interest-earning assets
Tax equivalent adjustment
Interest-earning assets - tax equivalent
Interest-bearing liabilities
Tax equivalent net interest income / spread
Tax equivalent interest rate margin
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities
Trading securities
Interest bearing cash and money market investments
Total investments
Non-acquired loans
Mortgage
Commercial
Consumer
Auto and leasing
Total non-acquired loans
Acquired loans:
Acquired BBVAPR
Mortgage
Commercial
Consumer
Auto
Total acquired BBVAPR loans
Acquired Eurobank
Total loans
Total interest earning assets
Interest
Average rate
Average balance
December December December December December
December
2015
2014
2015
2014
2015
2014
(Dollars in thousands)
$
406,568 $
6,891
413,459
69,196
344,263
485,257
50,793
536,050
76,782
459,268
37,596
70
1,280
38,946
39,778
60,931
21,003
62,108
183,820
34,842
48,730
13,187
34,633
131,392
52,410
367,622
406,568
48,242
151
1,311
49,704
40,978
64,328
15,367
51,971
172,644
37,612
73,403
15,412
47,513
173,940
88,969
435,553
485,257
6.06%
0.10%
6.16%
1.11%
5.05%
5.13%
2.49%
8.25%
0.26%
1.95%
5.16%
4.56%
10.35%
9.86%
6.25%
5.55%
10.65%
16.35%
9.03%
8.47%
24.58%
7.81%
6.06%
6.94% $ 6,704,995 $ 6,992,631
-
0.73%
6,992,631
7.67%
6,663,591
1.15%
6.52%
329,040
-
6,704,995
6,226,372
478,623
6.57%
3.33%
8.67%
0.23%
2.45%
1,508,819
848
491,051
2,000,718
1,450,778
1,741
573,403
2,025,922
5.21%
5.41%
10.04%
10.38%
6.56%
771,322
1,336,510
202,971
629,910
2,940,713
786,607
1,190,038
153,067
500,720
2,630,432
5.46%
11.29%
13.70%
8.62%
8.68%
26.70%
8.77%
6.94%
628,340
457,767
80,666
383,583
1,550,356
213,208
4,704,277
6,704,995
689,408
649,936
112,477
551,186
2,003,007
333,270
4,966,709
6,992,631
39
Interest
Average rate
Average balance
December December December December December
2015
2015
2015
2014
2014
December
2014
Interest-bearing liabilities:
Deposits:
NOW Accounts
Savings and money market
Individual retirement accounts
Retail certificates of deposits
Total core deposits
Institutional deposits
Brokered deposits
Total wholesale deposits
Non-interest bearing deposits
Deposits fair value premium amortization
Core deposit intangible amortization
Total deposits
Borrowings:
Securities sold under agreements to repurchase
Advances from FHLB and other borrowings
Subordinated capital notes
Total borrowings
Total interest bearing liabilities
Net interest income / spread
Interest rate margin
Excess of average interest-earning assets over
average interest-bearing liabilities
Average interest-earning assets to average
interest-bearing liabilities ratio
(Dollars in thousands)
$
4,451 $
6,504
2,482
5,397
18,834
2,790
4,900
7,690
26,524
-
(660)
1,170
27,034
29,567
9,072
3,523
42,162
69,196
8,001
8,097
3,760
6,852
26,710
4,961
5,715
10,676
37,386
-
(4,773)
1,341
33,954
29,654
9,185
3,989
42,828
76,782
$
337,372 $
408,475
0.38%
0.52%
0.88%
1.32%
0.61%
1.04%
0.78%
0.86%
0.66%
0.00%
0.00%
0.00%
0.57%
2.92%
2.68%
3.45%
2.90%
1.11%
4.95%
5.03%
0.56% $ 1,163,424 $ 1,417,272
1,169,482
1,256,909
0.69%
325,678
281,197
1.15%
491,485
409,038
1.39%
3,110,568
0.78%
3,403,917
348,742
268,678
1.42%
697,756
624,210
0.82%
1,046,498
892,888
1.02%
4,450,415
4,003,456
0.84%
715,729
0.00%
769,790 $
-
-
0.00%
-
-
0.00%
4,773,246
0.66%
5,166,144
1,012,756
338,299
102,071
1,453,126
6,226,372
1,041,378
355,322
100,747
1,497,447
6,663,591
2.85%
2.58%
3.96%
2.86%
1.15%
5.79%
5.84%
$
478,623 $
329,040
107.69%
104.94%
C - CHANGES IN NET INTEREST INCOME DUE TO:
Interest Income:
Investments
Loans
Total interest income
Interest Expense:
Deposits
Repurchase agreements
Other borrowings
Total interest expense
Net Interest Income
Volume
Rate
(In thousands)
Total
$
(729) $
(42,700)
(43,429)
(10,029) $
(25,231)
(35,260)
(10,758)
(67,931)
(78,689)
(2,582)
(815)
(453)
(3,850)
(39,579) $
(4,338)
728
(126)
(3,736)
(31,524) $
(6,920)
(87)
(579)
(7,586)
(71,103)
$
40
Net Interest Income
Net interest income is a function of the difference between rates earned on the Company’s interest-earning assets and rates paid on its
interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities
(interest rate margin). The Company constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net
interest income at adequate levels.
Comparison for the years ended December 31, 2016 and 2015
Table 1 above shows the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income,
expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the years ended December
31, 2016 and 2015. Net interest income of $299.4 million decreased 11.2% compared with $337.4 million reported during the same
period in 2015, reflecting decreases of 12.4% in interest income from loans and 11.0% in interest income from investments.
Interest rate spread decreased 21 basis points from 4.95% to 4.74%. This decrease is mainly due to the net effect of a 32 basis point
decrease in the average yield of interest-earning assets from 6.06% to 5.74% and an 11 basis point decrease in average costs of
interest-bearing liabilities from 1.11% to 1.00%.
Interest income decreased to $356.6 million from $406.6 million in the same period in 2015. Such decrease reflects decreases of $38.7
million and $11.2 million in the volume and interest rate, respectively, of interest-earning assets. Interest income from loans decreased
12.4% to $321.9 million, reflecting a decrease in volume and interest rate of $35.4 million and $10.2 million, respectively, primarily
due to lower acquired loan balances, yields and cost recoveries. Our loan portfolio is transitioning as originated loans with lower
yields grow at a slower pace than higher-yielding acquired loans decrease due to repayments and maturities. In addition, cost
recoveries on acquired loans decreased to $7.5 million in 2016, from $22.8 million in 2015. Interest income from investments
decreased 11.0% to $34.6 million, reflecting a decrease in volume and interest rate of $3.3 million and $992 thousand, respectively.
Originated loans interest income increased 8.4% to $199.2 million as average balances grew 5.4% and yields increased to 6.43%,
mainly from higher yielding retail categories. Acquired BBVAPR loans interest income declined 29.8% to $92.3 million as average
balances declined 26.1% and yields decreased 41 basis points to 8.06%. Acquired Eurobank loans interest income fell 41.8% to $30.5
million as average balances declined 34.5% and yields decreased 274 basis points to 21.84%.
The average balance of total interest-earning assets was $6.210 billion, a decrease of 7.3% from the same period in 2015. The decrease
in average balance of interest-earning assets was mainly attributable to a decrease of 6.8% in average loans. The decrease in average
loans is mostly related to the bulk sale on September 28, 2015, of a portion of covered non-performing commercial loans amounting to
$197.1 million unpaid principal balance ($100.0 million carrying amount), the strategic decrease of government exposures, and the
repayment and maturities of acquired loans. Also, the decrease reflects the sale of the PREPA line of credit, which amounted to
$190.3 million at December 31, 2015, and was not accruing interests since the second quarter of 2015.
Interest expense decreased 17.4% to $57.2 million, primarily because of a $13.8 million decrease in the volume of interest-bearing
liabilities, partially offset by an increase of $1.8 million in interest rate. The decrease in interest-bearing liabilities is mostly due to the
decrease in repurchase agreements volume and rate of $10.2 million and $576 thousand, respectively, and the decrease in other
borrowings volume and rate of $3.3 million and $161 thousand, respectively, which was partially offset by an increase in deposit
interest rate of $2.5 million and a decrease in volume of $322 thousand. During the first quarter of 2016, the Company made a partial
unwinding of a repurchase agreement amounting to $268.0 million, which carried a cost of 4.78%. In addition, during the third quarter
of 2016, $227.0 million in short term FHLB advances were repaid at maturity. The cost of deposits slightly increased 5 basis point to
0.62%, compared to 0.57% for the same period in 2015. The cost of borrowings decreased 7 basis points to 2.83% from 2.90%.
Comparison of years ended December 31, 2015 and 2014
Net interest income of $337.4 million decreased 17.4% compared with $408.5 million reported in 2014, reflecting a decrease of 15.6%
in interest income from loans and a decrease of 21.6% in interest income from investments.
Interest rate spread decreased 84 basis points from 5.79% to 4.95%. This decrease is mainly due to the net effect of a 88 basis points
decrease in the average yield of interest-earning assets from 6.94% to 6.06%, reflecting reduction in high yielding loan portfolios
including Puerto Rico government credit and acquired loan portfolio.
41
Interest income decreased to $406.6 million from $485.3 million in 2014. Such decrease reflects decreases of $43.4 million and $35.3
million in the volume and interest rate, respectively, of interest-earning assets. Interest income from loans decreased 15.6% to $367.6
million, reflecting a decrease in both, volume and interest rate of $42.7 million and $25.2 million, respectively. Such decrease reflects
lower acquired loan balances and yield mainly related to the bulk sale at the end of the third quarter of 2015 and also normal
repayments and maturities. In addition, the decrease reflects a $9.7 million decrease in interest income from loans to PREPA, which
was placed in non-accrual status at the end of the first quarter of 2015, and Puerto Rico Aqueducts and Sewer Authority ("PRASA"),
which was paid off during the second quarter of 2015. Non-acquired loans interest income increased 6.5% to $183.8 million as
average balances grew 11.8% and yield contracted 31 basis points to 6.25%. Acquired BBVAPR loans interest income fell 24.5% to
$131.4 million as average balances declined 22.6% and yield decreased 21 basis points to 8.47%. Acquired Eurobank loans interest
income fell 41.1% to $52.4 million as average balances declined 36.0% and yield decreased 212 basis points to 24.58%. Interest
income from investments decreased 21.6% to $38.9 million, reflecting a decrease in interest rate and volume of $10.0 million and
$729 thousand, respectively. Such decrease in interest income from investments reflects a decrease in investment securities from
redemptions, maturities and sales, and higher premium amortization on existing securities.
Interest expense decreased 9.9% to $69.2 million, primarily because of a $3.9 million decrease in the volume of interest-bearing
liabilities and a decrease of $3.7 million in interest rate. The decrease in interest-bearing liabilities is mostly due to the decrease of
$2.6 million in deposits volume and $4.3 million in interest rate, a decrease of $815 thousand in repurchase agreements volume which
was partially offset by an increase of $728 thousand in interest rate, and a decrease in other borrowings volume of $453 thousand and
$126 thousand in interest rate. The cost of interest bearing deposits before fair value amortization and core deposit intangible
amortization decreased 18 basis points to 0.66%, compared to 0.84% for 2014. The decrease in the cost of deposits was partially offset
by an increase in the cost of borrowings, which increased 4 basis points to 2.90% from 2.86%.
The average balance of total interest-earning assets was $6.704 billion, a decrease of 4.1% from 2014. The decrease in average
balance of interest-earning assets was mainly attributable to a decrease of 1.2% in average investments and a decrease of 5.3% in
average loans.
TABLE 2 - NON-INTEREST INCOME SUMMARY
Banking service revenue
Wealth management revenue
Mortgage banking activities
Total banking and financial service revenue
Total other-than-temporary impairment losses on investment securities
Portion of loss recognized in other comprehensive income, before taxes
Net impairment losses recognized in earnings
FDIC shared-loss expense, net
Reimbursement from FDIC shared-loss coverage in sale of loans
Net gain (loss) on:
Sale of securities available for sale
Derivatives
Early extinguishment of debt
Other non-interest income (loss)
Total non-interest income, net
2016
Year Ended December 31,
Variance
2015
(Dollars in thousands)
2014
$
$
41,647 $
27,433
5,021
74,101
-
-
-
(13,581)
-
12,207
(71)
(12,000)
6,163
(7,282)
66,819 $
41,466
29,040
6,128
76,634
(4,662)
3,172
(1,490)
(42,808)
20,000
2,572
(190)
-
(2,246)
(24,162)
52,472
0.4% $
-5.5%
-18.1%
-3.3%
100.0%
-100.0%
100.0%
68.3%
-100.0%
374.6%
62.6%
-100.0%
374.4%
69.9%
27.3% $
40,712
29,855
7,381
77,948
-
-
-
(65,756)
-
4,366
(608)
-
1,373
(60,625)
17,323
42
Non-Interest Income
Non-interest income is affected by the level of trust assets under management, transactions generated by clients’ financial assets
serviced by the securities broker-dealer and insurance agency subsidiaries, the level of mortgage banking activities, and the fees
generated from loans and deposit accounts. It is also affected by the FDIC shared-loss expense, which varies depending on the results
of the on-going evaluation of expected cash flows of the loan portfolio acquired in the FDIC-assisted acquisition. In addition, it is
affected by the amount of securities, derivatives, trading and other transactions.
Comparison of years ended December 31, 2016 and 2015
As shown in Table 2 above, the Company recorded non-interest income, net, in the amount of $66.8 million, compared to $52.5
million for the same period in 2015, an increase of 27.3%, or $14.3 million.
Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer
services increased slightly to $41.6 million from $41.5 million when compared to the same period in 2015. Electronic banking fees
increased $831 thousand, which was partially offset by a decrease of $487 thousand in other fees and $160 thousand in deposit
account fees.
Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities, decreased 5.5% to $27.4 million, compared to $29.0 million for the same period in 2015. Such decrease reflects a
reduction in some securities brokerage activities of $1.1 million, mainly from lower mutual fund and over-the-counter trading and
bond sales, and a reduction in trust fees from the IRA portfolio of $550 thousand from a decrease in portfolio balance.
Income generated from mortgage banking activities decreased 18.1% to $5.0 million, compared to $6.1 million for the same period in
2015. Mortgage banking activities decreased mostly due to decreased sales, as a result of the Company retaining securitized GNMA
pools.
During 2015, the Company recognized an other-than-temporary impairment charge on its portfolio of investment securities available-
for-sale classified as obligations from the Puerto Rico government and its political subdivisions. The Company determined that $1.5
million of the unrealized loss carried by these securities was attributed to estimated credit losses. These investment securities were
sold during 2016.
During the third quarter of 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a
sale of loss share assets covered under the non-single family loss share agreement and paid $20.0 million in loss share coverage with
respect to the aggregate loss resulting from the bulk sale of covered non-performing commercial loans, as reflected in Table 2. The net
FDIC shared-loss expense decreased to $13.6 million as compared to $42.8 million for the year ended December 31, 2015, primarily
from the expiration of the FDIC commercial and non-single family loans loss share coverage at June 30, 2015.
During the first quarter of 2016, the Company capitalized on favorable market conditions to partially unwind a high-rate repurchase
agreement amounting to $268.0 million at a cost of $12.0 million, included as a loss on early extinguishment of debt in the
consolidated statements of operations. In addition, the Company sold $277.2 million in mortgage backed securities and $11.1 million
in Puerto Rico government bonds. Resulting in net gain on sale of securities of $12.2 million. During 2015, the Company recorded a
net gain on sale of securities of $2.6 million.
Other non-interest income increased $8.4 million, as the Company recovered $5.0 million during the third quarter of 2016 from a loss
in 2009 related to a private label collateralized mortgage obligation. In addition, during the year ended December 31, 2015 the
Company recognized a $2.7 million loss related to the mortgage servicing asset sold.
43
Comparison of years ended December 31, 2015 and 2014
The Company recorded non-interest income in the amount of $52.5 million, compared to $17.3 million for 2014, an increase of
202.9%, or $35.2 million, mostly from a $20.0 million reimbursement from the FDIC upon successful negotiation and termination of
the commercial shared-loss coverage.
The net FDIC shared-loss expense decreased to $42.8 million as compared to $65.8 million for 2014, primarily from the decrease of
the FDIC commercial loss share amortization related to the expiration of the non-single family loss share coverage by the FDIC. The
decrease is also related to the ongoing evaluation of expected cash flows of the covered loan portfolio and from changes in the fair
value of the true-up payment obligation (also known as a clawback liability). The FDIC indemnification asset expense decreased to
$40.1 million from $62.3 million compared with 2014. The true-up payment obligation expense increased by $2.7 million as
compared to $3.5 million for 2014. The true-up payment obligation may increase if actual and expected losses decline. The Company
measures the true-up payment obligation at fair value. Notwithstanding the expiration of loss share coverage for non-single family
loans, on July 2, 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a sale of
loss-share assets covered under the non-single family loss share agreement and paid $20 million in loss share coverage with respect to
the aggregate loss resulting from the bulk sale of covered non-performing commercial loans, as reflected in Table 2.
Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer
services, increased to $41.5 million, from $40.7 million for 2014. The increase is mainly driven by higher electronic banking fees of
$2.4 million, partially offset by lower checking account fees of $1.4 million.
Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities, decreased to $29.0 million from $29.9 million in 2014, mainly due to a decrease in mutual fund and over-the-
counter trading of $680 thousand and lower bond sales of $294 thousand.
Income generated from mortgage banking activities decreased 17.0% to $6.1 million, compared to $7.4 million 2014. The decrease in
mortgage banking activities was mostly due to decreased sales as a result of retaining securitized GNMA pools. The Company
retained securitized GNMA pools totaling $54.5 million at a yield of 3.09% from its own originations during the second half of 2015.
During 2015, the Company recognized an other-than-temporary impairment charge on its portfolio of investment securities available-
for-sale classified as obligations from the Puerto Rico government and its political subdivisions. The Company determined that $1.5
million of the unrealized loss carried by these securities was attributed to estimated credit losses.
Gains from the sale of securities were $2.6 million compared to $4.4 million for the same period in 2014. Losses from derivative
activities were $190 thousand, compared to $608 thousand for 2014.
Other non-interest income declined $3.6 million, mainly related to the sale during the second quarter of 2015 of GNMA mortgage loan
servicing rights for approximately $7.0 million. The Company recognized a loss of $2.7 million related to this transaction.
44
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Year Ended December 31,
2016
2015
Variance %
2014
(Dollars in thousands)
Compensation and employee benefits
$
76,934 $
Professional and service fees
Occupancy and equipment
Insurance
Electronic banking charges
Information technology expenses
Advertising, business promotion, and strategic initiatives
Foreclosure, repossession and other real estate expenses
Loan servicing and clearing expenses
Taxes, other than payroll and income taxes
Communication
Printing, postage, stationery and supplies
Director and investor relations
Other operating expenses
Total non-interest expenses
Relevant ratios and data:
Efficiency ratio
Compensation and benefits to
non-interest expense
Compensation to average total assets owned
Average number of employees
Average compensation per employee
Average loans per average employee
14,935
30,966
9,109
20,707
7,116
5,485
15,702
8,068
9,782
2,715
2,557
1,086
79,172
16,217
34,186
9,567
21,893
5,648
6,452
37,522
9,075
9,460
3,086
2,575
1,091
-2.8% $
-7.9%
-9.4%
-4.8%
-5.4%
26.0%
-15.0%
-58.2%
-11.1%
3.4%
-12.0%
-0.7%
-0.5%
85,283
15,996
34,710
8,830
19,081
6,019
7,014
25,125
7,567
14,409
3,430
2,533
1,106
10,828
215,990 $
12,457
248,401
$
-13.1%
-13.0% $
11,622
242,725
57.82%
60.00%
35.62%
1.15%
1,446
53.2 $
3,031 $
31.87%
1.08%
1,496
52.9
3,145
$
$
49.90%
35.14%
1.10%
1,567
54.4
3,170
$
$
45
Non-Interest Expenses
Comparison of years ended December 31, 2016 and 2015
Non-interest expense for 2016 was $216.0 million, representing a decrease of 13.0% compared to $248.4 million in the previous year.
Foreclosure, repossession and other real estate expenses decreased 58.2% to $15.7 million, as compared to $37.5 million in the same
period of the previous year, primarily as a result of the bulk sale of non-performing assets in the third quarter of 2015. The year ended
December 31, 2015 included $9.1 million of other real estate owned and other mortgage properties markdowns, as part of 2015 de-
risking efforts. Also, 2015 included a loss of $4.8 million on the sale of repossessed assets, contrasting with 2016 which included a
gain of $1.6 million, mainly due to efficiencies in the selling process.
Occupancy and equipment expenses decreased 9.4% to $31.0 million reflecting a reduction in depreciation of leasehold
improvements, rent expense, security equipment rent and maintenance, and building maintenance, as a consequence of the closing of
seven branches during 2015.
Compensation and employee benefits decreased 2.8%, or $2.2 million, to $76.9 million, mostly due to the decrease in average
employees. In addition, during year ended December 31, 2015, the Company offered a voluntary early retirement program for
qualified employees and accumulated an additional compensation expense related to this program.
Professional and service fees decreased 7.9%, or $1.3 million, to $14.9 million, mostly due to lower legal expenses from strategic
initiatives performed in 2015, lower collection services due to in-house collection efforts, and lower billings, consulting and
outsourcing fees due to non-recurring expenses in 2015.
The decreases in the foregoing non-interest expenses were partially offset by increases in information technology.
Information technology expenses increased 26.0% to $7.1 million, as compared to $5.6 million in the same period of 2015, mainly due
to an increase in data processing expenses.
The efficiency ratio improved to 57.82% from 60.00% for the same period in 2015. The efficiency ratio measures how much of the
Company’s revenues is used to pay operating expenses. The Company computes its efficiency ratio by dividing non-interest expenses
by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives
gains or losses, FDIC shared-loss expense, losses on the early extinguishment of debt, other gains and losses, and other income that
may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability.
Amounts presented as part of non-interest income that are excluded from efficiency ratio computation for the year ended December
31, 2016 and 2015 amounted to $7.3 million and $24.2 million, respectively.
Comparison of years December 31, 2015 and 2014
Non-interest expense for 2015 was $248.4 million, representing an increase of 2.3% compared to $242.7 million in the previous year.
Foreclosure, repossession and other real estate expenses increased 49.3% to $37.5 million, as compared to $25.1 million for the
previous year, primarily reflecting an $8.5 million loss related to foreclosed estate sold as part of the bulk sale completed during the
third quarter of 2015. In addition, there was a $5.1 million increase in commercial properties markdowns, as part of our ongoing and
proactive de-risking efforts.
Electronic banking charges increased 14.7% to $21.9 million, mostly due to the increase in expenses related to merchant business and
card interchange transactions resulting from the continued growth of our banking business.
Loan servicing and clearing expenses increased 19.9% to $9.1 million, mainly due to an increase of $764 thousand in servicing
expenses and $807 thousand in the preparation for mortgage servicing migration to the Bank.
46
The increases in the foregoing non-interest expenses were partially offset by decreases in compensation and employee benefits and in
taxes other than payroll and income taxes.
Compensation and employee benefits decreased 7.2% to $79.2 million from $85.3 million for 2014. The decrease is due mainly to
lower salaries and lower benefits as a result of a headcount reduction from 1,567 to 1,496 mainly from the voluntary early retirement
programs offered by the Company in December 2014 and during 2015 for qualified employees as a cost savings initiative.
Taxes, other than payroll and income taxes decreased by $4.9 million or 34.3%, mostly due to a decrease of $6.6 million in the local
gross receipts tax that was repealed for taxable years commencing after December 31, 2014.
Efficiency ratio was 60.00% compared to 49.90% for 2014. The efficiency ratio measures how much of the Company’s revenues is
used to pay operating expenses. The Company computes its efficiency ratio by dividing non-interest expenses by the sum of its net
interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, credit-
related other-than-temporary impairment losses, FDIC shared-loss expense, FDIC reimbursement, 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 losses that are excluded from the efficiency ratio computation amounted to
losses of $24.2 million, compared to $53.7 million in 2014.
Provision for Loan and Lease Losses
Comparison of years ended December 31, 2016 and 2015
Provision for loan and lease losses decreased 59.7%, or $96.4 million, to $65.1 million. Based on an analysis of the credit quality and
the composition of the Company’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 originated and other loan and lease losses decreased 54.6%, or $54.3 million, to $45.1 million from $99.3 million when
compared with the same period in 2015. The provision was high in the 2015 period because the Company changed to non-accrual
status the PREPA line of credit and recorded a $53.3 million provision for loan and lease losses related thereto. This decrease was
partially offset by a $2.9 million provision related to the sale of the PREPA credit and another $2.9 million provision for a single
commercial loan recorded during 2016.
Total charge-offs on originated and other loans increased 112.3% to $112.5 million, as compared to $53.0 million for the same period
in 2015. Commercial charge-offs increased $56.9 million to $62.4 million as a result of a $56.2 million charge-off in connection with
the sale of the PREPA credit in 2016. Consumer charge-offs increased $2.9 million to $11.6 million. Mortgage charge-offs increased
$1.4 million to $6.8 million. Auto and leasing charge-offs decreased $1.6 million to $31.7 million. Total recoveries on originated and
other loans decreased from $14.9 million to $14.1 million. Net charge-off rate increased 188 basis points to 3.18% due to the
aforementioned sale of the PREPA credit.
Provision for acquired loan and lease losses decreased 67.8%, or $42.1 million, to $20.0 million from $62.2 million when compared
with the same period in 2015. Provision for acquired BBVAPR loan and lease losses decreased $6.4 million to $17.8 million from
$24.1 million, which included a provision of $5.2 million related to the sale of certain non-performing commercial loans during the
third quarter of 2015. During the third quarter of 2016, the Company recognized a $4.4 million provision in connection with a loan to
the Puerto Rico Housing Finance Authority (PRHFA). Provisions for acquired Eurobank loan and lease losses decreased $35.8 million
from $38.0 million to $2.3 million. The provision was higher in 2015 because of a provision of $32.9 million related to the sale of
certain non-performing commercial loans during the third quarter of 2015.
47
Comparison of years ended December 31, 2015 and 2014
Provision for loan and lease losses increased 166.3% or $100.9 million, to $161.5 million, reflecting a $38.1 million provision for loan
and lease losses resulting from the bulk sale completed during the third quarter of 2015 and a $53.3 million provision related to the
PREPA line of credit.
Based on an analysis of the credit quality and the composition of the Company’s loan portfolio, management determined that the
provision for 2015 was adequate in order to maintain the allowance for loan and lease losses at an adequate level to provide for
probable losses based upon an evaluation of known and inherent risks.
Provision for loan and lease losses, excluding acquired loans, increased 216.1%, or $67.9 million, to $99.3 million from $31.4 million
when compared with 2014. Such increase was primarily due to the classification of a $200 million participation in the PREPA line of
credit on non-accrual status and the recognition of a $53.3 million provision for loan and lease losses on such credit facility during
2015.
Total charge-offs, excluding acquired loans, increased 35.0% to $53.0 million, as compared to $39.3 million for 2014. Commercial
charge-offs increased $3.1 million to $5.5 million. Auto and leasing charge-offs increased $7.3 million to $33.4 million. Consumer
charge-offs increased $2.9 million to $8.7 million.
Total recoveries, excluding acquired loans, increased from $10.2 million to $14.9 million. As a result, the recoveries to charge-offs
ratio increased from 25.95% to 28.03%. Net credit losses increased $9.1 million to $38.1 million, representing 1.30% of average
originated and other loans outstanding versus 1.11% for 2014.
Provision for acquired loan and lease losses increased 113.0%, or $33.0 million, to $62.2 million from $29.2 million when compared
with 2014. Provision for acquired BBVAPR loan and lease losses increased 2.5% to $24.1 million, compared to $23.5 million for
2014. An additional provision of $5.2 million was recorded as a result of the sale of certain non-performing commercial loans from
the BBVAPR Acquisition, during the third quarter of 2015. Provision for acquired Eurobank loan and lease losses increased $32.4
million from $5.7 million to $38.0 million. Such increase reflects an additional provision of $32.9 million recorded as a result of the
sale of a portfolio of non-performing commercial loans acquired in the Eurobank transaction with an unpaid principal balance of
$197.1 million ($100.0 million carrying amount) during the third quarter of 2015.
The provision for loan and lease losses for loans accounted for under ASC 310-30 reflects the Company’s revision of the expected
cash flows in the covered loan portfolio considering actual experiences and changes in the Company’s expectations for the remaining
terms of the loan pools.
Income Taxes
Comparison of years ended December 31, 2016 and 2015
Income tax expense was $26.0 million, compared to an income tax benefit of $17.6 million for the same period in 2015. The effective
tax rate for 2016 was 30.5% compared to 87.52% for 2015 due to final year-end tax accounting.
Comparison of years ended December 31, 2015 and 2014
Income tax expense decreased $54.8 million to a benefit of $17.6 million, compared to $37.3 million for 2014. The decrease in income
tax expense reflects the decrease in the net income before income taxes of $142.5 million to a loss of $20.1 million in 2015, compared
to net income before income taxes of $122.4 million in 2014.
48
Business Segments
The Company 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 the Company’s organization, nature of its products, distribution channels and economic
characteristics of the products were also considered in the determination of the reportable segments. The Company measures the
performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net
interest income, loan production, and fees generated. The Company’s methodology for allocating non-interest expenses among
segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others.
Following are the results of operations and the selected financial information by operating segment for 2016, 2015 and 2014.
Year Ended December 31, 2016
Interest income
Interest expense
Net interest income
Provision for
loan and lease losses
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income (loss) before income taxes
Total assets
Interest income
Interest expense
Net interest income
Provision for
loan and lease losses
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
(Loss) income before income taxes
Total assets
$
$
$
$
$
$
Banking
Wealth
Management Treasury
Total Major
Segments
Consolidated
Eliminations
Total
321,868 $
(27,838)
294,030
(65,076)
35,587
(193,156)
1,521
(883)
72,023 $
65 $
-
65
(In thousands)
34,659 $
(29,327)
5,332
356,592 $
(57,165)
299,427
- $
-
-
356,592
(57,165)
299,427
-
26,788
(17,443)
-
(1,108)
8,302
-
4,444
(5,391)
883
(413)
4,855 $
(65,076)
66,819
(215,990)
2,404
(2,404)
85,180 $
-
-
-
(2,404)
2,404
- $
(65,076)
66,819
(215,990)
-
-
85,180
5,584,866 $
23,315 $
1,837,514 $
7,445,695 $
(943,871) $
6,501,824
Year Ended December 31, 2015
Banking
Wealth
Management Treasury
Total Major
Segments
Eliminations
Consolidated
367,620 $
(28,425)
339,195
(161,501)
23,900
(219,415)
1,427
(948)
95 $
-
95
-
(In thousands)
38,853 $
(40,771)
(1,918)
406,568 $
(69,196)
337,372
-
(161,501)
- $
-
-
-
28,288
(22,564)
-
(1,027)
284
(6,422)
948
(400)
52,472
(248,401)
2,375
(2,375)
-
-
(2,375)
2,375
Total
406,568
(69,196)
337,372
(161,501)
52,472
(248,401)
-
-
(17,342) $
4,792
(7,508) $
(20,058) $
- $
(20,058)
5,867,874 $
22,349 $
2,126,921 $
8,017,144 $
(917,995) $
7,099,149
49
Interest income
Interest expense
Net interest income
Provision for
loan and lease losses
Non-interest income (loss)
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income before income taxes
Total assets
Wealth
Management Treasury
Year Ended December 31, 2014
Total Major
Segments
Eliminations
Consolidated
Total
Banking
$
435,580 $
(34,721)
400,859
(60,640)
(13,389)
(213,935)
1,410
174 $
-
174
(In thousands)
49,503 $
485,257 $
(42,061)
7,442
(76,782)
408,475
-
28,525
(21,748)
-
-
2,187
(7,042)
327
(60,640)
17,323
(242,725)
1,737
(327)
113,978 $
(1,089)
5,862 $
(321)
2,593 $
(1,737)
122,433 $
- $
485,257
-
-
-
-
-
(1,737)
1,737
- $
(76,782)
408,475
(60,640)
17,323
(242,725)
-
-
122,433
6,454,015 $
21,644 $
1,940,504 $
8,416,163
(967,054) $
7,449,109
$
$
Comparison of years ended December 31, 2016 and 2015
Banking
Net interest income of the Company’s Banking segment decreased $45.2 million for 2016, or 13.3%, as a result of a decrease in
interest income from loans of $45.7 million, or 12.4%, to $321.9 million. Such decrease reflects decreases in volume and interest rate
of $35.4 million and $10.2 million, respectively, primarily due to lower acquired loan balances from repayments and maturities, and a
decrease in cost recoveries on acquired loans to $7.5 million in 2016 from $22.8 million in 2015.
Originated loans interest income increased 8.4% to $199.2 million as average balances grew 5.4% and yields increased to 6.43%,
mainly from higher yielding retail categories. Acquired BBVAPR loans interest income declined 29.8% to $92.3 million as average
balances declined 26.1% and yields decreased 41 basis points to 8.06%. Acquired Eurobank loans interest income fell 41.8% to $30.5
million as average balances declined 34.5% and yields decreased 274 basis points to 21.84%.
Provision for loan and lease losses decreased 59.7%, or $96.4 million, to $65.1 million. Provision for originated and other loan and
lease losses decreased 54.6%, or $54.3 million, to $45.1 million from $99.3 million when compared with the same period in 2015. The
provision was higher in the 2015 period because the Company changed to non-accrual status the PREPA line of credit and recorded a
$53.3 million provision for loan and lease losses related thereto. This decrease was partially offset by a $2.9 million provision related
to the sale of the PREPA credit and another $2.9 million provision for a single commercial loan recorded during 2016.
Provision for acquired loan and lease losses decreased 67.8%, or $42.1 million, to $20.0 million from $62.2 million when compared
with the same period in 2015. Provision for acquired BBVAPR loan and lease losses decreased $6.4 million to $17.8 million from
$24.1 million, which included a provision of $5.2 million related to the sale of certain non-performing commercial loans during the
third quarter of 2015. During the third quarter of 2016 the Company recognized a $4.4 million provision in connection with a loan to
the PRHFA. Provisions for acquired Eurobank loan and lease losses decreased $35.8 million from $38.0 million to $2.3 million. The
provision was higher in 2015 because of a provision of $32.9 million related to the sale of certain non-performing commercial loans
during the third quarter of 2015.
Non-interest income, net, is affected by the level of mortgage banking activities and fees generated from loans and deposit accounts. It
is also affected by the FDIC shared-loss expense, which varies depending on the results of the on-going evaluation of expected cash
flows of the loan portfolio acquired in the FDIC-assisted acquisition.
50
During 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a sale of loss share
assets covered under the non-single family loss share agreement and paid $20.0 million in loss share coverage with respect to the
aggregate loss resulting from the bulk sale of covered non-performing commercial loans, as reflected in Table 2. The net FDIC shared-
loss expense decreased to $13.6 million as compared to $42.8 million for the year ended December 31, 2015, primarily from the
expiration of the FDIC commercial and non-single family loans loss share coverage at June 30, 2015.
Non-interest expense of $193.2 million decreased 12.0%, or $26.3 million, when compared to the same period in 2015, primarily
reflecting a decrease in foreclosure, repossession and other real estate expenses of $21.8 million to $15.7 million, as compared to
$37.5 million in the same period for the previous year, primarily as a result of the bulk sale of non-performing assets in the third
quarter of 2015. The year ended December 31, 2015 included a $9.1 million increase in other real estate owned and other mortgage
properties markdowns, as part of 2015 de-risking efforts. Also, the year ended December 31, 2015 included a loss of $4.8 million on
the sale of repossessed assets, contrasting with 2016 which included a gain of $1.6 million, mainly due to efficiencies in the selling
process.
Wealth Management
Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities, decreased 5.3% to $26.8 million, compared to $28.3 million for the same period in 2015. Such decrease reflects a
reduction in some securities brokerage activities and a reduction in fees from the IRA portfolio.
Non-interest expenses decreased by 22.7% to $17.4 million, mainly due to a payment of $2.1 million required by the broker-dealer's
regulator during 2015 and a reduction in compensation expense from lower commissions as a result of lower brokerage activity.
Treasury
Treasury income before taxes, which consists of the Company's asset/liability management activities, such as purchase and sale of
investment securities, interest rate risk management, derivatives, and borrowings, increased to $4.9 million, compared to a loss of $7.5
million in the same period in 2015.
Net interest income increased $7.3 million to $5.3 million, mainly from a reduction in interest expenses. Interest income from
investments decreased 11.0% to $34.6 million, reflecting a decrease in volume and interest rate of $3.3 million and $992 thousand,
respectively. Decreases in both, interest income and expenses were affected by a partial unwinding of a high-rate repurchase
agreement amounting to $268.0 million, which carried a cost of 4.78%, and the sale of $272.1 million of mortgage backed securities
and $11.1 million of Puerto Rico government bonds during the first quarter of 2016. Also, during the third quarter of 2016, $227.0
million of short term FHLB advances were repaid at maturity.
Non--interest income increased from $284 thousand to $4.4 million, as the Company recovered $5.0 million in 2016 from a loss
related to a private label collateralized mortgage obligation.
Comparison of years ended December 31, 2015 and 2014
Banking
Net interest income of the Company’s Banking segment decreased $61.7 million for 2015, or 15.4%, reflecting a decrease of 15.6% in
interest income from loans. Interest income from loans decreased 15.6% to $367.6 million, reflecting a decrease in both, volume and
interest rate of $42.7 million and $25.2 million, respectively. Such decrease reflects lower acquired loan balances and yields mainly
related to the bulk sale of non-performing acquired commercial loans and foreclosed real estate at the end of the third quarter of 2015
and also normal repayments and maturities. In addition, the decrease reflects a $9.7 million decrease in interest income from a loan to
PREPA, which was placed in non-accrual status during the first quarter of 2015, and a loan to PRASA, which was paid off during the
second quarter of 2015.
51
Provision for loan and lease losses increased 166.3%, or $100.9 million, to $161.5 million, reflecting a $38.1 million provision for
loan and lease losses resulting from the bulk sale of non-performing acquired commercial loans and foreclosed real estate completed
during 2015. In addition, during 2015, the Company recorded an additional provision for loan and lease losses of $53.3 million related
to its participation in the line of credit to PREPA.
The net FDIC shared-loss expense decreased to $42.8 million as compared to $65.8 million for 2014, primarily from the decrease of
the FDIC commercial loss share amortization related to the expiration of the non-single family loss share coverage by the FDIC at the
end of the second quarter of 2015. Notwithstanding the expiration of loss share coverage for non-single family loans, on July 2, 2015,
the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a potential sale of a pool of loss
share assets covered under the non-single family loss share agreement and paid $20 million in loss share coverage with respect to the
aggregate loss resulting from the sale of covered non-performing commercial loans.
Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer
services, increased to $41.5 million, from $40.7 million for 2014. The increase is mainly driven by higher electronic banking fees of
$2.4 million, partially offset by lower checking account fees of $1.4 million.
Income generated from mortgage banking activities decreased 17.0% to $6.1 million, compared to $7.4 million in 2014. The decrease
in mortgage banking activities was mostly due to foregone gains on sales as a result of retaining securitized GNMA pools, as the
Company retained securitized GNMA pools totaling $54.5 million at a yield of 3.09% from its own loan originations during the
second half of 2015.
Non-interest expense of $219.4 million increased 2.6% when compared to 2014. The increase in non-interest expense primarily
reflects an $8.5 million loss related to the sale of foreclosed real estate, mostly from the Eurobank Acquisition, as part of the bulk sale
during 2015. In addition, there was a $5.1 million increase in commercial properties markdowns, as part of our ongoing de-risking
efforts. Also, electronic banking charges increased 14.7%, mainly from merchant business and credit/debit card interchange
transactions as our banking business continues to grow.
Wealth Management
Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and
insurance activities decreased slightly to $28.3 million, compared to $28.5 million in 2014.
Non-interest expenses increased by 3.8% to $22.6 million from $21.7 million, mainly due to a $2.1 million payment in 2015
consisting of restitution to certain clients of our broker-dealer subsidiary as required by FINRA.
Treasury
The investment portfolio of $1.616 billion at December 31, 2015 increased 15.3% compared to $1.402 billion at December 31, 2014.
This was mainly the result of $617.6 million purchases, $101.3 million sales, and $277.3 million principal paydowns of available-for-
sale and held-to-maturity investment securities during 2015. Interest income from investments decreased 21.6% to $38.9 million,
reflecting a decrease in interest rate of $10.0 million. Such decrease in interest income from investments reflects higher premium
amortization on existing securities.
52
ANALYSIS OF FINANCIAL CONDITION
Assets Owned
At December 31, 2016, the Company’s total assets amounted to $6.502 billion representing a decrease of 8.4% when compared to
$7.099 billion at December 31, 2015. This reduction is mainly due to a decrease in the loan portfolio and in the investment portfolio of
$286.5 million and $ $253.4 million, respectively.
The Company’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate
located in Puerto Rico, other commercial and industrial loans, consumer loans, and auto loans. At December 31, 2016, the Company’s
loan portfolio decreased $286.5 million from $4.434 billion at December 31, 2015 to $4.148 billion, primarily due to the sale of the
PREPA line of credit during 2016, which had an unpaid principal balance of $190.3 million and an allowance for loan and lease losses
of $53.3 million at December 31, 2015. In addition, this decrease was also due to a decrease in acquired loan balances. Our loan
portfolio is transitioning as originated loans grow at a slower pace than acquired loans decrease, due to repayments and maturities. At
December 31, 2016, the originated loan portfolio decreased $10.4 million, mainly from the aforementioned sale of PREPA, partially
offset by an increase of $98.5 million in our retail loan portfolios. The acquired BBVAPR loan portfolio decreased $262.8 million, or
20.7%, and the acquired Eurobank loan portfolio decreased $12.2 million, or 8.3%, from December 31, 2015.
The investment portfolio decreased $253.4 million from $1.616 billion at December 31, 2015 to $1.363 billion at December 31, 2016,
reflecting decreases in investment securities available-for-sale portfolio by $223.1 million and in investment securities held-to-
maturity portfolio by $20.3 million. Investment securities available-for-sale portfolio decreased primarily because of the sale of
$277.2 million in mortgage backed securities and $11.1 million in Puerto Rico government bonds during the first half of 2016.
Investment securities held-to-maturity portfolio decreased $20.3 million to $599.9 million reflecting the maturity of $25.0 million US
Treasury securities during the fourth quarter of 2016.
At December 31, 2016, loans represented 75% of total interest-earning assets while investments represented 25%, compared to 73%
and 27%, respectively, at December 31, 2015.
Financial Assets Managed
The Company’s financial assets include those managed by the Company’s trust division, retirement plan administration subsidiary,
and assets gathered by its broker-dealer subsidiary. The Company’s trust division offers various types of individual retirement
accounts ("IRA"s) 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, 2016, total assets managed by the
Company’s trust division and OPC amounted to $2.850 billion, compared to $2.691 billion at December 31, 2015. 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, 2016, total assets gathered by Oriental Financial Services
from its customer investment accounts increased to $2.351 billion, compared to $2.375 billion at December 31, 2015. Changes in trust
and broker-dealer related assets primarily reflect changes in portfolio balances and differences in market values.
53
Goodwill
Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank acquisition is not amortized to
expense, but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative
analysis, the Company determines that the existence of events and circumstances indicate that it is more likely than not that goodwill
is not impaired. The Company completes its annual goodwill impairment test as of October 31 of each year. The Company 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. The Company’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 the Company’s assets.
As of December 31, 2016, the Company 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 2016, based on its annual goodwill impairment test, the
Company determined that the Banking unit failed step one of the two-step impairment test and that the Wealth Management unit
passed such step. As a result of step one, the Banking unit’s adjusted net book value exceeded its fair value by approximately $140.7
million, or 15%. Accordingly, the Company proceeded to perform step two of the analysis. Based on the results of step two, the
Company determined that the carrying value of the goodwill allocated to the Banking unit was not impaired as of the valuation date.
For additional details related to such goodwill impairment test, please refer to "Goodwill and Intangible Assets" under Note 1 of the
accompanying consolidated financial statements.
54
TABLE 4 - ASSETS SUMMARY AND COMPOSITION
Investments:
FNMA and FHLMC certificates
Obligations of US government-sponsored agencies
US Treasury securities
CMOs issued by US government-sponsored agencies
GNMA certificates
Puerto Rico government and public instrumentalities
FHLB stock
Other debt securities
Other investments
Total investments
Loans
Total investments and loans
Other assets:
Cash and due from banks (including restricted cash)
Money market investments
FDIC indemnification asset
Foreclosed real estate
Accrued interest receivable
Deferred tax asset, net
Premises and equipment, net
Servicing assets
Derivative assets
Goodwill
Other assets and customers' liability on acceptances
Total other assets
Total assets
Investments portfolio composition:
FNMA and FHLMC certificates
Obligations of US government-sponsored agencies
US Treasury securities
CMOs issued by US government-sponsored agencies
GNMA certificates
Puerto Rico government and public instrumentalities
FHLB stock
Other debt securities and other investments
55
$
December 31,
Variance
2016
2015
(Dollars in thousands)
%
1,025,370 $
3,884
49,054
101,831
165,235
4,073
10,793
1,921
350
1,362,511
4,147,692
5,510,203
507,863
5,606
14,411
47,520
20,227
124,200
70,407
9,858
1,330
86,069
104,130
991,621
1,354,802
5,093
25,032
135,073
58,495
13,731
20,783
2,572
291
1,615,872
4,434,213
6,050,085
535,359
4,699
22,599
58,176
20,637
145,901
74,590
7,455
3,025
86,069
90,554
1,049,064
-24.3%
-23.7%
96.0%
-24.6%
182.5%
-70.3%
-48.1%
-25.3%
20.3%
-15.7%
-6.5%
-8.9%
-5.1%
19.3%
-36.2%
-18.3%
-2.0%
-14.9%
-5.6%
32.2%
-56.0%
0.0%
15.0%
-5.5%
$
6,501,824 $
7,099,149
-8.4%
75.2%
0.3%
3.6%
7.5%
12.1%
0.3%
0.8%
0.2%
100.0%
83.9%
0.3%
1.5%
8.4%
3.6%
0.8%
1.3%
0.2%
100.0%
TABLE 5 — LOANS RECEIVABLE COMPOSITION
Originated and other loans and leases held for investment:
Mortgage
Commercial
Consumer
Auto and leasing
Allowance for loan and lease losses on originated and other loans and leases
Deferred loan costs, net
Total originated and other loans loans held for investment, net
Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial
Consumer
Auto
Allowance for loan and lease losses on acquired BBVAPR loans accounted
for under ASC 310-20 (b)
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage
Commercial
Construction
Consumer
Auto
Allowance for loan and lease losses on acquired BBVAPR loans accounted
for under ASC 310-30
Total acquired BBVAPR loans, net
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties
Commercial and construction
Consumer
Allowance for loan and lease losses on Eurobank loans
Total acquired Eurobank loans, net
Total acquired loans, net
Total held for investment, net
Mortgage loans held for sale
Total loans, net
$
56
December 31,
2016
2015
(In thousands)
Variance
%
$
721,494 $
1,277,866
290,515
756,395
3,046,270
(59,300)
2,986,970
5,766
2,992,736
757,828
1,441,649
242,950
669,163
3,111,590
(112,626)
2,998,964
4,203
3,003,167
-4.8%
-11.4%
19.6%
13.0%
-2.1%
47.3%
-0.4%
37.2%
-0.3%
5,562
32,862
53,026
91,450
7,457
38,385
106,911
152,753
-25.4%
-14.4%
-50.4%
-40.1%
(4,300)
87,150
(5,542)
147,211
22.4%
-40.8%
569,253
222,856
69,708
4,301
85,676
951,794
608,294
287,311
88,180
11,843
153,592
1,149,220
(31,056)
920,738
1,007,888
(25,785)
1,123,435
1,270,646
73,018
81,460
1,372
155,850
(21,281)
134,569
1,142,457
4,135,193
12,499
4,147,692 $
92,273
142,377
2,314
236,964
(90,178)
146,786
1,417,432
4,420,599
13,614
4,434,213
-6.4%
-22.4%
-20.9%
-63.7%
-44.2%
-17.2%
-20.4%
-18.0%
-20.7%
-20.9%
-42.8%
-40.7%
-34.2%
76.4%
-8.3%
-19.4%
-6.5%
-8.2%
-6.5%
The Company’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to
as "originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated between
acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were purchased subject to loss-sharing agreements
with the FDIC, which was terminated in February 2017. The FDIC loss-sharing coverage, related to acquired Eurobank commercial
loans expired on June 30, 2015. The coverage for the single-family residential loans was set to expire on June 30, 2020. At December
31, 2016, the remaining covered loans amounting to $61.1 million, net carrying amount, are included as part of acquired Eurobank
loans under the name "loans secured by 1-4 family residential properties." At December 31, 2015, covered loans amounted to $67.2
million, net carrying amount, and also included under the name "loans secured by 1-4 family residential properties." At December 31,
2016 and 2015, covered loans were no longer a material amount.
As shown in Table 5 above, total loans, net, amounted to $4.148 billion at December 31, 2016 and $4.434 billion at December 31,
2015. The Company’s originated and other loans held-for-investment portfolio composition and trends were as follows:
• Mortgage loan portfolio amounted to $721.5 million (23.7% of the gross originated loan portfolio) compared to $757.8
million (24.4% of the gross originated loan portfolio) at December 31, 2015. Mortgage loan production totaled $208.2
million for the year ended December 31, 2016, which represents a decrease of 15.8%, from $247.2 million. Mortgage loans
included delinquent loans in the GNMA buy-back option program amounting to $9.7 million and $7.9 million at December
31, 2016 and 2015, 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 $1.278 billion (42.0% of the gross originated loan portfolio) compared to $1.442
billion (46.3% of the gross originated loan portfolio) at December 31, 2015. Commercial loan production decreased 19.2% to
$295.0 million for the year ended December 31, 2016, from $365.2 million in 2015.
• Consumer loan portfolio amounted to $290.5 million (9.5% of the gross originated loan portfolio) compared to $243.0
million (7.8% of the gross originated loan portfolio) at December 31, 2015. Consumer loan production increased 13.6% to
$159.8 million for the year ended December 31, 2016, from $140.7 million in 2015.
• Auto and leasing portfolio amounted to $756.4 million (24.8% of the gross originated loan portfolio) compared to $669.2
million (21.5% of the gross originated loan portfolio) at December 31, 2015. Auto and leasing production increased by 9.2%
to $284.8 million for the year ended December 31, 2016, compared to $260.8 million 2015.
57
The following table summarizes the remaining contractual maturities of the Company’s total gross non-covered loans, excluding loans
accounted for under ASC 310-30, segmented to reflect cash flows as of December 31, 2016. Contractual maturities do not necessarily
reflect the period of resolution of a loan, considering prepayments.
Maturities
From One to
Five Years
After Five Years
Balance
Outstandin
g at
December
31, 2016
One Year
or Less
Fixed
Interest
Rates
Variable
Interest
Rates
(Dollars in thousands)
Fixed
Interest
Rates
Variable
Interest
Rates
Originated and other loans:
Mortgage
Commercial
Consumer
Auto and leasing
Total
Acquired loans accounted under ASC
310-20
Commercial
Commercial secured by real estate
Consumer
Auto
$
721,492 $
1,277,867
290,516
756,395
$ 3,046,270
1,594 $
739,738
34,044
4,249
15,023 $
395,985
200,813
392,315
779,625 1,004,136
704,875 $
- $
142,144
-
55,659
-
-
359,831
- 1,262,509
3,029
2,533
32,862
53,026
3,029
2,353
32,862
8,645
-
180
-
44,381
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
Total
$
91,450 $
46,889 $
44,561 $
58
TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS
December 31, 2016
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)
$
10,610 $
94
39
75
259
1
3
1
2.44% $
1.06%
10,473 $
366
7.69%
1.33%
-
1,263
920
39
-
366
8.78% $
10.66%
80,449 $
2,141
1,503
38
1.87%
1.77%
0.00%
28.98%
1,088
2,472
61
316
5.61%
12.78%
349
11,167 $
$
59
323
16.91%
2.89% $
2,030
14,132 $
447
1,772
22.02%
12.54% $
9,343
95,493 $
681
2,599
7.29%
2.72%
Delinquency:
0 - 89 days
90 - 119 days
120 - 179 days
180 - 364 days
365+ days
Total
Percentage of total loans excluding
acquired loans accounted for under ASC 310-30
0.36%
0.45%
3.04%
Refinanced or Modified Loans:
Amount
Percentage of Higher-Risk Loan
Category
Loan-to-Value Ratio:
Under 70%
70% - 79%
80% - 89%
90% and over
$
2,140 $
188
8.79% $
556 $
47
8.45% $
18,080 $
1,094
6.05%
19.16%
3.93%
18.93%
$
6,930 $
186
2.68% $
793 $
70
8.83% $
4.57%
9.76%
2,822
3,887
255
537
9.04%
13.82%
- $
-
-
-
-
-
-
-
-
1.01%
2.89% $
6,630
14,132 $
910
1,772
13.73%
12.54% $
95,493
95,493 $
2,599
2,599
2.72%
2.72%
2,144
205
1,888
11,167 $
$
98
20
19
323
* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans.
59
The following table includes the Company's lending and investment exposure to the Puerto Rico government, including its
agencies, instrumentalities, municipalities and public corporations:
TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES
December 31, 2016
Maturity
Loans and Securities:
Carrying
Value
Less than
1 Year
1 to 3
Years
More than
3 Years
Comments
(In thousands)
Central government
Public corporations
Municipalities
$
10,850 $
100
191,831
- $
100
307
Repayment sources include abandoned and
unclaimed funds escheated to the
Commonwealth
10,850
-
- $
-
69,289 122,235 Repayment from property taxes
Investment securities
4,680
-
4,680
-
Remaining position is PRHTA security issued
for P3 Project Teodoro Moscoso Bridge
operated by private companies that have the
payment obligation
Total
$ 207,461 $
407
$ 73,969 $ 133,085
Some highlights follow regarding the data included above:
• Loans to municipalities are secured by a pledge of their unlimited taxing power for special additional real and personal property
taxes.
• Deposits from municipalities, central government and other government entities totaled $170.7 million at December 31, 2016.
• The outstanding balance of credit facilities to central government and public corporations decreased by $200.9 million during 2016
mainly as a result of the sale of the PREPA fuel line of credit which had an outstanding balance of $190.3 million at December 31,
2015.
60
Credit Risk Management
Allowance for Loan and Lease Losses
The Company maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable
losses based upon an evaluation of known and inherent risks. The Company’s allowance for loan and lease losses policy provides for a
detailed quarterly analysis of probable losses. At December 31, 2016, the Company’s allowance for loan and lease losses amounted to
$115.9 million, a $118.2 million decrease from $234.1 million at December 31, 2015, mainly related to the de-recognition of $84.4
million for a portion of the allowance for credit impaired loans due to a revision in policy during the second quarter of 2016 and a
$56.2 million charge-off during the third quarter of 2016. The allowance for loan and lease losses was charged-off in connection with
PREPA participation that was provisioned in 2016 ($2.9 million) and in 2015 ($53.3 million).
Effective June 30, 2016, pursuant to supervisory direction, the Company revised the purchase credit impaired policy for all loans
accounted for under ASC 310-30. Under the revised policy, the Company writes-off the loan’s recorded investment and derecognizes
the associated allowance for loan and lease losses for loans that exit the pools. The revised policy implementation was performed
prospectively due to the immaterial impact for retrospective adoption. Prior to June 30, 2016, the pool’s carrying value and allowance
was determined by discounting expected cash flows at the pool’s effective yield. The allowance for loan and lease losses was
maintained until all of the loans in the pool were paid off or charged-off. The transition to this revised policy on June 30, 2016
resulted in the de-recognition of loans recorded investment balance and associated allowance for loans and lease losses that had exited
the pools with no impact to the provision for loan and lease losses.
Tables 8 through 12 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.
At December 31, 2016, $59.3 million of the allowance corresponded to originated and other loans held for investment, or 1.95% of
total originated and other loans held for investment, compared to $112.6 million, or 3.62% of total originated and other loans held for
investment at December 31, 2015. The allowance decreased mainly as a result of the recognition of a $56.2 million charge-off in
connection with the sale of the PREPA participation during the third quarter of 2016. Provision for loan and lease losses of $45.1
million and recoveries of $14.1 million, were offset by charge-offs of $112.5 million during the year ended December 31, 2016. The
allowance for residential mortgage loans decreased by 5.5% (or $1.0 million), when compared with the balances recorded at
December 31, 2015. The allowance for consumer loans and auto and leases increased by 16.7% (or $1.9 million) and 6.6% (or $1.2
million), respectively, when compared with the balances recorded at December 31, 2015. The allowance for commercial loans
decreased 86.1% (or $55.8 million), when compared with the balances recorded at December 31, 2015, mainly from the sale of the
PREPA participation.
Allowance for loan and lease losses recorded for acquired BBVAPR loans accounted for under the provisions of ASC 310-20 at
December 31, 2016 was $4.3 million compared to $5.5 million at December 31, 2015, a 22.4% decrease. The allowance decreased as
a result of $5.8 million in charge-offs, which were partially offset by a $2.3 million provision for loan and lease losses and $2.3
million of recoveries during the year ended December 31, 2016. The allowance for commercial loans increased by 546.2% (or $142
thousand), when compared with the balance recorded at December 31, 2015. The allowance for consumer loans decreased by 11.7%
(or $401 thousand) and auto loans decreased by 47.2% (or $984 thousand), respectively, when compared with the balances recorded at
December 31, 2015, due to the normal amortization of credit discount of these acquired loans.
Allowance for loan and lease losses recorded for acquired BBVAPR loans accounted for under ASC-310-30 at December 31, 2016
was $31.1 million as compared to $25.8 million at December 31, 2015. The allowance increased mainly as a result of a $15.5 million
provision for loan and lease losses, partially offset by $10.0 million in allowance de-recognition from revised purchased credit
impaired loan policy and by loan pools fully charged-off of $282 thousand during the year ended December 31, 2016.
Allowance for loan and lease losses recorded for acquired Eurobank loans at December 31, 2016 was $21.3 million as compared to
$90.2 million at December 31, 2015. The allowance decreased as a result of $74.4 million in allowance de-recognition from revised
purchased credit impaired loan policy and by $134 thousand in loan pools fully charged-off, partially offset by a $2.3 million
provision for loan and lease losses and by $3.4 million for the FDIC shared-loss portion of provision for covered loan and lease losses.
The allowance for loan and lease losses on acquired Eurobank loans is accounted for under the provisions of ASC 310-30. The portion
of the loss on covered loans reimbursable from the FDIC is recorded as an offset to the provision for credit losses and increased the
FDIC indemnification asset.
61
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
The Company’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At December
31, 2016 and 2015, the Company had $104.1 million and $300.1 million, respectively, of non-accrual loans, including acquired
BBVAPR loans accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium). The decline of $195.8
million is directly related to the sale of the PREPA participation, which had an outstanding balance of $190.3 million at December 31,
2015.
At December 31, 2016 and 2015, loans whose terms have been extended and which are classified as troubled-debt restructuring that
are not included in non-performing assets amounted to $98.1 million and $93.6 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 18 months or more past
due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans.
Acquired loans with credit deterioration are considered to be performing due to the application of the accretion method under ASC
310-30, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.
Credit related decreases in expected cash flows, compared to those previously forecasted are recognized by recording a provision for
credit losses on these loans when it is probable that all cash flows expected at acquisition will not be collected.
At December 31, 2016, the Company’s non-performing assets decreased by 57.3% to $156.9 million (2.88% of total assets, excluding
acquired loans with deteriorated credit quality) from $367.8 million (6.31% of total assets, excluding acquired loans with deteriorated
credit quality) at December 31, 2015. The Company does not expect non-performing loans to result in significantly higher losses. At
December 31, 2016, the allowance for originated loan and lease losses to non-performing loans coverage ratio was 56.30% (37.15% at
December 31, 2015).
The Company follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio
consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans
offered by certain major U.S. mortgage loan originators. Furthermore, the Company has never been active in negative amortization
loans or adjustable rate mortgage loans, including those with teaser rates.
62
The following items comprise non-performing assets:
• Originated and other loans held for investment:
Residential mortgage loans — are placed on non-accrual status when they become 90 days or more past due and are written-
down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured
mortgage loans which are placed in non-accrual when they become 18 months or more past due. At December 31, 2016, the
Company’s originated non-performing mortgage loans totaled $74.5 million (68.9% of the Company’s non-performing loans), a
4.3% decrease from $77.9 million (25.5% of the Company’s non-performing loans) at December 31, 2015.
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, 2016, the Company’s originated
non-performing commercial loans amounted to $19.8 million (18.3% of the Company’s non-performing loans), a 90.8% decrease
from $215.3 million at December 31, 2015 (70.5% of the Company’s non-performing loans), mainly from the sale of the PREPA
participation. Most of this portfolio is collateralized by commercial real estate properties.
Consumer loans — are placed on non-accrual status when they become 90 days past due and written-off when payments are
delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit. At December 31, 2016, the
Company’s originated non-performing consumer loans totaled $2.0 million (1.8% of the Company’s non-performing loans), a
21.8% increase from $1.6 million (0.5% of the Company’s non-performing loans) at December 31, 2015.
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,
2016, the Company’s originated non-performing auto loans and leases amounted to $9.1 million (8.4% of the Company’s total
non-performing loans), an increase of 7.5% from $8.4 million at December 31, 2015 (2.8% of the Company’s total non-
performing loans).
• Acquired BBVAPR loans accounted for under ASC 310-20 (loans with revolving features and/or acquired at premium):
Commercial revolving lines of credit and credit cards — are placed on non-accrual status when they become 90 days or more past
due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any. At December 31,
2016, the Company’s acquired non-performing commercial lines of credit accounted for under ASC 310-20 amounted to $1.4
million (1.3% of the Company’s non-performing loans), a 60.8% increase from $880 thousand at December 31, 2015 (0.3% of the
Company’s non-performing loans).
Consumer revolving lines of credit and credit cards — are placed on non-accrual status when they become 90 days past due and
written-off when payments are delinquent 180 days. At December 31, 2016, the Company’s acquired non-performing consumer
lines of credit and credit cards accounted for under ASC 310-20 totaled $828 thousand (0.8% of the Company’s non-performing
loans), a 54.8% increase from $535 thousand at December 31, 2015 (0.2% of the Company’s non-performing loans).
Auto loans acquired at premium - are placed on non-accrual status when they become 90 days past due, partially written-off to
collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. At
December 31, 2016, the Company’s acquired non-performing auto loans accounted for under ASC 310-20 totaled $552 thousand
(0.5% of the Company’s non-performing loans), a 33.6% decrease from $831 thousand at December 31, 2015 (0.2% of the
Company’s non-performing loans).
63
The Company has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional
Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure,
while also reducing the Company’s losses on non-performing mortgage loans.
The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled
mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, PRHFA, (“Puerto Rico Housing
Finance Authority”), conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to
FNMA and FHLMC, and conventional loans retained by the Company. The program offers diversified alternatives such as regular or
reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and payment in lieu
of foreclosure.
The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/interests 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 by the Company’s
current credit and underwriting guidelines. The Company achieved an affordable and sustainable monthly payment by taking specific,
sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the
payment of principal or, if the borrower qualifies, refinancing the loan.
In order to apply for any of the loan modification programs, if the borrower is active in Chapter 13 bankruptcy, they 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 the
Company grants a concession for legal or economic reasons due to the debtor’s financial difficulties.
64
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN
December 31,
Variance
2016
2015
(Dollars in thousands)
%
Originated and other loans held for investment
Allowance balance:
Mortgage
Commercial
Consumer
Auto and leasing
Unallocated allowance
Total allowance balance
Allowance composition:
Mortgage
Commercial
Consumer
Auto and leasing
Unallocated allowance
Allowance coverage ratio at end of period applicable to:
Mortgage
Commercial
Consumer
Auto and leasing
Total allowance to total originated loans
Allowance coverage ratio to non-performing loans:
Mortgage
Commercial
Consumer
Auto and leasing
Total
Acquired BBVAPR loans accounted for under ASC 310-20
Allowance balance:
Commercial
Consumer
Auto
Total allowance balance
Allowance composition:
Commercial
Consumer
Auto
Allowance coverage ratio at end of period applicable to:
Commercial
Consumer
Auto
Total allowance to total acquired loans
Allowance coverage ratio to non-performing loans:
Commercial
Consumer
Auto
Total
18,352
64,791
11,197
18,261
25
112,626
-5.5%
-86.1%
16.7%
6.6%
1624.0%
-47.3%
$
$
17,344 $
8,995
13,067
19,463
431
$
59,300
29.24%
15.17%
22.04%
32.82%
0.73%
100.00%
2.40%
0.70%
4.50%
2.57%
1.95%
23.28%
45.46%
657.96%
215.01%
56.30%
16.30%
57.53%
9.94%
16.21%
0.02%
100.00%
2.42%
4.49%
4.61%
2.73%
3.62%
23.57%
30.10%
686.51%
216.93%
37.15%
79.4%
-73.6%
121.7%
102.5%
100.0%
-0.8%
-84.4%
-2.4%
-5.9%
-46.1%
-1.2%
51.0%
-4.2%
-0.9%
51.5%
550.0%
-11.7%
-47.1%
-22.4%
736.2%
13.8%
-31.9%
768.6%
3.1%
6.7%
29.5%
304.7%
-42.9%
-20.4%
-37.6%
$
$
169 $
3,028
1,103
4,300 $
26
3,429
2,087
5,542
3.93%
70.42%
25.65%
100.00%
0.47%
61.87%
37.66%
100.00%
3.04%
9.21%
2.08%
4.70%
0.35%
8.93%
1.95%
3.63%
11.94%
365.70%
199.82%
153.85%
2.95%
640.93%
251.14%
246.75%
65
TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)
Acquired BBVAPR loans accounted for under ASC 310-30
Allowance balance:
Mortgage
Commercial
Auto
Total allowance balance
Allowance composition:
Mortgage
Commercial
Auto
Acquired Eurobank loans accounted for under ASC 310-30
Allowance balance:
Mortgage
Commercial
Consumer
Total allowance balance
Allowance composition:
Mortgage
Commercial
Consumer
December 31,
2016
2015
(Dollars in thousands)
Variance
%
$
$
$
$
2,682 $
23,452
4,922
31,056 $
1,762
21,161
2,862
25,785
8.64%
75.51%
15.85%
100.00%
6.84%
82.06%
11.10%
100.00%
11,947 $
9,328
6
21,281 $
56.14%
43.82%
0.03%
100.0%
22,570
67,365
243
90,178
25.03%
74.70%
0.27%
100.0%
100.0%
10.8%
100.0%
20.4%
100.0%
-8.0%
100.0%
-47.1%
-86.2%
-97.5%
-76.4%
124.3%
-41.3%
-88.9%
66
TABLE 9 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY
Originated and other loans:
Balance at beginning of year
Provision for loan and lease losses
Charge-offs
Recoveries
Balance at end of year
Acquired loans:
BBVAPR loans
Acquired loans accounted for
under ASC 310-20:
Balance at beginning of year
Provision for loan and lease losses
Charge-offs
Recoveries
Balance at end of year
Acquired loans accounted for
under ASC 310-30:
Balance at beginning of year
Provision for loan and lease losses
Loan pools fully charged off
Allowance de-recognition
Balance at end of year
Eurobank loans
Balance at beginning of year
Provision for loan and lease losses
Loan pools fully charged off
FDIC shared-loss portion on
recapture of loan
and lease losses
Allowance de-recognition
Balance at beginning of year
Allowance for loans and lease losses on originated
and other loans to:
Total originated loans
Non-performing originated loans
Allowance for loans and lease losses on acquired
loans accounted for under
ASC 310-20 to:
Total acquired loans accounted
for under ASC 310-20
Non-performing acquired loans
accounted for under ASC 310-20
2016
Year Ended December 31,
Variance
%
2015
(Dollars in thousands)
2014
112,626 $
45,058
(112,497)
14,113
59,300 $
51,439
99,336
(53,001)
14,852
112,626
119.0% $
-54.6%
112.3%
-5.0%
-47.3% $
49,081
31,427
(39,258)
10,189
51,439
5,542 $
2,255
(5,816)
2,319
4,300 $
4,597
7,469
(9,345)
2,821
5,542
20.6% $
-69.8%
-37.8%
-17.8%
-22.4% $
2,354
12,915
(13,445)
2,773
4,597
25,785 $
15,508
(282)
(9,955)
31,056 $
13,481
16,656
(4,352)
-
25,785
91.3% $
-6.9%
-100.0%
-100.0%
20.4% $
2,863
10,618
-
-
13,481
90,178 $
2,255
(134)
64,245
38,040
(14,610)
40.4% $
-94.1%
-100.0%
52,729
5,680
-
3,391
(74,409)
21,281 $
2,503
-
90,178
35.5%
0.0%
-76.4% $
5,836
-
64,245
1.95%
56.30%
3.62%
37.15%
-46.1%
51.5%
1.81%
49.11%
4.70%
3.63%
29.5%
1.89%
153.85%
246.75%
-37.6%
110.11%
$
$
$
$
$
$
$
$
67
TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS
ACCOUNTED FOR UNDER ASC 310-30
Originated and other loans and leases:
Mortgage
Charge-offs
Recoveries
Total
Commercial
Charge-offs
Recoveries
Total
Consumer
Charge-offs
Recoveries
Total
Auto
Charge-offs
Recoveries
Total
Net credit losses
Total charge-offs
Total recoveries
Total
Net credit losses to average
loans outstanding:
Mortgage
Commercial
Consumer
Auto
Total
Recoveries to charge-offs
Average originated loans:
Mortgage
Commercial
Consumer
Auto
Total
2016
Year Ended December 31,
Variance
%
2015
(Dollar in thousands)
2014
$
$
$
$
(6,767) $
330
(6,437)
(62,445)
460
(61,985)
(11,554)
452
(11,102)
(31,731)
12,871
(18,860)
(112,497)
14,113
(98,384) $
0.87%
4.47%
4.39%
2.63%
3.18%
12.55%
(5,397)
391
(5,006)
(5,546)
432
(5,114)
(8,683)
871
(7,812)
(33,375)
13,158
(20,217)
(53,001)
14,852
(38,149)
25.4% $
-15.6%
28.6%
1025.9%
6.5%
1112.1%
33.1%
-48.1%
42.1%
-4.9%
-2.2%
-6.7%
112.3%
-5.0%
157.9% $
0.65%
0.38%
3.85%
3.21%
1.30%
28.02%
33.8%
1076.3%
14.0%
-18.1%
144.6%
-55.2%
(5,011)
428
(4,583)
(2,424)
333
(2,091)
(5,782)
570
(5,212)
(26,041)
8,858
(17,183)
(39,258)
10,189
(29,069)
0.58%
0.18%
3.41%
3.43%
1.11%
25.95%
743,838 $
1,385,421
253,069
716,373
3,098,701 $
771,322
1,336,510
202,971
629,910
2,940,713
-3.6% $
3.7%
24.7%
13.7%
5.4% $
786,607
1,190,038
153,067
500,720
$2,630,432
68
TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS
ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)
Acquired loans accounted for under ASC 310-20:
Commercial
Charge-offs
Recoveries
Total
Consumer
Charge-offs
Recoveries
Total
Auto
Charge-offs
Recoveries
Total
Net credit losses
Total charge-offs
Total recoveries
Total
Net credit losses to average
loans outstanding:
Commercial
Consumer
Auto
Total
Recoveries to charge-offs
Average loans accounted for under ASC 310-20:
Commercial
Consumer
Auto
Total
2016
Year Ended December 31,
Variance
%
2015
(Dollars in thousands)
2014
$
$
$
$
(42) $
73
31
(3,619)
301
(3,318)
(2,155)
1,945
(210)
(5,816)
2,319
(3,497) $
-5.78%
5.55%
0.28%
2.60%
39.87%
536 $
59,772
74,431
134,739 $
(42)
31
(11)
0.0% $
135.5%
-381.8%
(4,755)
680
(4,075)
(4,548)
2,110
(2,438)
(9,345)
2,821
(6,524)
1.31%
6.59%
1.27%
2.56%
30.19%
840
61,842
192,058
254,740
-23.9%
-55.7%
-18.6%
-52.6%
-7.8%
-91.4%
-37.8%
-17.8%
-46.4% $
-541.2%
-15.8%
-77.7%
1.5%
32.1%
-36.2% $
-3.3%
-61.2%
-47.1% $
(532)
73
(459)
(6,902)
532
(6,370)
(6,011)
2,169
(3,842)
(13,445)
2,774
(10,671)
1.61%
9.53%
1.61%
3.20%
20.63%
28,509
66,812
238,653
333,974
69
TABLE 11 — NON-PERFORMING ASSETS
Non-performing assets:
Non-accruing loans
Troubled-Debt Restructuring loans
Other loans
Accruing loans
Troubled-Debt Restructuring loans
Other loans
Total non-performing loans
Foreclosed real estate not covered under the
shared-loss agreements with the FDIC
Other repossessed assets
December 31,
2016
2015
(Dollars in thousands)
Variance
(%)
$
$
$
32,408 $
71,941
217,691
82,429
-85.1%
-12.7%
2,706
1,067
$
108,122
4,240
1,091
305,451
45,587
56,304
3,224
156,933 $
6,034
367,789
-36.2%
-2.2%
-64.6%
-19.0%
-46.6%
-57.3%
Non-performing assets to total assets, excluding covered assets and acquired loans
with deteriorated credit quality (including those by analogy)
Non-performing assets to total capital
2.88%
17.05%
6.31%
41.00%
-54.4%
-58.4%
2016
Year Ended December 31,
2015
(In thousands)
2014
Interest that would have been recorded in the period if the
loans had not been classified as non-accruing loans
$
2,917
$
3,118
$
2,204
70
TABLE 12 — NON-PERFORMING LOANS
Non-performing loans:
Originated and other loans held for investment
Mortgage
Commercial
Consumer
Auto and leasing
Acquired loans accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Commercial
Consumer
Auto
Total
Non-performing loans composition percentages:
Originated loans
Mortgage
Commercial
Consumer
Auto and leasing
Acquired loans accounted for under ASC 310-20 (Loans with
revolving feature and/or acquired at a premium)
Commercial
Consumer
Auto
Total
Non-performing loans to:
Total loans, excluding loans accounted for
under ASC 310-30 (including those by analogy)
Total assets, excluding loans accounted for
under ASC 310-30 (including those by analogy)
Total capital
Non-performing loans with partial charge-offs to:
Total loans, excluding loans accounted for
under ASC 310-30 (including those by analogy)
Non-performing loans
Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans
on which charge-offs have been taken
Allowance for loan and lease losses to non-performing
loans on which no charge-offs have been taken
71
December 31,
2016
2015
(Dollars in thousands)
Variance
%
$
$
74,503 $
19,786
1,986
9,052
105,327
77,875
215,281
1,631
8,418
303,205
1,415
828
552
2,795
108,122 $
880
535
831
2,246
305,451
-4.3%
-90.8%
21.8%
7.5%
-65.3%
60.8%
54.8%
-33.6%
24.4%
-64.6%
68.9%
18.3%
1.8%
8.4%
25.5%
70.5%
0.5%
2.8%
1.3%
0.8%
0.5%
100.0%
0.3%
0.2%
0.2%
100.0%
3.45%
1.99%
9.36%
-63.1%
5.24%
-62.0%
11.75%
34.05%
-65.5%
1.17%
34.09%
1.15%
12.25%
1.74%
178.3%
63.58%
61.15%
4.0%
89.25%
44.09%
102.4%
FDIC Indemnification Asset
The Company recorded the FDIC indemnification asset, measured separately from the covered loans, as part of the Eurobank FDIC-
assisted transaction. Based on the accounting guidance in ASC Topic 805, at each reporting date subsequent to the initial recording of
the indemnification asset, the Company measures the indemnification asset on the same basis as the covered loans and assesses its
collectability. The amount to be ultimately collected for the indemnification asset is dependent upon the performance of the
underlying covered assets, the passage of time, claims submitted to the FDIC and the Company’s compliance with the terms of the
loss sharing agreements. Refer to Notes 6 and 7 to the consolidated financial statements for additional information on the FDIC loss
share agreements.
The FDIC loss-share coverage for the commercial loans and other non-single family loans was in effect until June 30, 2015.
Accordingly, the Company amortized the remaining portion of the FDIC indemnification asset attributable to non-single family loans
at the close of the second quarter of 2015. At December 31, 2016 and 2015, the FDIC indemnification asset only reflects the balance
for single family residential mortgage loans.
Effective February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements.
TABLE 13 - ACTIVITY OF FDIC INDEMNIFICATION ASSET
2016
Year Ended December 31,
2015
(In thousands)
2014
FDIC indemnification asset:
Balance at beginning of year
Shared-loss agreements reimbursements from the FDIC
Increase in expected credit losses to be
covered under shared-loss agreements, net
FDIC indemnification asset expense
Final settlement with the FDIC on commercial loans
Net expenses (reimbursements) incurred under shared-loss agreements
Balance at end of year
$
22,599 $
(1,573)
97,378 $
(55,723)
189,240
(47,666)
3,391
(8,040)
-
(1,966)
14,411 $
2,503
(36,398)
(1,589)
16,428
22,599 $
5,836
(62,285)
-
12,253
97,378
$
TABLE 14 - ACTIVITY IN THE REMAINING FDIC INDEMNIFICATION ASSET DISCOUNT
2016
Year Ended December 31,
2015
(In thousands)
2014
Balance at beginning of year
Amortization of negative discount
Impact of lower projected losses
Balance at end of year
$
$
4,814 $
(8,040)
11,896
8,670 $
21,682 $
(36,417)
19,549
4,814 $
71,451
(62,285)
12,516
21,682
72
TABLE 15 - LIABILITIES SUMMARY AND COMPOSITION
Deposits:
Non-interest bearing deposits
NOW accounts
Savings and money market accounts
Certificates of deposit
Total deposits
Accrued interest payable
Total deposits and accrued interest payable
Borrowings:
Securities sold under agreements to repurchase
Advances from FHLB
Subordinated capital notes
Other term notes
Total borrowings
Total deposits and borrowings
Other Liabilities:
Derivative liabilities
Acceptances outstanding
Other liabilities
Total liabilities
Deposits portfolio composition percentages:
Non-interest bearing deposits
NOW accounts
Savings and money market accounts
Certificates of deposit
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase
Advances from FHLB
Other term notes
Subordinated capital notes
December 31,
2016
2015
(Dollars in thousands)
Variance
%
$
848,502 $
1,091,237
1,196,231
1,526,805
4,662,775
1,712
4,664,487
653,756
105,454
36,083
61
795,354
5,459,841
762,009
1,100,541
1,179,229
1,674,431
4,716,210
1,541
4,717,751
934,691
332,476
102,633
1,734
1,371,534
6,089,285
11.4%
-0.8%
1.4%
-8.8%
-1.1%
11.1%
-1.1%
-30.1%
-68.3%
-64.8%
-96.5%
-42.0%
-10.3%
2,437
23,765
95,370
6,162
14,582
92,043
$ 5,581,413 $ 6,202,072
-60.5%
63.0%
3.6%
-10.0%
18.2%
23.4%
25.7%
32.7%
100.0%
82.2%
13.3%
0.0%
4.5%
100.0%
16.2%
23.3%
25.0%
35.5%
100.0%
68.2%
24.2%
0.1%
7.5%
100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Amount outstanding at period-end
Daily average outstanding balance
Maximum outstanding balance at any month-end
$
$
$
652,229 $
932,500
663,845 $ 1,012,756
902,500 $ 1,158,945
73
Liabilities and Funding Sources
As shown in Table 15 above, at December 31, 2016, the Company’s total liabilities were $5.581 billion, 10.0% less than the $6.202
billion reported at December 31, 2015. Deposits and borrowings, the Company’s funding sources, amounted to $5.460 billion at
December 31, 2016 versus $6.089 billion at December 31, 2015, a 10.34% decrease.
At December 31, 2016, deposits represented 85% and borrowings represented 15% of interest-bearing liabilities. At December 31,
2016, deposits, the largest category of the Company’s interest-bearing liabilities, were $4.664 billion, a decrease of 1.1% from $4.718
billion at December 31, 2015. Demand and savings deposits increased 3.0% to $3.136 billion, time deposits, excluding brokered
deposits, increased 5.8% to $1.020 billion, and brokered deposits decreased 26.4%, or $206.6 million, to $576.4 million, as part of our
efforts to reduce the cost of deposits, which averaged 0.62% at December 31, 2016 compared to 0.59% at December 31, 2015.
Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At December 31, 2016,
borrowings amounted to $795.4 million, representing a decrease of 42.0% when compared with the $1.372 billion reported at
December 31, 2015. The decrease in borrowings is attributed to decreases in repurchases agreements, FHLB-NY advances and
subordinated capital notes. Repurchase agreements at December 31, 2016 decreased $280.9 million to $653.8 million from $934.7
million at December 31, 2015, as the Company partially unwound $268.0 million in repurchase agreements at a cost of $12.0 million
during the first quarter of 2016. As a member of the FHLB-NY, the Bank can obtain advances from the FHLB-NY secured by the
FHLB-NY stock owned by the Bank as well as by certain of the Bank’s mortgage loans and investment securities. FHLB-NY
advances decreased $227.0 million to $105.5 million at December 31, 2016 as $227.0 million of advances were repaid at maturity
during 2016 and not renewed. Also, $67.0 million in subordinated capital notes were repaid at maturity during the third quarter of
2016.
Stockholders’ Equity
At December 31, 2016, the Company’s total stockholders’ equity was $920.4 million, a 2.6% increase when compared to $897.1
million at December 31, 2015. This increase in stockholders’ equity reflects increases in retained earnings of $28.9 million, in legal
surplus of $5.9 million, partially offset by a decrease in accumulated comprehensive income, which reflects a decrease in net value of
available for sale securities of $14.4 million from decrease in market rates, partially offset by a $2.0 million increase in net value of
cash flow hedges. Book value per share was $17.18 at December 31, 2016 compared to $16.67 at December 31, 2015.
From December 31, 2015 to December 31, 2016, tangible common equity to total assets increased to 10.19% from 8.98%, Tier 1
Leverage capital ratio increased to 12.99% from 11.18%, Common Equity Tier 1 capital ratio increased to 14.05% from $12.14%,
Tier 1 Risk-Based capital ratio increased to 18.35% from 15.99%, and Total Risk-Based capital ratio increased to 19.62% from
17.29%.
New Capital Rules to Implement Basel III Capital Requirements
In July 2013, the Board of Governors of the Federal Reserve System (the “Board”), the Office of the Comptroller of the Currency (the
“OCC”) and the FDIC (together with the Board and the OCC, the “Agencies”) approved new rules (“New Capital Rules”) to establish
a revised comprehensive regulatory capital framework for all U.S. banking organizations. The New Capital Rules generally implement
the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel
III” for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements
applicable to bank holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared
to the previous U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory
capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital
Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and
replace the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords,
with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital
accords. In addition, the New Capital Rules implement certain provisions of Dodd-Frank Act, including the requirements of Section
939A to remove references to credit ratings from the federal agencies’ rules. The New Capital Rules became effective for the
Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Among
other matters, the New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related
regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1
capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital
74
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 existing regulations. Under the New Capital Rules, for most banking organizations, including
the Company, the most common form of Additional Tier 1 capital is noncumulative perpetual preferred stock and the most common
form of Tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New
Capital Rules’ specific requirements.
Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 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% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage
ratio”).
The New Capital Rules also introduce a new 2.5% “capital conservation buffer”, composed entirely of CET1, on top of the three minimum
risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions
with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends,
equity repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the Company and
the Bank will be required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of
(i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-
weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that
mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss
carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category
exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In addition (as noted above), under the previous general risk-based capital rules, the effects of AOCI items included in shareholders’ equity
(for example, mark-to-market adjustments to the value of securities held in the available for sale portfolio) under U.S. GAAP are reversed for
the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded;
however, non-advanced approach banking organizations may make a one-time permanent election to continue to exclude these items. The
Company and the Bank made the election to continue to exclude these items in order to avoid significant variations in the level of capital
depending upon the impact of interest rate fluctuations on the fair value of their securities portfolio, concurrently with the first filing of the
Company’s and the Bank’s periodic regulatory reports in the beginning of 2015. The New Capital Rules also preclude certain hybrid
securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, subject to phase-out, in the case of
bank holding companies that had $15 billion or more in total consolidated assets as of December 31, 2009. Therefore, the Company is
permitted to continue to include its existing trust preferred securities as Tier 1 capital.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period
(beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will
begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.
With respect to the Bank, the New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of
the Federal Deposit Insurance Act by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized),
with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each
category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the
current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately
capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category.
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current
four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature
of the assets, and resulting in higher risk weights for a variety of asset classes.
75
The following are the consolidated capital ratios of the Company under the New Capital Rules at December 31, 2016 and 2015:
TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA
Capital data:
Stockholders’ equity
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio
Minimum common equity tier 1 capital ratio required
Actual common equity tier 1 capital
Minimum common equity tier 1 capital required
Minimum capital conservation buffer required
Excess over regulatory requirement
Risk-weighted assets
Tier 1 risk-based capital ratio
Minimum tier 1 risk-based capital ratio required
Actual tier 1 risk-based capital
Minimum tier 1 risk-based capital required
Excess over regulatory requirement
Risk-weighted assets
Total risk-based capital ratio
Minimum total risk-based capital ratio required
Actual total risk-based capital
Minimum total risk-based capital required
Excess over regulatory requirement
Risk-weighted assets
Leverage capital ratio
Minimum leverage capital ratio required
Actual tier 1 capital
Minimum tier 1 capital required
Excess over regulatory requirement
Tangible common equity to total assets
Tangible common equity to risk-weighted assets
Total equity to total assets
Total equity to risk-weighted assets
Stock data:
Outstanding common shares
Book value per common share
Tangible book value per common share
Market price at end of period
Market capitalization at end of period
Common dividend data:
Cash dividends declared
Cash dividends declared per share
Payout ratio
Dividend yield
December 31,
2016
2015
(Dollars in thousands, except per
share data)
Variance
%
$
920,411 $
897,077
2.6%
14.05%
4.50%
627,733
201,040
27,922
398,770
4,467,556
18.35%
6.00%
819,662 $
268,053 $
551,608 $
4,467,556 $
19.62%
8.00%
876,657 $
357,404 $
519,252 $
4,467,556 $
12.99%
4.00%
819,662 $
252,344 $
567,318 $
10.19%
14.82%
14.16%
20.60%
43,914,844
17.18 $
15.08 $
13.10 $
575,284 $
12.14%
4.50%
594,482
220,344
-
374,138
4,896,539
15.99%
6.00%
782,912
293,792
489,120
4,896,539
17.29%
8.00%
846,748
391,723
455,025
4,896,539
11.18%
4.00%
782,912
280,009
502,903
8.98%
13.02%
12.64%
18.32%
43,867,909
16.67
14.53
7.32
321,113
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
15.7%
0.0%
5.6%
-8.8%
100.0%
6.6%
-8.8%
14.8%
0.0%
4.7%
-8.8%
12.8%
-8.8%
13.5%
13.5%
0.0%
3.5%
-8.8%
-8.8%
16.2%
0.0%
4.7%
-9.9%
-9.9%
12.8%
13.5%
13.8%
12.0%
0.1%
3.1%
3.8%
79.0%
79.2%
Year Ended December 31,
2016
2015
Variance
%
2014
$
$
10,544 $
0.24 $
23.30%
1.83%
15,932
0.36
-97.30%
4.92%
-33.8% $
-33.3% $
123.9%
-62.8%
15,286
0.34
22.67%
2.04%
76
The following table presents a reconciliation of the Company’s total stockholders’ equity to tangible common equity and total assets
to tangible assets at December 31, 2016, 2015 and 2014:
Total stockholders' equity
Preferred stock
Preferred stock issuance costs
Goodwill
Core deposit intangible
Customer relationship intangible
Total tangible common equity
Total assets
Goodwill
Core deposit intangible
Customer relationship intangible
Total tangible assets
Tangible common equity to tangible assets
Common shares outstanding at end of period
Tangible book value per common share
$
$
$
$
December 31,
2014
2015
2016
(In thousands, except share or per
share information)
897,077 $
(176,000)
10,130
(86,069)
(5,294)
(2,544)
637,300 $
7,099,149
(86,069)
(5,294)
(2,544)
7,005,242 $
9.10%
43,867,909
14.53 $
920,411 $
(176,000)
10,130
(86,069)
(4,260)
(1,900)
662,312 $
6,501,824
(86,069)
(4,260)
(1,900)
6,409,595 $
10.33%
43,914,844
15.08 $
942,197
(176,000)
10,130
(86,069)
(6,463)
(3,280)
680,515
7,449,109
(86,069)
(6,463)
(3,280)
7,353,297
9.25%
44,613,615
15.25
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 the Company calculates its tangible common equity, tangible assets and any other related
measures may differ from that of other companies reporting measures with similar names.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate
these limitations, the Company has procedures in place to calculate these measures using the appropriate GAAP or regulatory
components. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they
have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under
GAAP.
77
The following table presents the Company’s capital adequacy information under the New Capital Rules:
Risk-based capital:
Common equity tier 1 capital
Additional tier 1 capital
Tier 1 capital
Additional Tier 2 capital
Total risk-based capital
Risk-weighted assets:
Balance sheet items
Off-balance sheet items
Total risk-weighted assets
Ratios:
Common equity tier 1 capital (minimum required - 4.5%)
Tier 1 capital (minimum required - 6%)
Total capital (minimum required - 8%)
Leverage ratio
Equity to assets
Tangible common equity to assets
December 31,
2016
2015
(Dollars in thousands)
Variance
%
$
$
$
627,733 $
191,929
819,662
56,995
594,482
188,430
782,912
63,836
5.6%
1.9%
4.7%
-10.7%
876,657 $
846,748
3.5%
4,307,817 $ 4,742,113
154,426
159,739
-9.2%
3.4%
$
4,467,556 $ 4,896,539
-8.8%
14.05%
18.35%
19.62%
12.99%
14.16%
10.19%
12.14%
15.99%
17.29%
11.18%
12.64%
8.98%
15.7%
14.8%
13.5%
16.2%
12.0%
13.5%
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, 2016 and 2015:
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets
Actual common equity tier 1 capital
Minimum capital requirement (4.5%)
Minimum capital conservation buffer requirement (0.625%)
Minimum to be well capitalized (6.5%)
Tier 1 Capital to Risk-Weighted Assets
Actual tier 1 risk-based capital
Minimum capital requirement (6%)
Minimum to be well capitalized (8%)
Total Capital to Risk-Weighted Assets
Actual total risk-based capital
Minimum capital requirement (8%)
Minimum to be well capitalized (10%)
Total Tier 1 Capital to Average Total Assets
Actual tier 1 capital
Minimum capital requirement (4%)
Minimum to be well capitalized (5%)
December 31,
2016
2015
(Dollars in thousands)
Variance
%
17.96%
800,544 $
200,585 $
27,859 $
289,734 $
17.96%
800,544 $
267,447 $
356,596 $
19.23%
857,259 $
356,596 $
445,745 $
12.75%
800,544 $
251,200 $
314,000 $
15.40%
751,886
219,762
-
317,434
15.40%
751,886
293,016
390,688
16.70%
815,458
390,688
488,360
10.80%
751,886
278,399
347,999
16.6%
6.5%
-8.7%
100.0%
-8.7%
-8.7%
16.6%
6.5%
-8.7%
-8.7%
15.1%
5.1%
-8.7%
-8.7%
18.1%
6.5%
-9.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
78
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At December 31,
2016 and 2015, the Company’s market capitalization for its outstanding common stock was $575.3 million ($13.10 per share) and
$321.1 million ($7.32 per share), respectively.
The following table provides the high and low prices and dividends per share of the Company’s common stock for each quarter of the
last two calendar years:
2016
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
2015
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
2014
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Price
High
Low
Cash
Dividend
Per share
$
$
$
$
$
$
$
$
$
$
$
$
14.30 $
11.09 $
9.14 $
7.32 $
10.52 $
10.20 $
17.04 $
17.70 $
16.76 $
18.89 $
18.88 $
17.54 $
9.56 $
8.07 $
6.32 $
4.77 $
6.39 $
6.63 $
10.67 $
14.88 $
14.35 $
14.92 $
16.38 $
14.30 $
0.06
0.06
0.06
0.06
0.06
0.10
0.10
0.10
0.10
0.08
0.08
0.08
Under the Company’s current stock repurchase program it is authorized to purchase in the open market up to $70 million of its
outstanding shares of common stock, of which approximately $7.7 million of authority remains. During the year ended December 31,
2015 the Company purchased 803,985 shares under this program for a total of $8.9 million, at an average price of $11.10 per share.
There were no repurchases during the year ended December 31, 2016.
At December 31, 2016, the number of shares that may yet be purchased under the $70 million program is estimated at 590,141 and
was calculated by dividing the remaining balance of $7.7 million by $13.10 (closing price of the Company common stock at
December 31, 2016). The Company did not purchase any shares of its common stock other than through its publicly announced stock
repurchase program during 2015.
79
Contractual Obligations and Commercial Commitments
As disclosed in the notes to the Company’s consolidated financial statements, the Company has certain obligations and commitments
to make future payments under contracts. At December 31, 2016, the aggregate contractual obligations and commercial commitments,
excluding accrued interests and unamortized premiums (discounts), are as follows:
CONTRACTUAL OBLIGATIONS:
Securities sold under agreements to repurchase
Advances from FHLB
Subordinated capital notes
Annual rental commitments under noncancelable
operating leases
Certificates of deposits
Total
Payments Due by Period
Total
Less than 1
year
1 - 3 years 3 - 5 years
(In thousands)
$
652,229 $
105,154
35,000
349,729 $
40,613
-
302,500 $
55,000
-
- $
9,541
-
13,085
38,661
1,526,804
642,985
$ 2,357,848 $ 1,209,649 $ 1,013,570 $
7,138
812,169
18,438
71,650
99,629 $
After 5
years
-
-
35,000
-
-
35,000
Loan commitments, which represent unused lines of credit and letters of credit provided to customers, increased to $492.9 million and
$2.7 million, respectively, for 2016, as compared to $456.7 million and $1.5 million, respectively, at December 31, 2015.
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. The
Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management’s credit evaluation of the customer.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein (except for certain non-GAAP measures as previously indicated) have been
prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such
prices are affected by inflation.
80
QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations:
TABLE 17 — SELECTED QUARTERLY FINANCIAL DATA:
EARNINGS DATA:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan
and lease losses
Non-interest income
Non-interest expenses
Income before taxes
Income tax expense
Net income
Less: dividends on preferred stock
Income available to common shareholders
PER SHARE DATA:
Basic
Diluted
EARNINGS DATA:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Total provision for loan and lease losses, net
Net interest income after provision for loan
and lease losses
Non-interest income
Non-interest expenses
(Loss) income before taxes
Income tax expense (benefit)
Net (loss) income
Less: dividends on preferred stock
(Loss) income available to common shareholders
PER SHARE DATA:
Basic
Diluted
$
$
$
$
$
$
$
$
March 31,
2016
September 30, December 31,
June 30,
2016
2016
2016
(In thousands, except per share data)
Total
2016
91,306 $
16,331
74,975
13,789
87,908 $
14,596
73,312
14,445
90,584 $
13,657
76,927
23,469
86,794 $
12,581
74,213
13,373
61,186
58,867
53,458
60,840
13,503
54,857
19,832
5,661
14,171
(3,465)
10,706 $
15,155
53,825
20,197
5,858
14,339
(3,466)
10,873 $
20,215
54,926
18,747
3,627
15,120
(3,465)
11,655 $
17,946
52,382
26,404
10,848
15,556
(3,466)
12,090 $
356,592
57,165
299,427
65,076
234,351
66,819
215,990
85,180
25,994
59,186
(13,862)
45,324
0.24 $
0.24 $
0.25 $
0.25 $
0.27 $
0.26 $
0.28 $
0.27 $
1.03
1.03
March 31,
2015
June 30,
2015
September 30, December 31,
2015
2015
Total
2015
(In thousands, except per share data)
107,247 $
17,424
89,823
51,579
51,579
99,413 $
17,121
82,292
15,539
15,539
107,001 $
17,366
89,635
42,193
42,193
47,442
6,881
56,332
(2,009)
979
(2,988)
(3,465)
(6,453) $
66,753
(4,656)
64,437
(2,340)
769
(3,109)
(3,466)
(6,575) $
38,244
35,977
69,090
5,131
562
4,569
(3,465)
1,104 $
92,907 $
17,285
75,622
52,190
52,190
23,432
14,270
58,542
(20,840)
(19,864)
(976)
(3,466)
(4,442) $
406,568
69,196
337,372
161,501
161,501
175,871
52,472
248,401
(20,058)
(17,554)
(2,504)
(13,862)
(16,366)
(0.14) $
(0.14) $
(0.15) $
(0.15) $
0.03 $
0.03 $
(0.10) $
(0.10) $
(0.37)
(0.37)
81
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Background
The Company’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management
through the adoption of a risk management program, which is overseen and monitored by the Chief Risk Officer and the Risk
Management and Compliance Committee. The Company has continued to refine and enhance its risk management program by
strengthening policies, processes and procedures necessary to maintain effective risk management.
All aspects of the Company’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential
to risk management. As more fully discussed below, the Company’s primary risk exposures include, market, interest rate, credit,
liquidity, operational and concentration risks.
Market Risk
Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices.
The Company evaluates market risk together with interest rate risk. The Company’s financial results and capital levels are constantly
exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by the
Company complies with the guidelines established by policies approved by the Board. The Board has delegated the management of
this risk to the Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business,
treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by the Company is within the
parameters established in such policies.
Interest Rate Risk
Interest rate risk is the exposure of the Company’s earnings or capital to adverse movements in interest rates. It is a predominant
market risk in terms of its potential impact on earnings. The Company manages its asset/liability position in order to limit the effects
of changes in interest rates on net interest income. ALCO oversees interest rate risk, liquidity management and other related matters.
In 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, the Company performs a net interest income simulation analysis on a consolidated basis to estimate the potential
change in future earnings from projected changes in interest rates. These simulations are carried out over a 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 the Company had on the simulation date, and
(ii) using a dynamic balance sheet based on recent growth patterns and business strategies.
The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest
yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future
funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may
be important in projecting the future growth of net interest income.
The Company uses a software application to project future movements in the Company’s balance sheet and income statement. The
starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.
82
These simulations are complex, and use many assumptions that are intended to reflect the general behavior of the Company over the
period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results
of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The
following table presents the results of the simulations at December 31, 2016 for the most likely scenario, assuming a one-year time
horizon:
Net Interest Income Risk (one year projection)
Static Balance Sheet
Amount
Change
Percent
Change
Growing Simulation
Amount
Change
Percent
Change
Change in interest rate
+ 200 Basis points
+ 100 Basis points
- 50 Basis points
$
$
$
8,602
4,363
(1,941)
(Dollars in thousands)
3.20% $
1.63% $
-0.72% $
10,637
5,378
(2,428)
4.01%
2.03%
-0.91%
The impact of -100 and -200 basis point reductions in interest rates is not presented in view of current level of the federal funds rate
and other short-term interest rates.
Future net interest income could be affected by the Company’s investments in callable securities, prepayment risk related to mortgage
loans and mortgage-backed securities, and 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 the Company’s
assets and liabilities, the Company 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, 2016.
The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to
minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company’s goal is to manage
interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the
net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate
fluctuations, hedged fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or
liabilities, the effect of this variability in earnings is expected to be substantially offset by the Company’s gains and losses on the
derivative instruments that are linked to the forecasted cash flows of these hedged assets and liabilities. The Company considers its
strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the
market value of its equity to undue risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is
expected to be substantially offset by the Company’s gains or losses on the derivative instruments that are linked to these hedged
assets and liabilities. Another result of interest rate fluctuations is that the contractual interest income and interest expense of hedged
variable-rate assets and liabilities, respectively, will increase or decrease.
Derivative instruments that are used as part of the Company’s interest risk management strategy include interest rate swaps, forward-
settlement swaps, futures contracts, and option contracts that have indices related to the pricing of specific balance sheet assets and
liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based
on a common notional principal amount and maturity date. Interest rate futures generally involve exchanged-traded contracts to buy or
sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the
option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some
purchased option contracts give the Company the right to enter into interest rate swaps and cap and floor agreements with the writer of
the option. In addition, the Company enters into certain transactions that contain embedded derivatives. When the embedded
derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host
contract, it is bifurcated and carried at fair value. Please refer to Note 10 to the accompanying consolidated financial statements for
further information concerning the Company’s derivative activities.
83
Following is a summary of certain strategies, including derivative activities, currently used by the Company to manage interest rate
risk:
Interest rate swaps — The Company entered into hedge-designated swaps to hedge the variability of future interest cash flows of
forecasted wholesale borrowings attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowings
transactions occurred, the interest rate swap effectively fixes the Company’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 $1.0 million
(notional amount of $36.6 million) was recognized at December 31, 2016 related to the valuation of these swaps.
In addition, the Company 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 the
Company 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, 2016, interest rate swaps offered to clients not designated as hedging
instruments represented a derivative asset of $1.2 million (notional amounts of $12.5 million), and the mirror-image interest rate
swaps in which the Company entered into represented a derivative liability of $1.2 million (notional amounts of $12.5 million).
Wholesale borrowings — The Company 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 the Company’s interest payments on
these borrowings. As of December 31, 2016, the Company had $36.6 million in interest rate swaps at an average rate of 2.4%
designated as cash flow hedges for $36.6 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 the Company is its lending activities. In Puerto Rico, the Company’s
principal market, economic conditions are challenging, as they have been for the last ten 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 a federally created Fiscal Oversight Board.
The Company manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by
monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. The Company
also employs proactive collection and loss mitigation practices.
The Company may also encounter risk of default in relation to its securities portfolio. The securities held by the Company are
principally agency mortgage-backed securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S.
government-sponsored entity, or the full faith and credit of the U.S. government.
The Company’s executive Credit Risk Committee, composed of its Chief Executive Officer, Chief Financial Officer, Chief Credit
Risk Officer and other senior executives, has primary responsibility for setting strategies to achieve the Company’s credit risk goals
and objectives. Those goals and objectives are set forth in the Company’s Credit Policy as approved by the Board.
Liquidity Risk
Liquidity risk is the risk of the Company not being able to generate sufficient cash from either assets or liabilities to meet obligations
as they become due without incurring substantial losses. The Board has established a policy to manage this risk. The Company’s cash
requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and
funding of new and existing investments as required.
The Company’s business requires continuous access to various funding sources. While the Company is able to fund its operations
through deposits as well as through advances from the FHLB-NY and other alternative sources, the Company’s business is dependent
upon other external wholesale funding sources. The Company has selectively reduced its use of certain wholesale funding sources,
such as repurchase agreements and brokered deposits. As of December 31, 2016, the Company had $652.2 million in repurchase
agreements, excluding accrued interest, and $576.4 million in brokered deposits.
84
Brokered deposits are typically offered through an intermediary to small retail investors. The Company’s ability to continue to attract
brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities
markets, the Company’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are
generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered
deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based
on small differences in interest rates offered on deposits.
Although the Company expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that
such financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if
negative developments occur with respect to the Company, the availability and cost of the Company’s funding sources could be
adversely affected. In that event, the Company’s cost of funds may increase, thereby reducing its net interest income, or the Company
may need to dispose of a portion of its investment portfolio, which depending upon market conditions, could result in realizing a loss
or experiencing other adverse accounting consequences upon any such dispositions. The Company’s efforts to monitor and manage
liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other reductions
in liquidity driven by the Company or market-related events. In the event that such sources of funds are reduced or eliminated and the
Company is not able to replace these on a cost-effective basis, the Company may be forced to curtail or cease its loan origination
business and treasury activities, which would have a material adverse effect on its operations and financial condition.
As of December 31, 2016, the Company had approximately $510.4 million in unrestricted cash and cash equivalents, $648.1 million in
investment securities that are not pledged as collateral, $1.243 billion 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 the Company are susceptible to operational risk.
The Company faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking
and financial products and services. Coupled with external influences such as market conditions, security risks, and legal risks, the
potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Company has
developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage
operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide
reasonable assurance that the Company’s business operations are functioning within established limits.
The Company classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines.
For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes
and assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, the
Company has specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information
Technology, 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 Information
Technology Steering Committee and the Executive Risk and Compliance Committee.
The Company is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been
significantly increasing over the last several years. The Company has established and continues to enhance procedures based on legal
and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory
requirements. The Company has a corporate compliance function headed by a Regulatory Compliance Director who reports to the
Deputy General Counsel and the BSA Officer who reports to the Chief Risk Officer. The Regulatory Compliance Director is
responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program, except for the
Bank Secrecy Act/Anti-Money Laundering compliance program, which is overseen and implemented by the BSA Officer.
85
Concentration Risk
Substantially all of the Company’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico.
As a consequence, the Company’s profitability and financial condition may be adversely affected by an extended economic
slowdown, adverse political, 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.
86
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OFG Bancorp
FORM 10-K
FINANCIAL DATA INDEX
Management’s Annual Report on Internal Controls Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
Consolidated Statements of Financial Condition at December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31,
2016, 2015, and 2014
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31,
2016, 2015, and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014
Notes to the Consolidated Financial Statements
Note 1– Summary of Significant Accounting Policies
Note 2 – Restricted Cash
Note 3 – Investment Securities
Note 4 – Pledged Assets
Note 5 – Loans
Note 6 – Allowance for Loan and Lease Losses
Note 7 – FDIC Indemnification Asset and True-up Payment Obligation and FDIC Shared-
loss Expense
Note 8 – Premises and Equipment
Note 9 – Servicing Assets
Note 10 – Derivatives
Note 11 – Accrued Interest Receivable and Other Assets
Note 12 – Deposits
Note 13 – Borrowings and Related Interest
Note 14 – Offsetting of Financial Assets and Liabilities
Note 15 – Employee Benefit Plan
Note 16 – Related Party Transactions
Note 17 – Income Taxes
Note 18 – Regulatory Capital Requirements
Note 19 – Equity- Based Compensation Plan
Note 20 – Stockholders’ Equity
Note 21 – Accumulated Other Comprehensive Income
Note 22 – Earnings (loss) per Common Share
Note 23 – Guarantees
Note 24 – Commitments and Contingencies
Note 25 – Fair Value of Financial Instruments
Note 26 – Business Segments
Note 27 – OFG Bancorp (Holding Company Only) Financial Information
Note 28 – Subsequent events
87
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114-121
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146-153
153-154
155
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159
160-161
162-164
165-166
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170-171
172-173
174-175
175-177
177-178
178-179
179-181
181-187
188-189
190-192
193
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 (the “Company”) 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. The 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 accounting principles generally accepted in the United States of America.
The 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 accounting principles generally accepted in the United States of America, and that receipts and expenditures
of the Company are being made only in accordance with authorization 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.
As called for by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2016. Management made its assessment using the criteria set forth in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the “COSO Criteria”).
Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting
as of December 31, 2016 based on the COSO Criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, has been audited by KPMG
LLP, the Company’s independent registered public accounting firm, as stated in their report dated March 10, 2017.
By: /s/ José Rafael Fernández
By: /s/ Ganesh Kumar
José Rafael Fernández
Ganesh Kumar
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Date: March 10, 2017
Date: March 10, 2017
88
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
OFG Bancorp:
We have audited the accompanying consolidated statements of financial condition of OFG Bancorp and subsidiaries (the Company) as
of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
OFG Bancorp and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2015, 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), OFG
Bancorp and its subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 10, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG LLP
San Juan, Puerto Rico
March 10, 2017
Stamp No. E256118 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
89
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
OFG Bancorp:
We have audited OFG Bancorp and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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.
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.
In our opinion, OFG Bancorp and subsidiaries maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of OFG Bancorp and subsidiaries as of December 31, 2016 and 2015, and the related
consolidated statements of operations, changes in comprehensive income (loss), changes in stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2016, and our report dated March 10, 2017, expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
San Juan, Puerto Rico
March 10, 2017
Stamp No. E256119 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
90
OFG BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2016 AND 2015
December 31,
2016
2015
(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks
Money market investments
Total cash and cash equivalents
Restricted cash
Investments:
Trading securities, at fair value, with amortized cost of $667 (December 31, 2015 - $667)
Investment securities available-for-sale, at fair value, with amortized cost of $749,867 (December 31, 2015 - $955,646)
Investment securities held-to-maturity, at amortized cost, with fair value of $592,763 (December 31, 2015 - $614,679)
Federal Home Loan Bank (FHLB) stock, at cost
Other investments
Total investments
Loans:
Mortgage loans held-for-sale, at lower of cost or fair value
Loans held for investment, net of allowance for loan and lease losses of $115,937 (December 31, 2015 - $234,131)
Total loans
Other assets:
FDIC indemnification asset
Foreclosed real estate
Accrued interest receivable
Deferred tax asset, net
Premises and equipment, net
Customers' liability on acceptances
Servicing assets
Derivative assets
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits
Savings accounts
Time deposits
Total deposits
Borrowings:
Securities sold under agreements to repurchase
Advances from FHLB
Subordinated capital notes
Other borrowings
Total borrowings
Other liabilities:
Derivative liabilities
Acceptances executed and outstanding
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies (See Note 24)
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, 2014 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares)
$25 liquidation value
84,000 shares of Series C issued and outstanding (December 31, 2015 - 84,000 shares); $1,000 liquidation value
Common stock, $1 par value; 100,000,000 shares authorized; 52,625,869 shares issued:
43,914,844 shares outstanding (December 31, 2015 - 52,625,869; 43,867,909)
Additional paid-in capital
Legal surplus
Retained earnings
Treasury stock, at cost, 8,711,025 shares (December 31, 2015 - 8,757,960 shares)
Accumulated other comprehensive income, net of income taxes of $983 (December 31, 2015 -$544)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
504,833
5,606
510,439
3,030
532,010
4,699
536,709
3,349
288
974,609
620,189
20,783
3
1,615,872
13,614
4,420,599
4,434,213
22,599
58,176
20,637
145,901
74,590
14,582
7,455
3,025
86,069
75,972
7,099,149
1,862,572
1,179,229
1,675,950
4,717,751
934,691
332,476
102,633
1,734
1,371,534
6,162
14,582
92,043
6,202,072
347
751,484
599,884
10,793
3
1,362,511
12,499
4,135,193
4,147,692
14,411
47,520
20,227
124,200
70,407
23,765
9,858
1,330
86,069
80,365
6,501,824
1,939,764
1,196,232
1,528,491
4,664,487
653,756
105,454
36,083
61
795,354
2,437
23,765
95,370
5,581,413
$
92,000
84,000
52,626
540,948
76,293
177,808
(104,860)
1,596
920,411
6,501,824
$
92,000
84,000
52,626
540,512
70,435
148,886
(105,379)
13,997
897,077
7,099,149
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
91
OFG BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
Year Ended December 31,
2016
2015
(In thousands, except per share data)
2014
Interest income:
Loans
Mortgage-backed securities
Investment securities and other
Total interest income
Interest expense:
Deposits
Securities sold under agreements to repurchase
Advances from FHLB and other borrowings
Subordinated capital notes
Total interest expense
Net interest income
Provision for loan and lease losses, net
Net interest income after provision for loan and lease losses
Non-interest income:
Banking service revenue
Wealth management revenue
Mortgage banking activities
Total banking and financial service revenues
Other-than-temporary impairment losses on investment securities
Portion of losses recognized in other comprehensive income (loss), before taxes
Net impairment losses recognized in earnings
FDIC shared-loss expense, net
Reimbursement from FDIC shared-loss coverage in sale of loans and foreclosed real estate
Net gain (loss) on:
Sale of securities
Derivatives
Early extinguishment of debt
Other non-interest income (loss)
Total non-interest income, net
Non-interest expense:
Compensation and employee benefits
Professional and service fees
Occupancy and equipment
Insurance
Electronic banking charges
Information technology expenses
Advertising, business promotion, and strategic initiatives
Foreclosure, repossession and other real estate expenses
Loan servicing and clearing expenses
Taxes, other than payroll and income taxes
Communication
Printing, postage, stationary and supplies
Director and investor relations
Other
Total non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Less: dividends on preferred stock
Income (loss) available to common shareholders
Earnings (loss) per common share:
Basic
Diluted
Average common shares outstanding and equivalents
Cash dividends per share of common stock
$
321,945 $
367,622
$
30,522
4,125
356,592
29,253
18,805
6,186
2,921
57,165
299,427
65,076
234,351
41,647
27,433
5,021
74,101
-
-
-
(13,581)
-
12,207
(71)
(12,000)
6,163
66,819
76,934
14,935
30,966
9,109
20,707
7,116
5,485
15,702
8,068
9,782
2,715
2,557
1,086
10,828
215,990
85,180
25,994
59,186
(13,862)
45,324 $
1.03 $
1.03 $
51,088
0.24 $
$
$
$
$
35,338
3,608
406,568
27,034
29,567
9,072
3,523
69,196
337,372
161,501
175,871
41,466
29,040
6,128
76,634
(4,662)
3,172
(1,490)
(42,808)
20,000
2,572
(190)
-
(2,246)
52,472
79,172
16,217
34,186
9,567
21,893
5,648
6,452
37,522
9,075
9,460
3,086
2,575
1,091
12,457
248,401
(20,058)
(17,554)
(2,504)
(13,862)
(16,366)
(0.37)
(0.37)
51,455
0.36
$
$
$
$
435,553
44,836
4,868
485,257
33,954
29,654
9,185
3,989
76,782
408,475
60,640
347,835
40,712
29,855
7,381
77,948
-
-
-
(65,756)
-
4,366
(608)
-
1,373
17,323
85,283
15,996
34,710
8,830
19,081
6,019
7,014
25,125
7,567
14,409
3,430
2,533
1,106
11,622
242,725
122,433
37,252
85,181
(13,862)
71,319
1.58
1.50
52,326
0.34
The accompanying notes are an integral part of these consolidated financial statements
92
OFG BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
Year Ended December 31,
2016
2015
2014
(In thousands)
Net income (loss)
$
59,186 $
(2,504) $
85,181
Other comprehensive (loss) income before tax:
Unrealized (loss) gain on securities available-for-sale
Realized gain on investment securities included in net income (loss)
Other-than-temporary impairment on investment securities included in net income (loss)
Unrealized gain on cash flow hedges
Other comprehensive (loss) income before taxes
Income tax effect
Other comprehensive (loss) income after taxes
(5,023)
(12,207)
-
3,303
(13,927)
1,526
(12,401)
(8,814)
(2,572)
1,490
4,278
(5,618)
(96)
(5,714)
19,843
(4,366)
-
2,322
17,799
(1,279)
16,520
Comprehensive income (loss)
$
46,785 $
(8,218) $
101,701
The accompanying notes are an integral part of these consolidated financial statements
93
OFG BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
Preferred stock:
Balance at beginning of year
Balance at end of year
Common stock:
Balance at beginning of year
Exercised stock options
Reclassification to treasury stock
Balance at end of year
Additional paid-in capital:
Balance at beginning of year
Stock-based compensation expense
Exercised stock options
Lapsed restricted stock units
Balance at end of year
Legal surplus:
Balance at beginning of year
Transfer from (to) retained earnings
Balance at end of year
Retained earnings:
Balance at beginning of year
Net income (loss)
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Transfer to (from) legal surplus
Balance at end of year
Treasury stock:
Balance at beginning of year
Stock repurchased
Lapsed restricted stock units
Reclassification from common stock
Balance at end of year
Accumulated other comprehensive income, net of tax:
Balance at beginning of year
Other comprehensive (loss) income, net of tax
Balance at end of year
Total stockholders’ equity
2016
Year Ended December 31,
2015
(In thousands)
2014
$
$
176,000
176,000
$
176,000
176,000
52,626
-
-
52,626
540,512
1,270
-
(834)
540,948
70,435
5,858
76,293
148,886
59,186
(10,544)
(13,862)
(5,858)
177,808
(105,379)
-
519
-
(104,860)
13,997
(12,401)
1,596
920,411
$
52,626
-
-
52,626
539,311
1,637
-
(436)
540,512
70,467
(32)
70,435
181,152
(2,504)
(15,932)
(13,862)
32
148,886
(97,070)
(8,950)
641
-
(105,379)
19,711
(5,714)
13,997
897,077
$
$
176,000
176,000
52,707
55
(136)
52,626
538,071
1,036
591
(387)
539,311
61,957
8,510
70,467
133,629
85,181
(15,286)
(13,862)
(8,510)
181,152
(80,642)
(16,948)
384
136
(97,070)
3,191
16,520
19,711
942,197
The accompanying notes are an integral part of these consolidated financial statements
94
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Amortization of deferred loan origination fees, net of costs
Amortization of fair value premiums, net of discounts, on acquired loans
Amortization of investment securities premiums, net of accretion of discounts
Amortization of core deposit and customer relationship intangibles
Amortization of fair value premiums on acquired deposits
FDIC shared-loss expense, net
Other-than-temporary impairment on securities
Other
Depreciation and amortization of premises and equipment
Deferred income tax expense (benefit), net
Provision for loan and lease losses, net
Stock-based compensation
(Gain) loss on:
Sale of securities
Sale of mortgage loans held-for-sale
Derivatives
Early extinguishment of debt
Foreclosed real estate
Sale of other repossessed assets
Sale of premises and equipment
Originations of loans held-for-sale
Proceeds from sale of mortgage loans held-for-sale
Net (increase) decrease in:
Trading securities
Accrued interest receivable
Servicing assets
Other assets
Net increase (decrease) in:
Accrued interest on deposits and borrowings
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale
Investment securities held-to-maturity
FHLB stock
Maturities and redemptions of:
Investment securities available-for-sale
Investment securities held-to-maturity
FHLB stock
Proceeds from sales of:
Investment securities available-for-sale
Foreclosed real estate and other repossessed assets, including write-offs
Proceeds from sale of loans held-for-investment
Proceeds from sale of loans held-for-sale
Premises and equipment
Mortgage servicing rights
Origination and purchase of loans, excluding loans held-for-sale
Principal repayment of loans, including covered loans
Reimbursements from the FDIC on shared-loss agreements, net of repayments
Additions to premises and equipment
Net change in securities purchased under agreements to resell
Net change in restricted cash
Net cash provided by investing activities
95
2016
Year Ended December 31,
2015
(In thousands)
2014
$
59,186 $
(2,504) $
85,181
3,509
39
8,540
1,677
340
13,581
-
-
9,420
23,226
65,076
1,270
(12,207)
(1,570)
181
12,000
11,934
(1,623)
12
(179,430)
69,862
(59)
410
(2,403)
(7,941)
(862)
4,344
78,512
(119,544)
(86,478)
(20,421)
145,512
101,965
30,411
300,483
46,358
1,149
123,137
48
-
(768,353)
817,199
1,573
(5,297)
-
319
568,061
3,396
3,106
12,109
1,906
660
42,808
1,490
-
11,100
(37,329)
161,501
1,637
(2,572)
(3,135)
(81)
-
33,998
4,828
192
(211,352)
102,383
1,306
708
610
(14,849)
(250)
(14,584)
97,082
(1,939)
(499,317)
-
238,003
39,310
386
103,831
74,940
42,110
-
-
5,927
(802,572)
861,891
90,697
(5,283)
-
5,058
153,042
2,883
12,310
3,124
2,169
4,772
65,756
-
62
10,199
24,155
60,640
1,036
(4,366)
(5,123)
752
-
9,195
6,770
(11)
(176,199)
96,804
275
(2,611)
(191)
11,738
(1,292)
(33,028)
175,000
(219,853)
(166,562)
(86,175)
490,048
3,612
89,456
214,518
54,639
9,378
-
25
-
(739,017)
751,215
32,692
(7,909)
60,000
73,792
559,859
OFG BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 – (CONTINUED)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits
Securities sold under agreements to repurchase
FHLB advances, federal funds purchased, and other borrowings
Subordinated capital notes
Exercise of stock options and restricted units lapsed, net
Purchase of treasury stock
Dividends paid on preferred stock
Dividends paid on common stock
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid
Income taxes paid
Mortgage loans securitized into mortgage-backed securities
Transfer from loans to foreclosed real estate and other repossessed assets
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio
Year Ended December 31,
2016
2015
(In thousands)
2014
(61,078)
(292,264)
(228,633)
(66,550)
(315)
-
(13,862)
(10,141)
(198,052)
(45,315)
(4,155)
1,049
204
(8,950)
(13,862)
(17,761)
(672,843) $
(286,842) $
(26,270)
536,709
(36,718)
573,427
510,439 $
536,709 $
56,302
$
67,766
$
10,051
112,071
$
$
13,966
116,319
$
$
45,538
$
67,345
$
123,137
$
182
$
3,445
$
156
$
(450,976)
(287,184)
(1,469)
1,574
643
(16,948)
(13,862)
(14,479)
(782,701)
(47,842)
621,269
573,427
81,506
7,114
95,909
85,459
5,202
25,801
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
96
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of OFG Bancorp (the “Company”) conform with U.S. generally accepted accounting principles (“GAAP”)
and to banking industry practices. The following is a description of the Company’s most significant accounting policies:
Nature of Operations
The Company is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. The
Company operates through various subsidiaries including, a commercial bank, Oriental Bank (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”). The Company also has a special purpose
entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). Through these subsidiaries and their respective divisions,
the Company provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, leasing,
auto loans, financial planning, insurance sales, money management and investment banking and brokerage services, as well as
corporate and individual trust services.
The main offices of the Company and its subsidiaries are located in San Juan, Puerto Rico, except for OPC, which is located in Boca
Raton, Florida. The Company 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.
Oriental International Bank Inc. (“OIB”), a wholly-owned subsidiary of the Bank, and Oriental Overseas, a division of the Bank, are
international banking entities licensed pursuant to International Banking Center Regulatory Act of Puerto Rico, as amended. OIB and
Oriental Overseas offer the Bank certain Puerto Rico tax advantages. Their activities are limited under Puerto Rico law to persons
located in Puerto Rico with assets/liabilities located outside of Puerto Rico.
Oriental Financial Services is a securities broker-dealer and is subject to the supervision, examination and regulation of the Financial
Industry Regulatory Authority (“FINRA”), the SEC, and the OCFI. Oriental Financial Services is also a member of the Securities
Investor Protection Corporation. Oriental Insurance is an insurance agency and is subject to the supervision, examination and
regulation of the Office of the Commissioner of Insurance of Puerto Rico.
The Company’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include
the origination of mortgage loans for the Bank’s own portfolio, and the sale of loans directly in the secondary market or the
securitization of conforming loans into mortgage-backed securities. The Bank originates Federal Housing Administration (“FHA”)
insured and Veterans Administration (“VA”) guaranteed mortgages that are primarily securitized for issuance of Government National
Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the
secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under certain Federal National
Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) programs are referred to as conforming
mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller
of FNMA, as well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Bank is also an
approved issuer of GNMA mortgage-backed securities. The Bank is the master servicer of the GNMA, FNMA and FHLMC pools that
it issues and of its mortgage loan portfolio, and has a subservicing arrangement with a third party for a portion of its acquired loan
portfolio. During 2016, the Company began servicing most of its mortgage loan portfolio.
On December 18, 2012, the Company purchased from Banco Bilbao Vizcaya Argentaria, S. A. (“BBVA”), all of the outstanding
common stock of each of (i) BBVAPR Holding Corporation (“BBVAPR Holding”), the sole shareholder of Banco Bilbao Vizcaya
Argentaria Puerto Rico (“BBVAPR Bank”), a Puerto Rico chartered commercial bank, and BBVA Seguros, Inc. (“BBVA Seguros”), 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.”
97
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company 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 generally accepted accounting principles in the United States ("GAAP").
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate mainly to
the determination of the allowance for loan and lease losses, the valuation of securities and derivative instruments, revisions to
expected cash flows in acquired loans, accounting for the indemnification asset, the valuation of the true up payment obligation, the
determination of income taxes, other-than-temporary impairment of securities, and goodwill valuation and impairment assessment.
Cash Equivalents
The Company considers as cash equivalents all money market instruments that are not pledged and that have maturities of three
months or less at the date of acquisition.
Earnings (Loss) per Common Share
Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders (net income (loss) reduced
(increased) by dividends on preferred stock) by the weighted average of outstanding common shares. Diluted earnings (loss) per share
is similar to the computation of basic earnings (loss) per share except that the weighted average of common shares is increased to
include the number of additional common shares that would have been outstanding if the potentially dilutive common shares
underlying stock options and restricted units had been issued, assuming that proceeds from exercise are used to repurchase shares in
the market (treasury stock method). Any stock splits and dividends are retroactively recognized in all periods presented in the
consolidated financial statements.
Securities Purchased/Sold Under Agreements to Resell/Repurchase
The Company 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 the
Company’s policy to take possession of securities purchased under resale agreements while the counterparty retains effective control
over the securities. The Company monitors the fair value of the underlying securities as compared to the related receivable, including
accrued interest, and requests additional collateral when deemed appropriate.
The Company also sells securities under agreements to repurchase the same or similar securities. The Company 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 the Company 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).
The Company 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.
98
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s investment in the Federal Home Loan Bank (“FHLB”) of New York 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.
The Company 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.
99
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impairment of Investment Securities
The Company conducts periodic reviews to identify and evaluate each investment in an unrealized loss position for other-than-
temporary impairment. The Company 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.”
The Company’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;
• the Company’s intent to sell the debt security;
• whether it is more-likely-than-not that the Company 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
The Company’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. The Company’s goal is to manage interest rate sensitivity
by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is
not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate
assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this
variability in earnings is expected to be substantially offset by the Company’s gains and losses on the derivative instruments that are
linked to the forecasted cash flows of these hedged assets and liabilities. The Company considers its strategic use of derivatives to be a
prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue
risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset
by the Company’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of
interest rate fluctuations is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities,
respectively, will increase or decrease.
Derivative instruments that are used as part of the Company’s interest rate risk-management strategy include interest rate swaps, caps,
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 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 the Company the right to enter into interest rate swaps and cap and floor
agreements with the writer of the option. In addition, the Company enters into certain transactions that contain embedded derivatives.
When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic
characteristics of the host contract, it is bifurcated and carried at fair value.
100
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
When using derivative instruments, the Company 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, the Company’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 the
Company, thus creating a repayment risk for the Company. 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, the Company 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. The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with high-quality counterparties.
The Company 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 the Company’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, the Company minimizes its exposure to volatility in LIBOR.
As part of this hedging strategy, the Company 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. The Company 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.
The Company 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.
The Company’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 the Company’s overall interest rate risk-
management.
Off-Balance Sheet Instruments
In the ordinary course of business, the Company enters into off-balance sheet instruments consisting of commitments to extend credit,
further discussed in Note 24 hereto. Such financial instruments are recorded in the financial statements when these are funded or
related fees are incurred or received. The Company 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
the Company 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
The Company 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.
101
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company 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 the Company 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 the Company transfers financial assets and the transfer fails any one of these criteria, the
Company 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, the Company 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, the Company 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 the
Company 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 the Company 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 the
Company 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 the Company provides servicing. At the Company’s option and without GNMA prior authorization, the Company
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, the Company treats the transaction as a sale for accounting purposes because the
conditional nature of the buy-back option means that the Company 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, the Company is deemed to have regained effective control over these loans, and these must be
brought back onto the Company’s books as assets, regardless of whether the Company intends to exercise the buy-back option.
Quality review procedures are performed by the Company as required under the government agency programs to ensure that asset
guideline qualifications are met. The Company has not recorded any specific contingent liability in the consolidated financial
statements for these customary representation and warranties related to loans sold by the Company, and management believes that,
based on historical data, the probability of payments and expected losses under these representation and warranty arrangements is not
significant.
As part of the BBVAPR Acquisition, on December 18, 2012, the Company assumed a liability for residential mortgage loans sold by
BBVAPR 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, the Company is required to repurchase the
loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Company
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, the Company has rights to the underlying collateral securing the mortgage loan. The Company
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. The Company has established a liability to cover the estimated credit loss exposure related to loans sold
with credit recourse.
102
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 90 days
delinquent within the following twelve-month period.
Servicing Assets
The Company periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In
addition, the Company may purchase or assume the right to service mortgage loans originated by others. Whenever the Company
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 the Company
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 the Company 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, the Company 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 the Company 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. The
Company discontinues accrual of interest on originated loans after payments become more than 90 days past due or earlier if the
Company 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.
The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to
provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as economic conditions,
portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The provision for loan
and lease losses charged to current operations is based on such methodology. Loan and lease losses are charged and recoveries are
credited to the allowance for loan and lease losses on originated and other loans.
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where
appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow, and legal options available to the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current
information and events, it is probable that the Company 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. The Company measures for impairment all commercial loans over $250 thousand (i) that are either
over 90 days past due or adversely classified, (ii) that are troubled-debt restructurings (“TDR’s”), or (iii) when deemed necessary by
management. The portfolios of mortgage loans, auto and leasing, and consumer loans are considered homogeneous and are evaluated
collectively for impairment.
The Company 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 the Company over a determined look back period for each segment. The actual
loss factor is adjusted by the appropriate loss emergence period as calculated for each portfolio. Then, the adjusted loss experience is
supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include
consideration of the following: the credit grading assigned to commercial loans; levels of and trends in delinquencies and impaired
loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection
and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff, including the bank’s loan review system as graded by regulatory agencies in their last
examination; local economic trends and conditions; industry conditions; effects of external factors such as competition and regulatory
requirements on the level of estimated credit losses in the current portfolio; and effects of changes in credit concentrations and
collateral value. An additional impact from the historical loss experience is applied based on levels of delinquency, loan
classification, FICO score and/or origination date, depending on the portfolio.
At origination, a determination is made whether a loan will be held in our portfolio or is intended for sale in the secondary market.
Loans that will be held in the Company’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 the Company 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.
The Company has acquired loans in two separate acquisitions, the BBVAPR Acquisition in December 2012 and the FDIC-assisted
Eurobank acquisition in April 2010. For each acquisition, the Company considered the following factors as indicators that an acquired
loan had evidence of deterioration in credit quality and was therefore in the scope of ASC 310-30:
• Loans that were 90 days or more past due,
• Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is
defined as having a well-defined weakness that jeopardizes liquidation of the loan,
• Loans that were classified as nonaccrual by the acquired bank at the time of acquisition, and
• Loans that had been previously modified in a troubled debt restructuring.
Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i)
pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30
by analogy or (ii) accounted for under ASC 310-20 (non-refundable fees and other costs).
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OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium)
Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out
of ASC 310-30 are accounted for under the provisions of ASC 310-20. Also, performing auto loans with FICO scores over 660
acquired at a premium in the BBVAPR Acquisition are accounted for under this guidance. Auto loans with FICO scores below 660
were acquired at a discount and are accounted for under the provisions of ASC 310-30. The provisions of ASC 310-20 require that
any differences between the contractually required loan payments in excess of the Company’s initial investment in the loans be
accreted into interest income on a level-yield basis over the life of the loan. Loans 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 the Company’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)
The Company performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. The Company
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 the Company 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, the Company 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 the Company 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 the Company then
reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method.
The Company’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 the Company’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. The Company 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 the Company has a reasonable expectation about the timing and amount of
cash flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection
efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly
basis. For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated based on a model that
incorporates a projected probability of default and loss. For commercial loans, lifetime loss rates are assigned to each pool with
consideration given for pool make-up, including risk rating profile. Lifetime loss rates are developed from internally generated
historical loss data and are applied to each pool.
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OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
To the extent that the Company 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 the Company 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 the Company’s financial statement
disclosures, regardless of whether or not the Company expects any principal or interest cash flows on an individual loan 90 days or
more past due.
The Company writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans
that exit the acquired pools.
Effective February 6, 2017, the Company and the FDIC agreed to terminate the loss and recovery sharing agreements in connection
with a portfolio of loans acquired in an FDIC assisted transaction. As of December 31, 2016, these agreements continued in effect, and
therefore, their terms and conditions are considered in the accounting of these loans referred to herein as “covered loans.” Because of
the loss protection provided by the FDIC under these agreements, the risk of these covered loans are significantly different from other
loans. Covered loans are accounted for under ASC 310-30. To the extent credit deterioration occurs after the date of acquisition, the
Company increases both the allowance for loan and lease losses and the FDIC shared-loss indemnification asset for the expected
reimbursement from the FDIC under the shared-loss agreement. As of December 31, 2016 and 2015, covered loans are no longer a
material amount. Therefore, the Company changed its current and prior year disclosures to group together covered loans with other
acquired loans.
Allowance for Loan and Lease Losses
The Company 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.
The loss factor used for the general reserve of these loans is established considering the Bank's historical loss experience adjusted for
an estimated loss emergence period and the consideration of environmental factors. Environmental factors considered are: change in
non-performing loans; migration in classification; trends in charge offs; trends in volume of loans; changes in collateral values;
changes in risk selections and underwriting standards, and other changes in lending policies, procedures and practices; experience,
ability and depth of lending management and other relevant staff, including the Company’s loan review system; national and local
economic trends and industry conditions; and effect of external factors such as competition and regulatory requirements on the level of
estimated credit losses. The sum of the adjusted loss experience factors and the environmental factors will be the general valuation
reserve (“GVA”) factor to be used for the determination of the allowance for loan and lease losses in each category.
As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the year 2016 the
following assumptions were reviewed:
- An assessment of the look-back period and historical loss factor was performed for all portfolio segments. The analysis was
based on the trends observed and their relation with the economic cycle as of the period of the analysis. As a result of the
assessment, the commercial portfolio look-back period was maintained at 36 months. Also, for the auto, leasing and
consumer portfolios, a look-back period of 24 months was maintained. For the residential mortgages portfolio a 12-month
look-back period was maintained as management concluded that, given the charge off evolution, a shorter period of losses is
more representative of the recent trends and more accurate in predicting future losses.
- During the third quarter of 2016, an assessment of environmental factors was performed for commercial, auto, and consumer
portfolios. As a result, the environmental factors continue to reflect our assessment of their impact to our portfolio, taking
into consideration the current evolution of the portfolios and expected impact, due to recent economic developments, changes
in values of collateral and delinquencies, among others.
- During the third quarter of 2016 the loss realization period was revised to 2.10 years from 1.60 in 2015 for commercial real
estate portfolio, other portfolios remained at one year.
This change in the allowance for loan and lease losses’ loss realization period for the commercial real estate portfolio is considered a
change in accounting estimate as per ASC 250-10 provisions, where adjustments are made prospectively.
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OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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)
The Company determines the allowance for loan and lease losses by portfolio segment, which consist of mortgage loans, commercial
loans, consumer loans, and auto and leasing, as follows:
Mortgage loans: These loans are divided into four classes: traditional mortgages, non-traditional mortgages, loans in loan
modification programs and home equity secured personal loans. Traditional mortgage loans include loans secured by a dwelling,
fixed coupons and regular amortization schedules. Non-traditional mortgages include loans with interest-first amortization schedules
and loans with balloon considerations as part of their terms. Mortgages in loan modification programs are loans that are being
serviced under such programs. Home equity loans are mainly equity lines of credit. The allowance factor on mortgage loans is
impacted by the adjusted historical loss factors on the sub-segments and the environmental risk factors described above and by
delinquency buckets. The traditional mortgage loan portfolio is further segregated by vintages and then by delinquency buckets.
Commercial loans: The commercial portfolio is segmented by business line (corporate, institutional, middle market, corporate retail,
floor plan, and real estate) and by collateral type (secured by real estate and other commercial and industrial assets). The loss factor
used for the GVA of these loans is established considering the Bank's past 36 month historical loss experience of each segment
adjusted for the loss realization period and the consideration of environmental factors. The sum of the adjusted loss experience and
the environmental factors is the GVA factor used for the determination of the allowance for loan and lease losses on each segment.
Consumer loans: The consumer portfolio consists of smaller retail loans such as retail credit cards, overdrafts, unsecured personal
lines of credit, and personal unsecured loans. The allowance factor, consisting of the adjusted historical loss factor and the
environmental risk factors, will be calculated for each sub-class of loans by delinquency bucket.
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. These loans are granted mainly through dealers authorized and approved by the auto department credit committee of the
Bank. In addition, this segment includes personal loans guaranteed by vehicles in the form of lease financing. The allowance factor
on the auto and leasing portfolio is impacted by the adjusted historical loss factor and the environmental risk factors. For the
determination of the allowance factor, the portfolio is segmented by FICO score, which is updated on a quarterly basis and then by
delinquency bucket.
The Company 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. The Company 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.
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OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
When current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest
due under the original terms of a business or commercial real estate loan greater than $250 thousand, such loan will be classified as
impaired. Additionally, all loans modified in a TDR are considered impaired. The need for specific valuation allowances are
determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral,
less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in
determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off
immediately. Prior to a loan becoming impaired, we typically would obtain an appraisal through our internal loan grading process to
use as the basis for the fair value of the underlying collateral.
Loan loss ratios and credit risk categories, for commercial loans, are updated at least quarterly and are applied in the context of
GAAP. Management uses current available information in estimating possible loan and lease losses, factors beyond the Company’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.
Covered loans are accounted for under ASC 310-30 and our policy is consistent with our policy for non-covered acquired loans. For
covered loans, the portion of the loss reimbursable from the FDIC is recorded as an offset to the provision for credit losses and
increases the FDIC shared-loss indemnification asset.
Lease Financing
The Company leases vehicles for personal and commercial use to individual and corporate customers. The direct finance lease method
of accounting is used to recognize revenue on leasing contracts that meet the criteria specified in the guidance for leases in ASC Topic
840. Aggregate rentals due over the term of the leases, less unearned income, are included in lease financing contracts receivable.
Unearned income is amortized using a method over the average life of the leases as an adjustment to the interest yield.
Troubled Debt Restructuring
A TDR is the restructuring of a receivable in which the Company, 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, the Company 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, the Company 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, the Company 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.
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OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 is accounted for and measured separately from the covered loans acquired in the FDIC-assisted
acquisition as it is not contractually embedded in any of the covered loans. The indemnification asset related to estimated future loan
and lease losses is not transferable should the Company sell a loan prior to foreclosure or maturity. The indemnification asset was
recorded at fair value at the acquisition date and represents 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 includes incurred expenses under the shared-loss agreements. These cash flows are 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 amount
ultimately collected for this asset is dependent upon the performance of the underlying covered assets, the passage of time, the proper
submission of claims to the FDIC and compliance with the obligations set forth in the FDIC shared-loss agreements. The time value of
money incorporated into the present value computation is 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 is reduced as shared-loss payments are received from the FDIC. Realized credit losses in excess of
acquisition-date estimates result in an increase in the FDIC indemnification asset. Conversely, if realized credit losses are less than
acquisition-date estimates, the FDIC indemnification asset is amortized through the term of the shared-loss agreements. Depending on
the timing of claims and covered asset resolution, the Company could also have owed payments to the FDIC for the recovery of prior
claims. The liability for these payments is recorded in other liabilities in the consolidated statements of financial condition until cash is
paid to the FDIC.
The true-up payment obligation associated with the loss share agreements is accounted for at fair value in accordance with ASC
Section 805-30-25-6 as it is considered contingent consideration. The true-up payment obligation is included as part of other liabilities
in the consolidated statements of financial condition. Any changes in the carrying value of the obligation are included in the category
of FDIC loss share income (expense) in the consolidated statements of operations.
Goodwill and Intangible Assets
The Company’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment. Intangibles
with indefinite lives are evaluated for impairment at least annually, and on a more frequent basis, if events or circumstances indicate
impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an
adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or
dispose of a reporting unit.
Under applicable accounting standards, goodwill impairment analysis is a two-step test. The Company 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 the Company chooses to bypass the qualitative assessment, the Company 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. The Company performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an
ongoing basis. The Company performed its annual impairment review of goodwill during the fourth quarter of 2016 and 2015 using
October 31, 2016 and 2015 as the annual evaluation dates and concluded that there was no impairment at December 31, 2016 and
2015.
109
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Foreclosed Real Estate and Other Repossessed Property
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.
Foreclosed Real Estate covered by the FDIC
Covered foreclosed real estate is initially recorded at its estimated fair value on the acquisition date, based on appraisal value less
estimated selling costs. Any subsequent write-downs due to declines in fair value and costs and expenses associated with holding these
properties in portfolio are charged as incurred to non-interest expense with a partially offsetting non-interest income for the loss
reimbursement under the FDIC shared-loss agreement. Any recoveries of previous write-downs are credited to non-interest expense
with a corresponding charge to non-interest income for the portion of the recovery that is due to the FDIC. At December 31, 2016 and
2015 foreclosed real estate covered by the FDIC amounted to $1.9 million at each period.
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
The Company 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, 2016 and 2015, there was no
indication of impairment as a result of such review.
Income Taxes
In preparing the consolidated financial statements, the Company is required to estimate income taxes. This involves an estimate of
current income tax expense together with an assessment of temporary differences resulting from differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of
current income tax expense involves estimates and assumptions that require the Company 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 the Company’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 the Company’s net deferred tax assets assumes that the Company will be able to generate
sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future,
the Company may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense
in the consolidated statements of operations.
110
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Management evaluates on a regular basis whether the deferred tax assets can be realized and assesses the need for a valuation
allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its
deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Company’s tax
provision in the period of change.
In addition to valuation allowances, the Company establishes accruals for uncertain tax positions when, despite the belief that the
Company’s tax return positions are fully supported, the Company 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 the Company’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.
The Company 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.
The Company’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.
The Company is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2012 to 2016, until
the applicable statute of limitations expires. Tax audits by their nature are often complex and can require several years to complete.
Equity-Based Compensation Plan
The Company’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 purpose of the Omnibus Plan is to provide flexibility to the Company to attract, retain and motivate directors, officers, and key
employees through the grant of awards based on performance and to adjust its compensation practices to the best compensation
practice and corporate governance trends as they develop from time to time. The Omnibus Plan is further intended to motivate high
levels of individual performance coupled with increased shareholder returns. Therefore, awards under the Omnibus Plan (each, an
“Award”) are intended to be based upon the recipient’s individual performance, level of responsibility and potential to make
significant contributions to the Company. Generally, the Omnibus Plan will terminate as of (a) the date when no more of the
Company’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 the Company’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 Omnibus Plan replaced and superseded the Company’s 1996, 1998 and 2000 Incentive Stock Option Plans (the “Stock Option
Plans”). All outstanding stock options under the Stock Option Plans continue in full force and effect, subject to their original terms
and conditions.
The 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 the Company’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 the Company’s shares of common stock.
111
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company follows the fair value method of recording stock-based compensation. The Company 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 (loss). 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 (loss), are components of comprehensive income (loss).
Commitments and Contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when
it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in
connection with loss contingencies are expensed as incurred.
Subsequent Events
The Company 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, 2016, 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
Simplifying the Test for Goodwill Impairment. In January 2017, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2017-04, which simplifies the measurement of goodwill impairment. An entity will no
longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using
the difference between the carrying amount and the fair value of the reporting unit. This ASU will be applied prospectively for annual
and interim periods in fiscal years beginning after December 15, 2019. We are currently assessing the impact that the adoption of ASU
2017-04 will have on our consolidated financial statements and related disclosures.
Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which amends Topic 230 (Statement of Cash Flows) and
requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. ASU No. 2016-18 is intended to reduce diversity in practice in
how restricted cash or restricted cash equivalents are presented and classified in the statement of cash flows. ASU No. 2016-18 is
effective for fiscal years, and interim periods, beginning after December 15, 2017, with early adoption permitted. The standard
requires application using a retrospective transition method. The adoption of ASU No. 2016-18 will change the presentation and
classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows.
Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, which includes an
impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred
losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU No. 2016-13 is
effective for fiscal years, and interim periods, beginning after December 15, 2019. Early application is permitted for fiscal years, and
interim periods, beginning after December 15, 2018. While we continue to assess the impact of ASU No. 2016-13, we have developed
a roadmap with time schedules in place from 2016 to implementation date.
112
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Improvements to Employee Share-Based Payment Accounting. In March 2016, the FASB issued ASU No. 2016-09, which simplifies
the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or
liabilities, and the classification on the statement of cash flows. ASU No. 2016-09 is effective for fiscal years, and interim periods,
beginning after December 15, 2016. Early application is permitted, but we have not yet adopted ASU No. 2016-09. We are currently
assessing the impact the adoption of ASU No. 2016-09 will have on our consolidated financial statements and related disclosures. The
adoption of ASU No. 2016-09 on January 1, 2017 will change how we recognize tax benefits from stock-based compensation plans in
our consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize a right-of-use asset and related
lease liability for leases classified as operating leases at the commencement date that have lease terms of more than 12 months. This
ASU retains the classification distinction between finance leases and operating leases. ASU No. 2016-02 is effective for fiscal years,
and interim periods, beginning after December 15, 2018. Early application is permitted, but we have not yet adopted ASU No. 2016-
02. We are currently assessing the impact the adoption of ASU 2016-02 will have on our consolidated financial statements and related
disclosures.
Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, which supersedes the revenue recognition
requirements Topic 605 (Revenue Recognition), and most industry-specific guidance. ASU No. 2014-09 is based on the principle that
revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments
and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 permits two
methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the
cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). In
August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09 by one year to fiscal years beginning
after December 15, 2017. ASU No. 2015-14 also permits early adoption of ASU No. 2014-09, but not before the original effective
date, which was for fiscal years beginning after December 15, 2016. We currently anticipate adopting ASU 2014-09, as amended by
ASU No. 2015-14, using the modified retrospective method and do not believe the adoption will have a material impact on the timing
of our revenue recognition as it is not applicable to our finance charges and premiums earned sources of revenue. We are currently
evaluating the effect that ASU 2014-09, as amended by ASU No. 2015-14, will have on our other income source of revenue.
New Accounting Updates Adopted During the Current Year
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, the FASB issued ASU No. 2015-05 which
provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing
arrangement includes a software license, the customer should account for the software license element of the arrangement consistent
with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer
should account for the arrangement as a service contract. The guidance will not change the customer's accounting for service
contracts. ASU No. 2015-05 is effective for fiscal years, and interim periods, beginning after December 15, 2015 with early adoption
permitted. The adoption of ASU No. 2015-05 on January 1, 2016 did not have a material impact on our consolidated financial
statements and related disclosures.
Simplifying the Presentation of Debt Issuance Costs. In April 2015, the FASB issued ASU No. 2015-03, which amends Topic 835
(Interest) and requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the
related debt liability instead of a deferred charge. In August 2015, the FASB issued ASU No. 2015-15, which amends Subtopic 835-
30 (Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements) and states that
the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the
deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement. ASU Nos. 2015-03 and 2015-15 are effective for fiscal years, and interim periods,
beginning after December 15, 2015, with early adoption permitted. The adoption of ASU No. 2015-03, as amended by ASU No. 2015-
15, on January 1, 2016 did not have a material impact on our consolidated financial statements and related disclosures.
Amendments to the Consolidation Analysis. In February 2015, the FASB issued ASU No. 2015-02, which amends Topic 810
(Consolidation) and requires an entity to evaluate whether it should consolidate certain legal entities. ASU No. 2015-02 is effective for
fiscal years, and interim periods, beginning after December 15, 2015 with early adoption permitted. The adoption of ASU No. 2015-
02 on January 1, 2016 did not have a material impact on our consolidated financial statements and related disclosures.
113
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 2 – RESTRICTED CASH
The following table includes the composition of the Company’s restricted cash:
Cash pledged as collateral to other financial institutions to secure:
Derivatives
Obligations under agreement of loans sold with recourse
December 31,
2016
2015
(In thousands)
$
$
1,980 $
1,050
3,030 $
1,980
1,369
3,349
At December 31, 2016 and 2015, the Bank’s international banking entities, Oriental International Bank Inc. (“OIB”) and Oriental
Overseas, a division of the Bank, each held unencumbered certificates of deposit in the amount of $300 thousand as the legal reserve
required for international banking entities under Puerto Rico law. Each certificate of deposit cannot be withdrawn by OIB or Oriental
Overseas without prior written approval of the OCFI.
As part of its derivative activities, the Company has entered into collateral agreements with certain financial counterparties. At
December 31, 2016 and 2015, the Company had delivered $2.0 million, at both periods, of cash as collateral for such derivatives
activities.
As part of the BBVA Acquisition, the Company assumed a contract with FNMA which required collateral to guarantee the
repurchase, if necessary, of loans sold with recourse. At December 31, 2016 and 2015, the Company delivered as collateral cash
amounting to $1.1 million and $1.4 million, respectively.
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, 2016 was $161.0 million (December 31, 2015 - $148.3
million). At December 31, 2016 and 2015, the Bank complied with the requirement. Cash and due from bank as well as other short-
term, highly liquid securities are used to cover the required average reserve balances.
NOTE 3 – INVESTMENT SECURITIES
Money Market Investments
The Company considers as cash equivalents all money market instruments that are not pledged and that have maturities of three
months or less at the date of acquisition. At December 31, 2016 and 2015, money market instruments included as part of cash and cash
equivalents amounted to $5.6 million and $4.7 million, respectively.
114
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Investment Securities
The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Company
at December 31, 2016 and 2015 were as follows:
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
GNMA certificates
CMOs issued by US government-sponsored agencies
Total mortgage-backed securities
Investment securities
US Treasury securities
Obligations of US government-sponsored agencies
Obligations of Puerto Rico government and
public instrumentalities
Other debt securities
Total investment securities
Total securities available for sale
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates
Total
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
GNMA certificates
CMOs issued by US government-sponsored agencies
Total mortgage-backed securities
Investment securities
Obligations of US government-sponsored agencies
Obligations of Puerto Rico government and
political subdivisions
Other debt securities
Total investment securities
Total securities available-for-sale
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates
Investment securities
US Treasury securities
Total securities held to maturity
Total
Amortized
Cost
Gross
Unrealized
Gains
December 31, 2016
Gross
Unrealized
Losses
(In thousands)
Fair
Value
Weighted
Average
Yield
422,168 $
163,614
103,990
689,772
49,672
3,903
4,680
1,840
60,095
749,867 $
6,354 $
2,241
64
8,659
-
-
-
81
81
8,740 $
3,036 $
620
2,223
5,879
618
19
607
-
1,244
7,123 $
425,486
165,235
101,831
692,552
49,054
3,884
4,073
1,921
58,932
751,484
599,884 $
1,349,751 $
145 $
8,885 $
7,266 $
14,389 $
592,763
1,344,247
2.59%
2.95%
1.88%
2.57%
1.73%
1.38%
5.55%
3.00%
2.04%
2.53%
2.15%
2.36%
December 31, 2015
Gross
Amortized
Cost
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair
Value
Weighted
Average
Yield
$
735,363
57,129
137,787
930,279
$ 25,791
1,366
27
27,184
5,122
17,801
-
-
$
1,509
-
2,741
4,250
29
4,070
2,444
25,367
955,646 $
128
128
27,312 $
-
4,099
8,349 $
759,645
58,495
135,073
953,213
5,093
13,731
2,572
21,396
974,609
595,157 $
426 $
5,865 $
589,718
25,032
620,189
1,575,835 $
-
426
27,738 $
71
5,936
14,285 $
24,961
614,679
1,589,288
2.97%
3.19%
1.85%
2.82%
1.36%
6.24%
2.98%
4.94%
2.87%
2.24%
0.49%
2.17%
2.60%
115
$
$
$
$
$
$
$
$
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The amortized cost and fair value of the Company’s investment securities at December 31, 2016, 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.
Mortgage-backed securities
Due from 1 to 5 years
FNMA and FHLMC certificates
Total due from 1 to 5 years
Due after 5 to 10 years
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
Total due after 5 to 10 years
Due after 10 years
FNMA and FHLMC certificates
GNMA certificates
CMOs issued by US Government-sponsored agencies
Total due after 10 years
Total mortgage-backed securities
Investment securities
Due less than one year
US Treasury securities
Total due in less than one year
Due from 1 to 5 years
US Treasury securities
Obligations of Puerto Rico government and
public instrumentalities
Total due from 1 to 5 years
Due from 5 to 10 years
US Treasury securities
Obligations of US Government and sponsored agencies
Other debt securities
Total due after 10 years
Total investment securities
Total securities available-for-sale
December 31, 2016
Available-for-sale
Held-to-maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
(In thousands)
(In thousands)
$
$
$
$
$
$
$
10,157 $
10,157 $
8,637 $
25,407
34,044
386,604 $
163,614
95,353
645,571
689,772
10,237 $
10,237
8,420 $
25,740
34,160
389,509 $
165,235
93,411
648,155
692,552
- $
-
- $
-
-
-
-
-
-
-
599,884 $
-
-
599,884
599,884
592,763
-
-
592,763
592,763
500 $
500
500 $
500
34,464 $
34,122 $
4,680
39,144
4,073
38,195
14,708 $
14,432 $
- $
-
- $
-
-
- $
-
-
-
-
-
-
3,903
1,840
20,451
60,095
749,867 $
3,884
1,921
20,237
58,932
751,484 $
-
-
-
-
599,884 $
-
-
-
-
592,763
116
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company, as part of its asset/liability management, may purchase U.S. Treasury securities and U.S. government-sponsored
agency discount notes close to their maturities as alternatives to cash deposits at correspondent banks or as a short term vehicle to
reinvest the proceeds of sale transactions until investment securities with attractive yields can be purchased. During the year ended
December 31, 2016, the Company retained securitized GNMA pools totaling $112.2 million amortized cost, at a yield of 2.89% from
its own originations. Previously, until June 2015, the Company was selling all securitized GNMA pools. During the years ended 2015
and 2014, the Company sold $63.5 million and $99.4 million, respectively, of available-for-sale GNMA certificates as part of its
recurring mortgage loan origination and securitization activities. These sales did not result in any gains or losses during such periods.
During the year ended December 31, 2016, the Company sold $277.2 million of mortgage-backed securities and $11.1 million of
Puerto Rico government bonds, and recorded a net gain on sale of securities of $12.2 million. Among the 2016 sales, the Company
sold all but one of the Puerto Rico government bonds it held. The Company had other-than-temporary impairment charges on such
securities sold totaling $1.5 million recorded during the second half of 2015. During the year ended December 31, 2015, the Company
sold $101.3 million of mortgage-backed securities, and recorded a net gain on sale of securities of $2.6 million. During the year ended
December 31, 2014, the Company sold $210.2 million of mortgage-backed securities, and recorded a net gain on sale of securities of
$4.4 million. The table below presents the gross realized gains and gross realized losses by category for such periods:
Description
Sale Price
at Sale
Gross Gains
Gross Losses
(In thousands)
Year Ended December 31, 2016
Book Value
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
Investment securities
Obligations of PR government and public instrumentalities
Total
$
$
293,505 $
277,181 $
16,324 $
6,978
300,483 $
11,095
288,276 $
-
16,324 $
-
4,117
4,117
Description
Sale Price
Year Ended December 31, 2015
Book Value
at Sale
Gross Gains
(In thousands)
Gross Losses
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
GNMA certificates
Total mortgage-backed securities
Description
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates
GNMA certificates
Total mortgage-backed securities
$
$
$
$
40,307 $
63,524
103,831 $
37,736 $
63,523
101,259 $
2,571 $
1
2,572 $
-
-
-
Sale Price
Year Ended December 31, 2014
Book Value
at Sale
Gross Gains
(In thousands)
Gross Losses
115,158 $
99,360
214,518 $
110,792 $
99,360
210,152 $
4,366 $
-
4,366 $
-
-
-
117
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables show the Company’s gross unrealized losses and fair value of investment securities available-for-sale and held-
to-maturity, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized
loss position at December 31, 2016 and 2015:
Securities available-for-sale
CMOs issued by US government-sponsored agencies
Obligations of Puerto Rico government and
public instrumentalities
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
Obligations of US government and sponsored agencies
GNMA certificates
US Treausury Securities
Securities held-to-maturity
FNMA and FHLMC Certificates
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
Obligations of Puerto Rico Government and political subdivisions
Obligations of US government and sponsored agencies
GNMA certificates
US Treausury Securities
Securities held-to-maturity
FNMA and FHLMC certificates
Amortized
Cost
December 31, 2016
12 months or more
Unrealized
Loss
(In thousands)
Fair
Value
$
$
$
33,883 $
4,680
793 $
607
38,563 $
1,400 $
33,090
4,073
37,163
Amortized
Cost
Less than 12 months
Unrealized
Loss
(In thousands)
Fair
Value
67,777 $
184,782
3,903
29,445
49,172
1,430 $
3,036
19
620
618
66,347
181,746
3,884
28,825
48,554
$
525,258
860,337 $
7,266
12,989 $
517,992
847,348
Amortized
Cost
Total
Unrealized
Loss
(In thousands)
Fair
Value
$
$
101,660 $
184,782
4,680
3,903
29,445
49,172
373,642
525,258
898,900 $
2,223 $
3,036
607
19
620
618
7,123
7,266
14,389 $
99,437
181,746
4,073
3,884
28,825
48,554
366,519
517,992
884,511
118
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Securities available-for-sale
Obligations of Puerto Rico Government and public instrumentalities
CMOs issued by US government-sponsored agencies
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
Obligations of US government and sponsored agencies
Securities held to maturity
FNMA and FHLMC certificates
US Treausury Securities
Securities available-for-sale
CMOs issued by US Government-sponsored agencies
FNMA and FHLMC certificates
Obligations of Puerto Rico Government and public instrumentalities
Obligations of US government and sponsored agencies
Securities available-for-sale
FNMA and FHLMC certificates
US Treasury Securities
Amortized
Cost
December 31, 2015
12 months or more
Unrealized
Loss
(In thousands)
Fair
Value
$
$
17,801 $
103,340
121,141 $
4,070 $
2,410
6,480 $
13,731
100,930
114,661
Amortized
Cost
Less than 12 months
Unrealized
Loss
(In thousands)
Fair
Value
25,736
149,480
5,122
180,338 $
468,487
25,032
493,519 $
673,857 $
331
1,509
29
1,869 $
5,865
71
5,936 $
7,805 $
25,405
147,971
5,093
178,469
462,622
24,961
487,583
666,052
Amortized
Cost
Total
Unrealized
Loss
(In thousands)
Fair
Value
129,076
149,480
17,801
5,122
301,479 $
468,487
25,032
493,519 $
794,998 $
2,741
1,509
4,070
29
8,349 $
5,865
71
5,936 $
14,285 $
126,335
147,971
13,731
5,093
293,130
462,622
24,961
487,583
780,713
$
$
$
$
$
$
119
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company performs valuations of the investment securities on a monthly basis. Moreover, the Company conducts quarterly
reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a
decline in value associated with credit loss is recognized in the statements of operations with the remaining noncredit-related
component recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost
basis of the security will be recovered by comparing the present value of cash flows expected to be collected from the security,
discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the
present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.”
Other-than-temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change
over time. In addition, while the Company believes that the methodology used to value these exposures is reasonable, the
methodology is subject to continuing refinement, including those made as a result of market developments. Consequently, it is
reasonably possible that changes in estimates or conditions could result in the need to recognize additional other-than-temporary
impairment charges in the future.
Most of the investments ($894.2 million, amortized cost, or 99.5%) with an unrealized loss position at December 31, 2016 consist of
securities issued or guaranteed by the U.S. Treasury or U.S. government-sponsored agencies, all of which are highly liquid securities
that have a large and efficient secondary market. Their aggregate losses and their variability from period to period are the result of
changes in market conditions, and not due to the repayment capacity or creditworthiness of the issuers or guarantors of such securities.
The remaining investment ($4.7 million, amortized cost, or 0.5%) with an unrealized loss position at December 31, 2016 consists of
an obligation issued by the Puerto Rico Highways and Transportation Authority ("PRHTA") secured by a pledge of toll revenues from
the Teodoro Moscoso Bridge operated through a public-private partnership. The decline in the market value of this security is mainly
attributed to the significant economic and fiscal challenges that Puerto Rico is facing, which is expected to result on a significant
restructuring of the government under the supervision of a federally created Fiscal Oversight Board. All other Puerto Rico government
securities were sold during the first quarter of 2016. The PRHTA bond had an aggregate fair value of $4.1 million at December 31,
2016 (87% of the bond's amortized cost). The discounted cash flow analysis for the investment showed a cumulative default
probability at maturity of 7.7%, thus reflecting that it is more likely than not that the bond will not default during its remaining term.
Based on this analysis, the Company determined that it is more likely than not that it will recover all interest and principal invested in
this Puerto Rico government bond and is, therefore, not required to recognize a credit loss as of December 31, 2016. Also, the
Company’s conclusion is based on the assessment of the specific source of repayment of the outstanding bond, which continues to
perform. PRHTA started principal repayments on July 1, 2014. All scheduled principal and interest payments to date have been
collected. On July 1, 2016, the Company received a scheduled principal payment of $2.0 million. The next payment is due on July 1,
2017. As a result of the aforementioned analysis, no other-than-temporary losses were recorded during the year ended December 31,
2016.
As of December 31, 2016, the Company performed a cash flow analysis of its Puerto Rico government bond to calculate the cash
flows expected to be collected and determine if any portion of the decline in market value of this investment was considered an other-
than-temporary impairment. The analysis derives an estimate of value based on the present value of risk-adjusted future cash flows of
the underlying investment, and included the following components:
• The contractual future cash flows of the bond are projected based on the key terms as set forth in the official statements for
the investment. Such key terms include among others the interest rate, amortization schedule, if any, and maturity date.
• The risk-adjusted cash flows are calculated based on a monthly default probability and recovery rate assumptions based on
the credit rating of the investment. Constant monthly default rates are assumed throughout the life of the bond which is based
on the respective security’s credit rating as of the date of the analysis.
• The adjusted future cash flows are then discounted at the original effective yield of the investment based on the purchase
price and expected risk-adjusted future cash flows as of the purchase date of the investment.
120
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents a rollforward of credit-related impairment losses recognized in earnings for the years ended December
31, 2016, 2015 and 2014 on available-for-sale securities:
Year Ended December 31,
2015
2016
2014
Balance at beginning of year
Reductions for securities sold during the period (realized)
Additions from credit losses recognized on available-for-sale securities that had no previous impairment losses
Balance at end of year
$
$
1,490 $
(1,490)
-
- $
- $
-
1,490
1,490 $
-
-
-
-
NOTE 4 - PLEDGED ASSETS
The following table shows a summary of pledged and not pledged assets at December 31, 2016 and 2015. 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:
Pledged investment securities to secure:
Securities sold under agreements to repurchase
Derivatives
Puerto Rico Cash & Money Market Fund
Bond for the Bank's trust operations
Total pledged investment securities
Pledged residential mortgage loans to secure:
Advances from the Federal Home Loan Bank
Pledged commercial loans to secure:
Advances from the Federal Home Loan Bank
Federal Reserve Bank Credit Facility
Puerto Rico public fund deposits
Total pledged assets
Financial assets not pledged:
Investment securities
Residential mortgage loans
Commercial loans
Consumer loans
Auto loans and leases
$
$
$
December 31,
2016
2015
(In thousands)
700,498 $
2,397
-
348
703,243
1,021,370
8,100
81,576
379
1,111,425
1,028,234
1,095,810
381,990
1,303
209,236
592,529
2,324,006 $
648,125 $
348,030
1,064,923
329,050
895,097
253,263
12,877
410,932
677,072
2,884,307
483,373
379,065
1,287,036
295,492
929,666
3,374,632
Total assets not pledged
$
3,285,225 $
121
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 5 - LOANS
The Company’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to
as "originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated between
acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were purchased subject to loss-sharing agreements
with the FDIC. The FDIC loss-share coverage related to commercial and other-non single family acquired Eurobank loans expired on
June 30, 2015. Notwithstanding the expiration of loss share coverage of commercial loans, on July 2, 2015, the Company entered into
an agreement with the FDIC pursuant to which the FDIC concurred with a potential sale of a pool of loss-share assets covered under
the commercial loss-sharing agreement and paid $20 million in loss share coverage with respect to the aggregate loss resulting from
the portfolio sale. Covered loans are no longer a material amount. Therefore, the Company changed its loan disclosures during 2015.
Loans held for sale are presented separately.
At December 31, 2016, the remaining covered loans amounting to $61.1 million, net carrying amount ($73.0 million gross amount),
are included as part of acquired Eurobank loans under the name "loans secured by 1-4 family residential properties". At December 31,
2015, covered loans amounted to $67.2 million, net carrying amount ($92.3 million gross amount). Interest income recognized for
covered loans during the year ended December 31, 2016 and 2015 was $8.6 million and $33.7 million, respectively. The decrease in
interest income recognized for covered loans is mainly due to the expiration of the FDIC loss-share coverage related to commercial
and other-non single family residential loans on June 30, 2015. Effective February 6, 2017, the Bank and the FDIC agreed to terminate
the single family and commercial shared-loss agreements.
Effective June 30, 2016, pursuant to supervisory direction, the Company revised the purchase credit impaired policy for all loans
accounted for under ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality). Under the revised policy,
the Company writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans
that exit the acquired pools. The revised policy was implemented prospectively due to the immaterial impact of retrospective adoption.
Prior to June 30, 2016, the pool’s carrying value and allowance was determined by discounting expected cash flows at the pool’s
effective yield. The allowance for loan and lease losses was maintained until all of the loans in the pool were paid off or charged-off.
The transition to this revised policy during 2016 resulted in the de-recognition of $10.0 million and $74.4 million in the recorded
investment balance and associated allowance for loans that had exited the pools, for acquired BBVAPR loans and acquired Eurobank
loans, respectively, with no impact to the provision for loan and lease losses. Refer to Note 6 Allowances for Loan and Lease Losses.
On October 7, 2016, the Company sold its outstanding $200.0 million participation in the Puerto Rico Electric Power Authority
("PREPA") line of credit for $123.5 million, slightly lower than the adjusted book balance, net of reserves. As a result of this
transaction, the Company recognized a $56.2 million charge-off and $2.9 million provision for loan and lease losses.
122
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The composition of the Company’s loan portfolio at December 31, 2016 and 2015 was as follows:.
Originated and other loans and leases held for investment:
Mortgage
Commercial
Consumer
Auto and leasing
Allowance for loan and lease losses on originated and other loans and leases
Deferred loan costs, net
Total originated and other loans loans held for investment, net
Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial
Consumer
Auto
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20 (b)
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage
Commercial
Construction
Consumer
Auto
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30
Total acquired BBVAPR loans, net
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties
Commercial and construction
Consumer
Total acquired Eurobank loans
Allowance for loan and lease losses on Eurobank loans
Total acquired Eurobank loans, net
Total acquired loans, net
Total held for investment, net
Mortgage loans held-for-sale
Total loans, net
$
December 31,
2016
2015
(In thousands)
721,494 $
1,277,866
290,515
756,395
3,046,270
(59,300)
2,986,970
5,766
2,992,736
757,828
1,441,649
242,950
669,163
3,111,590
(112,626)
2,998,964
4,203
3,003,167
5,562
32,862
53,026
91,450
(4,300)
87,150
569,253
222,856
69,708
4,301
85,676
951,794
(31,056)
920,738
1,007,888
73,018
81,460
1,372
155,850
(21,281)
134,569
1,142,457
4,135,193
12,499
4,147,692 $
7,457
38,385
106,911
152,753
(5,542)
147,211
608,294
287,311
88,180
11,843
153,592
1,149,220
(25,785)
1,123,435
1,270,646
92,273
142,377
2,314
236,964
(90,178)
146,786
1,417,432
4,420,599
13,614
4,434,213
$
123
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Originated and Other Loans and Leases Held for Investment
The Company’s originated and other loans held for investment are encompassed within four portfolio segments: mortgage,
commercial, consumer, and auto and leasing.
The following tables present the aging of the recorded investment in gross originated and other loans held for investment as of
December 31, 2016 and 2015 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, 2016
Current
30-59 Days
60-89 Days
90+ Days
Total Past
in Non-
Current
Loans 90+
Days Past
Due and
Still
Past Due
Past Due
Past Due
Due
(In thousands)
Accrual
Accruing
Total Loans
Accruing
Mortgage
Traditional (by origination year):
Up to the year 2002
Years 2003 and 2004
Year 2005
Year 2006
Years 2007, 2008
and 2009
Years 2010, 2011, 2012, 2013
Years 2014, 2015 and 2016
Non-traditional
Loss mitigation program
Home equity secured personal loans
GNMA's buy-back option program
Commercial
Commercial secured by real estate:
Corporate
Institutional
Middle market
Retail
Floor plan
Real estate
Other commercial and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
$
196 $
156
-
506
2,176 $
3,872
1,952
2,905
3,371 $
7,272
4,306
6,261
5,743 $
11,300
6,258
9,672
409
349
47
1,663
-
8,911
10,574
-
-
10,574
-
-
-
154
-
-
154
-
-
-
930
8
938
1,092
1,439
1,772
123
14,239
498
7,205
21,942
-
-
21,942
-
-
60
350
-
-
410
-
-
-
100
-
100
510
13,580
12,538
1,527
60,618
5,228
32,657
98,503
-
9,681
108,184
-
254
3,379
7,098
-
-
10,731
-
-
-
1,999
69
2,068
12,799
11,732
10,417
1,357
44,716
4,730
16,541
65,987
-
9,681
75,668
-
254
3,319
6,594
-
-
10,167
-
-
-
969
61
1,030
11,197
124
- $
44,542 $
79,226
43,571
59,534
50,285 $
90,707
50,009
69,300
181
180
94
111
126
-
692
-
3,599
4,291
-
-
4,291
-
-
1,304
4,638
-
-
5,942
-
-
1,278
294
-
1,572
7,514
63,038
127,196
106,672
523,779
17,631
67,272
608,682
337
-
609,019
242,770
26,546
230,298
237,992
2,989
16,395
756,990
76,729
139,860
108,199
585,089
22,859
103,528
711,476
337
9,681
721,494
242,770
26,800
234,981
249,728
2,989
16,395
773,663
136,438
180,285
80,355
71,412
32,073
500,563
1,257,553
136,438
180,285
81,633
73,705
32,142
504,203
1,277,866
158
-
-
-
398
583
-
1,139
-
1,724
2,863
-
-
2,863
-
-
-
-
-
-
-
-
-
-
-
-
-
-
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2016
Current
30-59 Days
60-89 Days
90+ Days
Total Past
Past Due
Past Due
Past Due
Due
in Non-
Current
Accrual
Accruing
(In thousands)
Loans 90+
Days Past
Due and
Still
Total Loans
Accruing
Consumer
Credit cards
Overdrafts
Personal lines of credit
Personal loans
Cash collateral personal
l
Auto and leasing
Total
$
$
527 $
16
41
2,474
240
3,298
42,714
57,678 $
283 $
12
4
1,489
20
1,808
19,014
43,274 $
525 $
5
32
1,081
4
1,647
8,173
96,685 $ 197,637 $
1,335 $
33
77
5,044
264
6,753
69,901
- $
-
-
259
-
259
181
25,023 $
174
2,327
240,969
15,010
283,503
686,313
12,245 $ 2,836,388 $
26,358 $
207
2,404
246,272
15,274
290,515
756,395
3,046,270 $
-
-
-
-
-
-
-
2,863
125
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2015
Current
30-59 Days
60-89 Days
90+ Days
Total Past
in Non-
Current
Loans 90+
Days Past
Due and
Still
Past Due
Past Due
Past Due
Due
Accrual
Accruing
Total Loans
Accruing
(In thousands)
Mortgage
Traditional (by origination year):
Up to the year 2002
Years 2003 and 2004
Year 2005
Year 2006
Years 2007, 2008
and 2009
Years 2010, 2011, 2012, 2013
Years 2014 and 2015
Non-traditional
Loss mitigation program
Home equity secured personal loans
GNMA's buy-back option program
Commercial
Commercial secured by real estate:
Corporate
Institutional
Middle market
Retail
Floor plan
Real estate
Other commercial and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
$
80 $
251
79
551
2,217 $
5,036
2,553
2,878
3,889 $
5,536
3,549
7,934
6,186 $
10,823
6,181
11,363
41 $
-
-
176
51,562 $
88,623
48,040
66,864
57,789 $
99,446
54,221
78,403
170
2,053
14,733
16,956
-
74,590
91,546
662
-
1,793
-
9,958
11,751
-
-
11,751
-
213
1,174
686
-
-
2,073
-
-
-
282
238
520
2,593
1,673
65
16,475
977
6,887
24,339
-
-
24,339
-
-
712
466
-
-
1,178
-
-
-
639
51
690
1,868
10,519
663
46,823
5,079
14,930
66,832
64
7,945
74,841
-
-
9,113
6,921
-
-
16,034
-
-
-
604
39
643
16,677
12,854
728
65,091
6,056
31,775
102,922
64
7,945
110,931
-
213
10,999
8,073
-
-
19,285
-
-
-
1,525
328
1,853
21,138
141
137,749
150,744
-
358
13
5,593
5,964
-
-
5,964
-
-
1,730
1,177
-
-
2,907
85,128
552,556
23,483
64,548
640,587
346
-
640,933
227,557
33,594
194,219
231,840
2,892
16,662
706,764
85,856
618,005
29,552
101,916
749,473
410
7,945
757,828
227,557
33,807
206,948
241,090
2,892
16,662
728,956
-
190,290
1,565
783
-
192,638
195,545
108,582
190,695
105,748
75,489
37,688
518,202
1,224,966
108,582
380,985
107,313
77,797
38,016
712,693
1,441,649
144
-
-
-
526
72
-
742
-
3,083
3,825
-
-
3,825
-
-
-
-
-
-
-
-
-
-
-
-
-
-
126
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2015
Current
30-59 Days
60-89 Days
90+ Days
Total Past
in Non-
Current
Loans 90+
Days Past
Due and
Still
Consumer
Credit cards
Overdrafts
Personal lines of credit
Personal loans
Cash collateral personal loans
Auto and leasing
Total
Past Due
Past Due
Past Due
Due
Accrual
Accruing
Total Loans
Accruing
(In thousands)
$
$
449 $
24
74
2,078
125
2,750
53,566
70,660 $
182 $
-
-
1,179
17
1,378
16,898
44,483 $
369 $
-
45
627
2
1,043
8,293
100,854 $
1,000 $
24
119
3,884
144
5,171
78,757
215,997 $
- $
-
19
414
-
433
49
21,766 $
166
2,106
196,858
16,450
237,346
590,357
22,766 $
190
2,244
201,156
16,594
242,950
669,163
201,991 $ 2,693,602 $ 3,111,590 $
-
-
-
-
-
-
-
3,825
During 2015, the Company changed its early delinquency reporting on mortgage loans from one scheduled payment due to two
scheduled payments due to be comparable with local peers, except for troubled-debt restructured loans which continue using one
scheduled payment due for delinquency reporting. During 2016, the Company changed its early delinquency reporting on
consumer and auto loans from one scheduled payment due to two scheduled payments to report consistently its retail portfolio. The
change resulted in a $19 thousand and $5.9 million reduction in early and total delinquency for consumer and auto loans,
respectively.
At December 31, 2016 and 2015, the Company had carrying balance of $136.6 million and $334.6 million, respectively, in
originated and other loans held for investment granted to the Puerto Rico government, including its instrumentalities, public
corporations and municipalities as part of the institutional commercial loan segment. All originated and other loans granted to the
Puerto Rico government were current at December 31, 2016 and 2015.
127
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired Loans
Acquired loans were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20 (Non-
refundable fees and Other Costs). We have acquired loans in two acquisitions, BBVAPR and Eurobank.
Acquired BBVAPR Loans
Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660
acquired at a premium, excluding the acquired Eurobank loan portfolio, are accounted for under the guidance of ASC 310-20, which
requires that any contractually required loan payment receivable in excess of the Company’s initial investment in the loans be accreted
into interest income on a level-yield basis over the life of the loan. Loans accounted for under ASC 310-20 are placed on non-accrual
status when past due in accordance with the Company’s non-accrual policy, and any accretion of discount or amortization of premium
is discontinued. 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, 2016 and 2015, by class of loans:
December 31, 2016
Current
30-59 Days
60-89 Days
90+ Days
Total Past
Past Due
Past Due
Past Due
Due
in Non-
Current
Accrual
Accruing
(In thousands)
Loans 90+
Days Past
Due and
Still
Total Loans
Accruing
Commercial
Commercial secured by real estate
Retail
Floor plan
$
Other commercial and industrial
Retail
Floor plan
Consumer
Credit cards
Personal loans
Auto
Total
33 $
-
33
- $
-
-
110 $
219
329
143 $
219
362
97
-
97
130
34
-
34
34
121
2
123
452
252
2
254
616
- $
- $
929
929
-
-
-
929
1,242
1,242
2,775
-
2,775
4,017
736
48
784
3,652
4,566 $
369
14
383
1,355
1,772 $
708
120
828
517
1,797 $
1,813
182
1,995
5,524
8,135 $
$
-
-
-
15
944 $
28,280
2,587
30,867
47,487
82,371 $
128
143 $
2,390
2,533
3,027
2
3,029
5,562
30,093
2,769
32,862
53,026
91,450 $
-
-
-
-
-
-
-
-
-
-
-
-
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2015
30-59 Days 60-89 Days
90+ Days Total Past
Past Due Past Due Past Due
Due
Current
in Non-
Current
Accrual Accruing
Total
Loans
(In thousands)
Loans 90+
Days Past
Due and
Still
Accruing
Commercial
Commercial secured by real estate
Retail
Floor plan
Other commercial and industrial
Retail
Floor plan
Consumer
Credit cards
Personal loans
Auto
Total
$
$
- $
-
-
- $
-
-
228 $
467
695
228 $
467
695
186
-
186
186
29
-
29
29
930
14
944
7,553
8,683 $
384
29
413
2,279
2,721 $
178
7
185
880
489
46
535
831
393
7
400
1,095
1,803
89
1,892
10,663
2,246 $ 13,650 $
- $
-
-
-
-
-
-
- $
228 $
2,422
2,422
3,331
609
3,940
6,362
2,889
3,117
3,724
616
4,340
7,457
33,414
3,079
36,493
96,248
-
-
-
-
- $ 139,103 $ 152,753 $
35,217
3,168
38,385
106,911
-
-
-
-
-
-
-
-
-
-
-
-
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 the Company 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, 2016 and 2015 is as follows:
Contractual required payments receivable:
Less: Non-accretable discount
Cash expected to be collected
Less: Accretable yield
Carrying amount, gross
Less: allowance for loan and lease losses
Carrying amount, net
December 31,
2016
2015
(In thousands)
$
$
1,669,602 $
363,107
1,306,495
354,701
951,794
31,056
920,738 $
1,945,098
434,190
1,510,908
361,688
1,149,220
25,785
1,123,435
At December 31, 2016 and 2015, the Company had $66.2 million and $80.9 million, respectively, in loans granted to the Puerto Rico
government, including its instrumentalities, public corporations and municipalities as part of its acquired BBVAPR loans accounted
for under ASC 310-30.
129
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2016, 2015 and 2014:
Year Ended December 31, 2016
Mortgage
Commercial
Construction
Auto
Consumer
Total
(In thousands)
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
Transfer (to) from non-accretable discount
$
$
268,794
(32,834)
(1)
56,156
$
45,411
(20,443)
13,949
(1,800)
$
19,615
(5,811)
310
(865)
$
21,578
(13,567)
1,251
(724)
$
6,290
(2,982)
(242)
616
361,688
(75,637)
15,267
53,383
Balance at end of year
$
292,115
$
37,117
$
13,249
$
8,538
$
3,682
$
354,701
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer from (to) accretable yield
Balance at end of year
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in actual and expected losses
Transfer (to) from non-accretable discount
Balance at end of year
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer from (to) accretable yield
Balance at end of year
$
$
$
$
$
$
374,772
(13,001)
(56,156)
305,615
$
$
11,781
(3,916)
1,800
9,665
$
$
6,764
(329)
865
7,300
$
$
22,039
(356)
724
22,407
$
$
18,834
(98)
(616)
18,120
$
434,190
(17,700)
(53,383)
$
363,107
Year Ended December 31, 2015
Mortgage
Commercial
Construction
Auto
Consumer
Total
298,364
(34,842)
-
5,272
268,794
389,839
(9,795)
(5,272)
374,772
$
$
$
$
61,196
(39,268)
6,130
17,353
45,411
23,069
6,065
(17,353)
11,781
$
$
$
$
(In thousands)
25,829
(10,161)
2,402
1,545
19,615
3,486
4,823
(1,545)
6,764
$
$
$
$
53,998
(23,463)
-
(8,957)
21,578
16,215
(3,133)
8,957
22,039
$
$
$
$
6,559
(4,379)
(1)
4,111
6,290
24,018
(1,073)
(4,111)
18,834
$
$
$
$
445,946
(112,113)
8,531
19,324
361,688
456,627
(3,113)
(19,324)
434,190
130
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2014
Accretable Yield Activity:
Balance at beginning of year
Accretion
Mortgage
Commercial
Construction
Auto
Consumer
Total
(In thousands)
$
287,841 $
(37,612)
96,139 $
(49,039)
42,993 $
(21,894)
77,845 $
(39,023)
12,735 $
(5,968)
517,553
(153,536)
Transfer (to) from non-accretable discount
48,135
14,096
4,730
15,176
(208)
81,929
Balance at end of year
$
298,364 $
61,196 $
25,829 $
53,998 $
6,559 $
445,946
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer from (to) accretable yield
Balance at end of year
Acquired Eurobank Loans
$
$
463,166 $
(25,192)
(48,135)
389,839 $
42,515 $
(5,350)
(14,096)
23,069 $
5,851 $
2,365
(4,730)
3,486 $
39,645 $
(8,254)
(15,176)
16,215 $
28,410 $
(4,600)
208
24,018 $
579,587
(41,031)
(81,929)
456,627
The carrying amount of acquired Eurobank loans at December 31, 2016 and 2015 is as follows:
December 31
2016
2015
(In thousands)
Contractual required payments receivable:
Less: Non-accretable discount
Cash expected to be collected
Less: Accretable yield
Carrying amount, gross
Less: Allowance for covered loan and lease losses
Carrying amount, net
$
$
232,698 $
12,340
220,358
64,508
155,850
21,281
134,569 $
342,511
21,156
321,355
84,391
236,964
90,178
146,786
131
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables describe the accretable yield and non-accretable discount activity of acquired Eurobank loans for the years ended
December 31, 2016, 2015 and 2014:
Year Ended December 31, 2016
Loans Secured
by 1-4 Family
Residential
Properties
Commercial and
Other
Construction
Construction &
Development
Secured by 1-4
Family
Residential
Properties
Leasing
Consumer
Total
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in expected cash flows
Transfer from (to) non-accretable discount
Balance at end of year
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer from (to) accretable yield
Balance at end of year
$
$
$
$
51,954 $
(8,942)
2,134
693
45,839 $
12,869 $
(3,735)
(693)
8,441 $
26,970 $
(19,593)
13,722
(4,624)
16,475 $
- $
(744)
4,624
3,880 $
(In thousands)
2,255 $
(90)
1
28
2,194 $
- $
39
(28)
11 $
- $
(60)
(15)
75
- $
- $
75
(75)
- $
3,212 $
(1,813)
(1,386)
(13)
84,391
(30,498)
14,456
(3,841)
- $
64,508
8,287 $
(8,292)
13
8 $
21,156
(12,657)
3,841
12,340
132
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Year Ended December 31, 2015
Loans Secured
by 1-4 Family
Residential
Properties
Commercial and
Other
Construction
Construction &
Development
Secured by 1-4
Family Residential
Properties
Leasing
Consumer
Total
Accretable Yield Activity:
Balance at beginning of year
Accretion
Change in actual and expected losses
Transfer from (to) non-accretable discount
Balance at end of year
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer (to) from accretable yield
Balance at end of year
$
$
$
$
47,636 $
(13,685)
4,631
13,372
51,954 $
37,920 $
(32,124)
44,660
(23,486)
26,970 $
(In thousands)
20,753 $
(2,513)
(15,048)
(937)
2,255 $
2,479 $
(3,458)
(51)
1,030
- $
1,071 $
(631)
305
2,467
3,212 $
109,859
(52,411)
34,497
(7,554)
84,391
27,348 $
(1,107)
(13,372)
12,869 $
24,464 $
(47,950)
23,486
- $
- $
(937)
937
- $
1,030
(1,030)
- $
- $
10,598 $
156
(2,467)
8,287 $
62,410
(48,808)
7,554
21,156
Year Ended December 31, 2014
Loans Secured
by 1-4 Family
Residential
Properties
Commercial and
Other
Construction
Construction &
Development
Secured by 1-4
Family Residential
Properties
(In thousands)
Leasing
Consumer
Total
Accretable Yield Activity:
Balance at beginning of year
Accretion
Transfer from (to) non-accretable discount
Balance at end of year
Non-Accretable Discount Activity:
Balance at beginning of year
Change in actual and expected losses
Transfer (to) from accretable yield
Balance at end of year
$
$
$
$
53,250 $
(15,731)
10,117
47,636 $
95,093 $
(57,099)
(74)
37,920 $
1,690 $
(4,102)
23,165
20,753 $
10,238 $
(9,837)
2,078
2,479 $
2,688 $
(2,200)
583
1,071 $
162,959
(88,969)
35,869
109,859
39,182 $
(1,717)
(10,117)
27,348 $
81,092 $
(56,702)
74
24,464 $
- $
- $
23,165
(23,165)
2,078
(2,078)
- $
- $
9,203 $
1,978
(583)
10,598 $
129,477
(31,198)
(35,869)
62,410
133
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Non-accrual Loans
The following table presents the recorded investment in loans in non-accrual status by class of loans as of December 31, 2016 and
2015:
Originated and other loans and leases held for investment
Mortgage
Traditional (by origination year):
Up to the year 2002
Years 2003 and 2004
Year 2005
Year 2006
Years 2007, 2008 and 2009
Years 2010, 2011, 2012, 2013
Years 2014, 2015 and 2016
Non-traditional
Loss mitigation program
Home equity loans, secured personal loans
Commercial
Commercial secured by real estate
Middle market
Retail
Other commercial and industrial
Institutional
Middle market
Retail
Floor plan
Consumer
Credit cards
Personal lines of credit
Personal loans
Cash collateral personal loans
Auto and leasing
Total non-accrual originated loans
December 31,
2016
December 31,
2015
(In thousands)
$
$
3,336 $
7,668
4,487
6,746
11,526
10,089
1,404
45,256
4,730
20,744
70,730
-
70,730
4,682
11,561
16,243
-
1,278
1,950
61
3,289
19,532
525
32
1,420
4
1,981
9,052
101,295 $
3,786
5,737
3,627
8,189
14,625
10,588
663
47,215
5,092
20,172
72,479
64
72,543
12,729
8,726
21,455
190,290
1,565
1,932
39
193,826
215,281
369
100
1,146
16
1,631
8,418
297,873
134
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired BBVAPR loans accounted for under ASC 310-20
Commercial
Commercial secured by real estate
Retail
Floor plan
Other commercial and industrial
Retail
Floor plan
Consumer
Credit cards
Personal loans
Auto
Total non-accrual acquired BBVAPR loans accounted for under ASC
310-20
Total non-accrual loans
December 31,
2016
December 31,
2015
(In thousands)
$
143 $
1,149
1,292
121
2
123
1,415
708
120
828
552
2,795
$
104,090 $
228
467
695
178
7
185
880
489
46
535
831
2,246
300,119
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 18 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, 2016 and 2015, loans whose terms have been extended and which are classified as troubled-debt restructurings that
are not included in non-accrual loans amounted to $98.1 million and $93.6 million, respectively, as they are performing under their
new terms.
135
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impaired Loans
The Company evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The
total investment in impaired commercial loans was $54.3 million and $235.8 million at December 31, 2016 and 2015, respectively.
Impaired commercial loans at December 31, 2015 included the PREPA line of credit with an unpaid principal balance of $190.3
million which was sold in 2016. The impaired 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 impaired
commercial loans amounted to $1.8 million and $55.9 million at December 31, 2016 and 2015, respectively. The allowance for loan
and lease losses for impaired commercial loans at December 31, 2015 included $53.3 million of specific allowance for PREPA. The
total investment in impaired mortgage loans was $91.6 million and $90.0 million at December 31, 2016 and 2015, 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 impaired mortgage loans amounted to $7.8 million and $9.2 million at December 31, 2016 and 2015,
respectively.
Originated and Other Loans and Leases Held for Investment
The Company’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, 2016
and 2015 are as follows:
Impaired loans with specific allowance:
Commercial
Residential impaired and troubled-debt restructuring
Impaired loans with no specific allowance:
Commercial
Total investment in impaired loans
Impaired loans with specific allowance:
Commercial
Residential impaired and troubled-debt restructuring
Impaired loans with no specific allowance
Commercial
Total investment in impaired loans
December 31, 2016
Unpaid
Principal
Recorded
Investment
Related
Allowance
Coverage
(In thousands)
13,183 $
100,101
11,698 $
91,650
49,038
162,322 $
41,441
144,789 $
1,626
7,761
N/A
9,387
14%
8%
0%
6%
Unpaid
Principal
December 31, 2015
Recorded
Investment
Related
Allowance
(In thousands)
Coverage
210,718 $
97,424
42,110
350,252 $
199,366 $
89,973
55,947
9,233
35,928
325,267 $
N/A
65,180
13%
9%
0%
11%
$
$
$
$
136
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Acquired BBVAPR Loans
Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
The Company’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, 2016 and 2015 are as follows:
Impaired loans with specific allowance
Commercial
Impaired loans with no specific allowance
Commercial
Total investment in impaired loans
Impaired loans with no specific allowance
Commercial
Total investment in impaired loans
December 31, 2016
Unpaid
Principal
Recorded
Investment
Related
Allowance
Coverage
944 $
240 $
1,184 $
(In thousands)
929
221
1,150 $
141
N/A
141
15%
0%
12%
December 31, 2015
Unpaid
Principal
Recorded
Investment
Specific
Allowance
Coverage
(In thousands)
486 $
486 $
474
474 $
N/A
-
0%
0%
$
$
$
$
$
Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
The Company’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, 2016 and 2015 are as follows:
Impaired loan pools with specific allowance:
Mortgage
Commercial
Construction
Auto
Total investment in impaired loan pools
December 31, 2016
Unpaid
Principal
Recorded
Investment
Allowance
(In thousands)
Coverage
to Recorded
Investment
$
$
595,757 $
160,254
38,838
92,797
887,646 $
569,250 $
156,241
39,287
85,676
850,454 $
2,682
19,873
3,579
4,922
31,056
0%
13%
9%
6%
4%
137
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impaired loan pools with specific allowance:
Mortgage
Commercial
Construction
Auto
Total investment in impaired loan pools
December 31 , 2015
Unpaid
Principal
Recorded
Investment
Allowance
(In thousands)
Coverage
to Recorded
Investment
$
$
608,294 $
287,311
88,180
153,592
1,137,377 $
608,294 $
168,107
87,983
153,592
1,017,976 $
1,761
15,455
5,707
2,862
25,785
0%
9%
6%
2%
3%
The tables above only present information with respect to acquired BBVAPR loans and loan pools accounted for under ASC 310-30 if
there is a recorded impairment to such loans or loan pools and a specific allowance for loan losses.
Acquired Eurobank Loans
The Company’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, 2016 and 2015 are as follows:
Impaired loan pools with specific allowance:
Loans secured by 1-4 family residential properties
Commercial and construction
Consumer
Total investment in impaired loan pools
Impaired loan pools with specific allowance
Loans secured by 1-4 family residential properties
Commercial and construction
Consumer
Total investment in impaired loan pools
December 31, 2016
Unpaid
Principal
Recorded
Investment
Allowance
(In thousands)
Coverage
to Recorded
Investment
88,017 $
81,992
29
170,038 $
73,018 $
72,140
1,372
146,530 $
11,947
9,328
6
21,281
16%
13%
0%
15%
December 31, 2015
Unpaid
Principal
Recorded
Investment
Specific
Allowance
(In thousands)
Coverage
to Recorded
Investment
101,444 $
133,148
6,713
241,305 $
92,273 $
142,377
2,314
236,964 $
22,570
67,365
243
90,178
24%
47%
11%
38%
$
$
$
$
The tables above only present information with respect to acquired Eurobank loans and loan pools accounted for under ASC 310-30 if
there is a recorded impairment to such loans or loan pools and a specific allowance for loan losses.
138
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for
impairment, excluding loans accounted for under ASC 310-30, for the years ended 2016, 2015, and 2014:
Originated and other loans held for investment:
Impaired loans with specific allowance
Commercial
Residential troubled-debt restructuring
Impaired loans with no specific allowance
Commercial
Total interest income from impaired loans
Acquired loans accounted for under ASC 310-20:
Impaired loans with specific allowance
Commercial
Impaired loans with no specific allowance
Commercial
Total interest income from impaired loans
$
$
$
$
2016
2015
2014
Year Ended December 31,
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
(In thousands)
452 $
3,190
1,941
5,583 $
118,980 $
91,139
40,443
250,562 $
280 $
3,219
175,115 $
90,736
237 $
2,623
5,899
90,383
1,350
4,849 $
64,356
330,207 $
9,400
12,260 $
90,748
187,030
- $
319 $
- $
- $
- $
-
-
5,583 $
608
251,489 $
-
4,849 $
-
330,207 $
-
12,260 $
-
187,030
139
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Modifications
The following tables present the troubled-debt restructurings during the years ended 2016, 2015 and 2014.
Year Ended December 31, 2016
Number of
contracts
Pre-Modification
Outstanding
Recorded
Investment
Pre-
Modification
Weighted
Average Rate
Mortgage
Commercial
Consumer
$
90
20
75
11,684
9,833
817
Post-Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average Rate
Post-
Modification
Weighted
Average Term
(in Months)
11,625
10,151
902
4.77%
5.93%
11.23%
439
116
66
Number of
contracts
Pre-Modification
Outstanding
Recorded
Investment
Pre-
Modification
Weighted
Average Rate
Mortgage
Commercial
Consumer
Auto
$
160
9
64
5
21,053
5,664
611
130
Number of
contracts
Pre-Modification
Outstanding
Recorded
Investment
Pre-
Modification
Weighted
Average Rate
Mortgage
Commercial
Consumer
$
162
26
26
21,188
200,446
212
Post-Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average Rate
Post-
Modification
Weighted
Average Term
(in Months)
21,182
13,174
898
131
4.35%
4.57%
13.43%
10.87%
272
56
60
61
Post-Modification
Outstanding
Recorded
Investment
Post-
Modification
Weighted
Average Rate
Post-
Modification
Weighted
Average Term
(in Months)
20,958
200,125
240
4.25%
7.25%
12.96%
420
10
65
The following table presents troubled-debt restructurings for which there was a payment default during the years ended 2016, 2015
and 2014:
2016
Year Ended December 31,
2015
2014
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Mortgage
Commercial
Consumer
Auto
19
2
11
$
$
$
-
$
2,241
157
126
-
(Dollars in thousands)
$
65
7,387
-
8
1
$
$
$
-
177
64
140
15
-
5
$
$
$
-
$
1,700
-
37
-
Pre-
Modification
Weighted
Average Term
(in Months)
(Dollars in thousands)
351 $
64
73
6.05%
5.73%
13.60%
Year Ended December 31, 2015
Pre-
Modification
Weighted
Average Term
(in Months)
(Dollars in thousands)
$
5.42%
6.79%
13.85%
10.51%
356
66
71
65
Year Ended December 31, 2014
Pre-
Modification
Weighted
Average Term
(in Months)
(Dollars in thousands)
350 $
3
56
6.03%
7.25%
10.09%
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Credit Quality Indicators
The Company categorizes originated and other loans and acquired loans accounted for under ASC 310-20 into risk categories based
on relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics,
prior loss experience, and the results of periodic credit reviews of individual loans.
The Company uses the following definitions for risk ratings:
Pass: Loans classified as “pass” have a well-defined primary source of repayment very likely to be sufficient, with no apparent
risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.
Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
institution’s credit position at some future date.
Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful: Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, questionable and improbable.
Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is
not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not
practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass
rated loans.
141
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2016 and 2015, and based on the most recent analysis performed, the risk category of gross originated and other
loans and BBVAPR acquired loans accounted for under ASC 310-20 subject to risk rating by class of loans is as follows:
December 31, 2016
Risk Ratings
Balance
Outstanding
Pass
Special
Mention
Substandard
Doubtful
(In thousands)
Individually
Measured for
Impairment
- $
-
514
4,318
-
-
4,832
-
-
149
740
28
917
5,749
143
-
143
13
-
13
156
5,905 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
1,643
30,117
15,863
-
-
47,623
-
-
1,778
3,705
33
5,516
53,139
-
1,148
1,148
-
2
2
1,150
54,289
Commercial - originated and other loans
held for investment
Commercial secured by real estate:
Corporate
Institutional
Middle market
Retail
Floor plan
Real estate
Other commercial and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
Total
Commercial - acquired loans
(under ASC 310-20)
Commercial secured by real estate:
Retail
Floor plan
Other commercial and industrial:
Retail
Floor plan
Total
Total
$
$
242,770 $
26,800
234,981
249,728
2,989
16,395
773,663
136,438
180,285
81,633
73,705
32,142
504,203
1,277,866
226,768 $
16,067
194,913
221,687
2,989
16,395
678,819
136,438
180,185
63,556
68,529
29,267
477,975
1,156,794
143
2,390
2,533
3,027
2
3,029
5,562
1,283,428 $
-
905
905
3,014
-
3,014
3,919
1,160,713 $
16,002 $
9,090
9,437
7,860
-
-
42,389
-
100
16,150
731
2,814
19,795
62,184
-
337
337
-
-
-
337
62,521 $
142
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2015
Risk Ratings
Balance
Outstanding
Pass
Special
Mention
Substandard
Doubtful
(In thousands)
Individually
Measured for
Impairment
Commercial - originated and other loans
held for investment
Commercial secured by real estate:
Corporate
Institutional
Middle market
Retail
Floor plan
Real estate
$
Other commercial and industrial:
Corporate
Institutional
Middle market
Retail
Floor plan
Total
Commercial - acquired loans
(under ASC 310-20)
Commercial secured by real estate:
Retail
Floor plan
Other commercial and industrial:
Retail
Floor plan
Total
Total
227,557 $
33,807
206,948
241,090
2,892
16,662
728,956
108,582
380,985
107,313
77,797
38,016
712,693
1,441,649
212,410 $
25,907
181,916
217,836
2,892
16,662
657,623
100,826
190,695
97,288
73,757
35,862
498,428
1,156,051
228
2,889
3,117
-
602
602
3,724
616
4,340
7,457
1,449,106 $
3,637
609
4,246
4,848
1,160,899 $
$
15,147 $
-
9,697
7,936
-
-
32,780
-
-
8,052
1,076
2,115
11,243
44,023
-
1,820
1,820
-
-
-
1,820
45,843 $
- $
-
-
5,097
-
-
5,097
-
-
-
1,184
-
1,184
6,281
228
-
228
87
-
87
315
6,596 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
7,900
15,335
10,221
-
-
33,456
7,756
190,290
1,973
1,780
39
201,838
235,294
-
467
467
-
7
7
474
235,768
At December 31, 2016 and 2015, the Company had outstanding credit facilities of approximately $202.8 million and $415.4 million,
respectively, granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, included
within its portfolio of originated and other loans and acquired BBVAPR loans accounted for under ASC 310-30. A substantial portion
of the Company’s credit exposure to Puerto Rico’s government consists of collateralized loans or obligations that have a specific
source of income or revenues identified for their repayment. At December 31, 2016 approximately $191.8 million of these loans 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.
At December 31, 2016, we had approximately $11.0 million of credit facilities to central government and public corporations of the
Commonwealth, consisting of a participation in a loan to the Puerto Rico Housing Finance Authority ("PRHFA") with an outstanding
balance of $10.9 million to be repaid from abandoned or unclaimed funds at financial institutions that revert to the government under a
Puerto Rico escheat law. The loan to PRHFA defaulted on an annual principal payment in the third quarter of 2016.
The outstanding balance of credit facilities to the central government and public corporations decreased by $200.8 million during 2016
mainly as a result of the sale of the PREPA fuel line of credit which had an outstanding balance of $190.3 million at December 31,
2015.
143
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For residential and consumer loan classes, the Company evaluates credit quality based on the delinquency status of the loan. As of
December 31, 2016 and 2015, and based on the most recent analysis performed, the risk category of gross originated and other loans
and acquired BBVAPR loans accounted for under ASC 310-20 not subject to risk rating by class of loans is as follows:
December 31, 2016
Delinquency
Balance
Outstanding
0-29 days
30-59 days 60-89 days 90-119 days 120-364 days
365+ days
(In thousands)
Individually
Measured for
Impairment
Originated and other loans and leases
held for investment
Mortgage
Traditional
(by origination year)
Up to the year 2002
Years 2003 and 2004
Year 2005
Year 2006
Years 2007, 2008
and 2009
Years 2010, 2011, 2012
2013
Years 2014, 2015 and 2016
$
Non-traditional
Loss mitigation program
Home equity secured
personal loans
GNMA's buy-back
option program
Consumer
Credit cards
Overdrafts
Unsecured personal lines of credit
Unsecured personal loans
Cash collateral personal loans
Auto and Leasing
Acquired loans (accounted for under
ASC 310-20)
Consumer
Credit cards
Personal loans
Auto
Total
50,285 $
90,707
50,009
69,300
76,729
139,860
108,199
585,089
22,859
103,528
711,476
337
9,681
44,248 $
78,501
43,177
57,271
61,547
127,375
106,672
518,791
17,631
17,814
554,236
337
(1)
- $
-
-
82
83
60
-
225
-
2,304
2,529
-
-
2,095 $
3,712
1,952
2,397
1,439
1,451
123
13,169
498
1,681
15,348
-
-
368 $
1,767
561
353
865
1,459
386
5,759
366
388
6,513
1,315 $
2,675
1,024
2,210
2,330
1,667
210
11,431
1,263
1,599
14,293
1,552 $
2,100
2,181
3,410
6,459
3,584
761
20,047
3,101
3,759
26,907
-
-
-
2,441
3,141
4,100
707
1,952
1,114
3,577
4,006
4,264
47
15,667
-
75,983
91,650
-
-
721,494
554,572
2,529
15,348
8,954
17,434
31,007
91,650
26,358
207
2,404
246,272
15,274
290,515
756,395
1,768,404
25,023
174
2,327
241,227
15,010
283,761
686,493
1,524,826
527
16
41
2,474
240
3,298
42,714
48,541
283
12
4
1,489
20
1,808
19,014
36,170
191
1
3
1,074
4
1,273
6,253
16,480
334
4
25
8
-
371
1,921
19,726
-
-
4
-
-
4
-
31,011
30,093
2,769
32,862
53,026
85,888
1,854,292 $
28,281
2,587
30,868
47,503
78,371
1,603,197 $
736
48
784
3,652
4,436
52,977 $
369
14
383
1,355
1,738
37,908 $
227
21
248
415
663
17,143 $
480
99
579
101
680
20,406 $
-
-
-
-
-
31,011 $
$
-
-
-
-
-
-
-
91,650
-
-
-
-
-
91,650
144
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2015
Delinquency
Balance
Outstanding
0-29 days
30-59 days 60-89 days 90-119 days 120-364 days
(In thousands)
365+ days
Individually
Measured for
Impairment
Originated and other loans and leases
held for investment
Mortgage
Traditional
(by origination year)
Up to the year 2002
Years 2003 and 2004
Year 2005
Year 2006
Years 2007, 2008
and 2009
Years 2010, 2011, 2012
2013
Year 2014 and 2015
$
Non-traditional
Loss mitigation program
Home equity secured
personal loans
GNMA's buy-back
option program
Consumer
Credit cards
Overdrafts
Unsecured personal lines of credit
Unsecured personal loans
Cash collateral personal loans
Auto and Leasing
Acquired loans (accounted for under
ASC 310-20)
Consumer
Credit cards
Personal loans
Auto
Total
57,789 $
99,446
54,221
78,403
91,546
150,744
85,856
618,005
29,552
101,916
749,473
410
7,945
50,912 $
87,060
47,197
63,659
71,439
134,945
85,128
540,340
23,497
16,031
579,868
346
-
82 $
251
79
318
170
2,218 $
4,867
2,553
2,878
1,665
569
1,611
-
1,469
-
4,173
5,642
-
-
65
15,857
977
1,977
18,811
-
-
530 $
1,261
292
1,168
1,504 $
1,353
1,068
1,895
1,858 $
2,921
2,189
4,871
685
2,972
10,725
434
148
4,518
552
727
5,797
1,982
6,737
281
11,055
2,621
1,728
15,404
234
29,535
1,905
2,538
33,978
-
64
-
1,593
3,578
2,774
685
1,733
843
3,614
3,890
4,466
-
15,231
-
74,742
89,973
-
-
757,828
580,214
5,642
18,811
7,390
19,046
36,752
89,973
22,766
190
2,244
201,156
16,594
242,950
669,163
1,669,941
21,766
166
2,125
197,339
16,450
237,846
590,482
1,408,542
449
24
74
2,083
125
2,755
53,549
61,946
182
-
-
1,107
17
1,306
16,839
36,956
179
-
17
621
2
819
190
-
28
6
-
224
5,708
13,917
2,585
21,855
-
-
-
-
-
-
-
36,752
35,217
3,168
38,385
106,911
145,296
1,815,237 $
33,414
3,079
36,493
96,247
132,740
1,541,282 $
930
14
944
7,553
8,497
70,443 $
384
29
413
2,279
2,692
39,648 $
186
1
187
623
810
14,727 $
303
45
348
209
557
22,412 $
-
-
-
-
-
36,752 $
$
-
-
-
-
-
-
-
89,973
-
-
-
-
-
89,973
145
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES
The composition of the Company’s allowance for loan and lease losses at December 31, 2016 and 2015 was as follows:
Allowance for loans and lease losses on non-acquired loans:
Originated and other loans and leases held for investment:
Mortgage
Commercial
Consumer
Auto and leasing
Unallocated
Total allowance for originated and other loans and lease losses
Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial
Consumer
Auto
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage
Commercial
Auto
Total allowance for acquired BBVAPR loans and lease losses
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties
Commercial and other construction
Consumer
Total allowance for acquired Eurobank loan and lease losses
Total allowance for loan and lease losses
December 31,
2016
December 31,
2015
(In thousands)
$
$
17,344 $
8,995
13,067
19,463
431
59,300
169
3,028
1,103
4,300
2,682
23,452
4,922
31,056
35,356
11,947
9,328
6
21,281
115,937 $
18,352
64,791
11,197
18,261
25
112,626
26
3,429
2,087
5,542
1,762
21,161
2,862
25,785
31,327
22,570
67,365
243
90,178
234,131
The Company maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable
losses based upon an evaluation of known and inherent risks. The Company’s allowance for loan and lease losses policy provides for a
detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying
collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available
information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond the
Company’s control. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC
310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the
inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.
146
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Allowance for Originated and Other Loan and Lease Losses Held for Investment
The following tables presents the activity in our allowance for loan and lease losses and the related recorded investment of the
originated and other loans held for investment portfolio by segment for the periods indicated:
Allowance for loan and lease losses for originated
and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision for originated and other loans and lease
losses
Balance at end of year
$
$
Mortgage
Commercial
Consumer
Auto and
Leasing
Unallocated
Total
Year Ended December 31, 2016
(In thousands)
18,352 $
(6,767)
330
5,429
64,791 $
(62,445)
460
11,197 $
(11,554)
452
18,261 $
(31,731)
12,871
25 $
-
-
112,626
(112,497)
14,113
6,189
12,972
20,062
406
45,058
17,344 $
8,995 $
13,067 $
19,463 $
431 $
59,300
Mortgage
Commercial
Consumer
Auto and
Leasing
Unallocated
Total
Year Ended December 31, 2015
(In thousands)
Allowance for loan and lease losses for originated
and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision for originated and other loans and
lease losses
Balance at end of year
$
19,679 $
(5,397)
391
8,432 $
(5,546)
432
9,072 $
(8,683)
871
14,255 $
(33,375)
13,158
3,679
61,473
9,937
24,223
1 $
-
-
24
51,439
(53,001)
14,852
99,336
$
18,352 $
64,791 $
11,197 $
18,261 $
25 $
112,626
Mortgage
Commercial
Consumer
Auto and
Leasing
Unallocated
Total
Year Ended December 31, 2014
(In thousands)
Allowance for loan and lease losses for originated
and other loans:
Balance at beginning of year
Charge-offs
Recoveries
Provision (recapture) for originated and other
loans and lease losses
Balance at end of year
$
$
19,937 $
(5,011)
428
4,325
14,897 $
(2,424)
333
(4,374)
6,006 $
(5,782)
570
8,278
7,866 $
(26,041)
8,858
23,572
19,679 $
8,432 $
9,072 $
14,255 $
375 $
-
-
(374)
1 $
49,081
(39,258)
10,189
31,427
51,439
147
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Mortgage
Commercial
Consumer
Auto and
Leasing
Unallocated
Total
December 31, 2016
(In thousands)
Allowance for loan and lease losses on originated and
other loans:
Ending allowance balance attributable
to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
$
$
$
Allowance for loan and lease losses on originated and
other loans:
Ending allowance balance attributable
to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
$
$
$
7,761 $
9,583
17,344 $
1,626 $
7,369
8,995 $
- $
13,067
13,067 $
- $
19,463
19,463 $
- $
431
431 $
9,387
49,913
59,300
91,650 $
629,844
721,494 $
53,139 $
1,224,727
1,277,866 $
- $
290,515
290,515 $
- $
756,395
756,395 $
- $
-
- $
144,789
2,901,481
3,046,270
Mortgage
Commercial
Consumer
Auto and
Leasing
Unallocated
Total
December 31, 2015
(In thousands)
9,233 $
9,119
18,352 $
55,947 $
8,844
64,791 $
- $
11,197
11,197 $
- $
18,261
18,261 $
89,973 $
667,855
757,828 $
235,294 $
1,206,355
1,441,649 $
- $
242,950
242,950 $
- $
669,163
669,163 $
- $
25
25 $
65,180
47,446
112,626
- $
-
- $
325,267
2,786,323
3,111,590
148
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, excluding loans accounted for under ASC 310-30, for the periods indicated:
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Balance at beginning of year
Charge-offs
Recoveries
Provision (recapture) for acquired BBVAPR
loan and lease losses accounted for
under ASC 310-20
Balance at end of year
Year Ended December 31, 2016
Commercial
Consumer
Auto
Total
(In thousands)
$
$
$
26
(42)
73
$
3,429
(3,619)
301
$
2,087
(2,155)
1,945
5,542
(5,816)
2,319
112
2,917
(774)
2,255
169
$
3,028
$
1,103
$
4,300
Year Ended December 31, 2015
Commercial
Consumer
Auto
Total
(In thousands)
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Balance at beginning of year
Charge-offs
Recoveries
Provision (recapture) for acquired BBVAPR
loan and lease losses accounted for
under ASC 310-20
Balance at end of year
$
$
$
65
(42)
31
$
1,211
(4,755)
680
$
3,321
(4,548)
2,110
(28)
6,293
1,204
4,597
(9,345)
2,821
7,469
26
$
3,429
$
2,087
$
5,542
Year Ended December 31, 2014
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
Charge-offs
Recoveries
Provision (recapture) for acquired BBVAPR
loan and lease losses accounted for
under ASC 310-20
Balance at end of year
$
$
$
926
(532)
73
$
-
(6,902)
531
$
1,428
(6,011)
2,169
2,354
(13,445)
2,773
(402)
65
$
7,582
1,211
$
5,735
3,321
$
12,915
4,597
149
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2016
Commercial
Consumer
Auto
Total
(In thousands)
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Ending allowance balance attributable
to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:
Ending allowance balance attributable
to loans:
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending loan balance
$
$
$
$
141 $
28
169 $
- $
3,028
3,028 $
- $
1,103
1,103 $
1,150 $
4,412
5,562 $
- $
32,862
32,862 $
- $
53,026
53,026 $
141
4,159
4,300
1,150
90,300
91,450
December 31, 2015
Commercial
Consumer
Auto
Total
(In thousands)
$
$
$
$
26 $
26 $
3,429 $
3,429 $
2,087 $
2,087 $
5,542
5,542
474 $
6,983
7,457 $
- $
38,385
38,385 $
- $
106,911
106,911 $
474
152,279
152,753
150
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)
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, 2016
Mortgage
Commercial
Consumer
(In thousands)
Auto
Total
Allowance for loan and lease losses for acquired
BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of year
Provision for BBVAPR loans and
lease losses accounted for
under ASC 310-30
Loan pools fully charged-off
Allowance de-recognition
Balance at end of year
Allowance for loan and lease losses for acquired
BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of year
Provision (recapture) for BBVAPR loans
and lease losses accounted for
under ASC 310-30
Loan pools fully charged-off
Balance at end of year
$
$
$
$
1,762
$
21,161
$
$
2,862
$
25,785
1,105
11,710
(14)
(171)
2,682 $
(66)
(9,353)
23,452 $
-
-
-
-
- $
2,693
(202)
(431)
4,922 $
15,508
(282)
(9,955)
31,056
Year Ended December 31, 2015
Mortgage
Commercial
Consumer
(In thousands)
Auto
Total
5 $
13,476 $
1,757
-
1,762 $
12,037
(4,352)
21,161 $
- $
-
-
- $
- $
13,481
2,862
-
2,862 $
16,656
(4,352)
25,785
Year Ended December 31, 2014
Mortgage
Commercial
Consumer
(In thousands)
Auto
Total
Allowance for loan and lease losses for acquired
BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of year
$
5
1,713
413
732
2,863
Provision for BBVAPR loans
and lease losses accounted for
under ASC 310-30
Loan pools fully charged-off
Balance at end of year
-
11,763
(413)
(732)
10,618
-
-
$
5 $
13,476 $
-
- $
-
- $
-
13,481
151
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Allowance for Acquired Eurobank Loan Losses
For loans accounted for under ASC 310- 30, as part of the evaluation of actual versus expected cash flows, the Company assesses on a
quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions.
Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through
the end of the reporting period.
The changes in the allowance for loan and lease losses on acquired Eurobank loans for the years ended December 31, 2016, 2015 and
2014 were as follows:
Year Ended December 31, 2016
Loans Secured
by 1-4 Family
Residential
Properties
Commercial and
Construction
Consumer
(In thousands)
Leasing
Total
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of year
Provision for (recapture) covered loan and lease losses, net
$
Loan pools fully charged-off
Allowance de-recognition from new policy
FDIC shared-loss portion of provision for covered loan and lease
losses, net
Balance at end of year
22,570
1,080
$
$
-
(15,094)
$
67,365
1,183
(134)
(59,086)
3,391
-
$
11,947
$
9,328
$
243
$
(8)
-
(229)
-
6
$
-
-
-
-
-
-
$
$
90,178
2,255
(134)
(74,409)
3,391
21,281
Year Ended December 31, 2015
Loans secured
by 1-4 Family
Residential
Properties
Commercial
and
Construction
Consumer
(In thousands)
Leasing
Total
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of year
Provision for covered loan and lease losses, net
Loan pools fully charged-off
FDIC shared-loss portion of provision for covered loan and lease
losses, net
Balance at end of year
$
$
$
5,469
17,718
(722)
$
58,511
20,043
(13,587)
105
22,570
$
2,398
67,365
$
$
265
279
(301)
-
243
$
-
-
-
-
-
$
$
64,245
38,040
(14,610)
2,503
90,178
Year Ended December 31, 2014
Mortgage
Commercial
and
Construction
Consumer
(In thousands)
Leasing
Total
Allowance for loan and lease losses for Eurobank loans:
Balance at beginning of year
$
2,441
$
49,797
$
491
$
Provision for (recapture) covered loan and lease losses, net
2,144
3,717
(181)
FDIC shared-loss portion of provision for covered loan and lease
losses, net
Balance at end of year
$
884
5,469
$
4,997
58,511
$
(45)
265
$
-
-
-
-
$
52,729
5,680
5,836
64,245
$
152
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The FDIC shared-loss portion of provision for acquired Eurobank loans and lease losses, net, represents the credit impairment losses
to be covered under the FDIC loss-share agreement which is increasing the FDIC loss-share indemnification asset.
At December 31, 2016 and 2015, allowance for loan losses on loans covered by the FDIC shared-loss agreement amounted $11.9
million and $22.6 million, respectively, the provision for covered loan and lease losses for the years ended December 31, 2016, 2015,
and 2014 was $1.1 million, $17.7 million, and $5.7 million, respectively.
NOTE 7- FDIC INDEMNIFICATION ASSET, TRUE-UP PAYMENT OBLIGATION, AND FDIC SHARED-LOSS
EXPENSE
In connection with the FDIC-assisted acquisition, the Bank and the FDIC entered into shared-loss agreements pursuant to which the
FDIC covers a substantial portion of any losses on loans (and related unfunded loan commitments), foreclosed real estate and other
repossessed properties covered by the agreements.
The acquired loans, foreclosed real estate, and other repossessed properties subject to the shared-loss agreements are collectively
referred to as “covered assets.” Under the terms of the shared-loss agreements, the FDIC absorbs 80% of losses and shares in 80% of
loss recoveries on covered assets. The term of the shared-loss agreement covering single family residential mortgage loans is ten years
with respect to losses and loss recoveries, while the term of the shared-loss agreement covering commercial loans is five years with
respect to losses and eight years with respect to loss recoveries, from the April 30, 2010 acquisition date. The coverage under the
commercial shared-loss agreement expired on June 30, 2015. The shared-loss agreements also provide for certain costs directly related
to the collection and preservation of covered assets to be reimbursed at an 80% level. The FDIC indemnification asset represents the
portion of estimated losses covered by the shared-loss agreements between the Bank and the FDIC.
The following table presents the activity in the FDIC indemnification asset and true-up payment obligation for the years ended
December 31, 2016, 2015 and 2014:
2016
Year Ended December 31,
2015
(In thousands)
2014
FDIC indemnification asset:
Balance at beginning of year
Shared-loss agreements reimbursements from the FDIC
Increase in expected credit losses to be
covered under shared-loss agreements, net
FDIC indemnification asset expense
Final settlement with the FDIC on commercial loans
Net expenses (reimbursements) incurred under shared-loss
agreements
$
22,599 $
(1,573)
97,378 $
(55,723)
189,240
(47,666)
3,391
(8,040)
-
2,503
(36,398)
(1,589)
5,836
(62,285)
-
(1,966)
16,428
12,253
Balance at end of year
$
14,411 $
22,599 $
97,378
True-up payment obligation:
Balance at beginning of year
Change in true-up payment obligation
Balance at end of year
$
$
24,658 $
2,128
26,786 $
21,981 $
2,677
24,658 $
18,510
3,471
21,981
The FDIC shared-loss expense bears an inverse relationship with a change in the yield of covered loan pools in accordance with ASC
310-30. ASC 310-30 dictates that such pools should be subject to increases in their yield when the present value of the expected cash
flows is higher than the pool’s carrying balance. When the increases in cash flow expectations are driven by reductions in the expected
credit losses, the Bank recognizes that such losses are no longer expected to be collected from the FDIC. Accordingly, the Bank
reduces the FDIC indemnification asset by amortizing the reduction in expected collections throughout the remaining life of the
underlying pools. This amortization is recognized in the FDIC shared-loss expense account.
153
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The underlying factors that caused an increase in the expected cash flows and resulting reduction in projected losses are derived from
the pool-level cash flow forecasts. Credit loss assumptions used to develop each pool-level cash flow forecast are based on the
behavior of defaults, recoveries and losses of the corresponding pool of covered loans.
The FDIC indemnification asset shared-loss expense for the year ended December 31, 2016, 2015 and 2014 amounted to $8.0 million,
$36.4 million and $62.3 million, respectively. The FDIC loss-share coverage for the commercial loans was in effect until June 30,
2015. Accordingly, the Company amortized the remaining portion of the FDIC indemnification asset attributable to non-single family
loans at the close of the second quarter of 2015. At December 31, 2016 and 2015, the FDIC indemnification asset reflects only the
balance for single family residential mortgage loans.
The Company owes the FDIC for the recovery of prior claims. At December 31, 2016 and 2015, the liability for these payments
amounted to $500 thousand and $2.1 million, respectively, and is recorded in other liabilities in the consolidated statements of
financial condition until cash is paid to the FDIC.
Also in connection with the FDIC-assisted acquisition, the Bank agreed to make a true-up payment, also known as clawback liability
or clawback provision, to the FDIC on the date that is 45 days following the last day (such day, the “True-Up Measurement Date”) of
the final shared-loss month, or upon the final disposition of all covered assets under the shared-loss agreements in the event losses
thereunder fail to reach expected levels. Under the shared-loss agreements, the Bank will pay to the FDIC 50% of the excess, if any,
of: (i) 20% of the Intrinsic Loss Estimate of $906.0 million (or $181.2 million) (as determined by the FDIC) less (ii) the sum of: (A)
25% of the asset discount (per bid) (or $227.5 million); plus (B) 25% of the cumulative shared-loss payments (defined as the
aggregate of all of the payments made or payable to the Bank minus the aggregate of all of the payments made or payable to the
FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the True-
Up Measurement Date in respect of each of the shared-loss agreements during which the shared-loss provisions of the applicable
shared-loss agreement is in effect (defined as the product of the simple average of the principal amount of shared-loss loans and
shared-loss assets at the beginning and end of such period times 1%). The estimated liability is included within accrued expenses and
other liabilities in the consolidated statements of financial condition.
This true-up payment obligation may increase if actual and expected losses decline. The Company measures the true-up payment
obligation at fair value. The changes in fair value are included as change in true-up payment obligation within FDIC shared-loss
expense, net in the consolidated statements of operations.
The following table provides the fair value and the undiscounted amount of the true-up payment obligation at December 2016 and
2015:
Carrying amount (fair value)
Undiscounted amount
December 31,
2016
2015
$
$
(In thousands)
26,786 $
33,635 $
24,658
34,956
In connection with the FDIC-assisted acquisition, the Company recognized an FDIC shared-loss expense, net in the consolidated
statements of operations, which consists of the following, for the years ended December 31, 2016, 2015 and 2014:
FDIC indemnification asset expense
Change in true-up payment obligation
Reimbursement to FDIC for recoveries
Final settlement with the FDIC on commercial loans
Total FDIC shared-loss expense, net
2016
Year Ended December 31,
2015
(In thousands)
2014
$
$
8,040 $
2,128
3,413
-
13,581 $
36,398 $
2,677
2,144
1,589
42,808 $
62,285
3,471
-
-
65,756
154
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 8 — PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2016 and 2015 are stated at cost less accumulated depreciation and amortization as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture and fixtures
Information technology and other
Less: accumulated depreciation and amortization
Useful Life
(Years)
—
40
5 — 10
3 — 7
3 — 7
December 31,
2016
2015
(In thousands)
$
$
5,638 $
64,048
20,414
14,479
26,003
130,582
(60,175)
70,407 $
5,638
64,392
20,166
13,656
23,226
127,078
(52,488)
74,590
Depreciation and amortization of premises and equipment totaled $9.4 million in 2016, $11.1 million in 2015 and $10.2 million in
2014. These are included in the consolidated statements of operations as part of occupancy and equipment expenses.
NOTE 9 - SERVICING ASSETS
The Company periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In
addition, the Company may purchase or assume the right to service mortgage loans originated by others. Whenever the Company
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 the Company
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 the Company 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, the Company 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, 2016, the servicing asset amounted to $9.9 million ($7.5 million — December 31, 2015) related to mortgage
servicing rights.
During 2015, the Company completed the sale of certain servicing assets for approximately $7.0 million. The Company recognized a
loss of $2.7 million related to this transaction, which is included as other non-interest (loss) income in the consolidated statements of
operations.
155
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the changes in servicing rights measured using the fair value method for years ended December 31, 2016,
2015 and 2014:
Year Ended December 31,
2016
2015
2014
(In thousands)
Fair value at beginning of year
Sale of mortgage servicing rights
Servicing from mortgage securitizations or asset transfers
Changes due to payments on loans
Changes in fair value related to price of MSR's held for sale
Changes in fair value due to changes in valuation model
inputs or assumptions
$
7,455 $
-
2,616
(489)
-
276
13,992 $
(5,927)
2,620
(1,017)
(2,939)
726
Fair value at end of year
$
9,858 $
7,455 $
13,801
-
2,149
(1,072)
-
(886)
13,992
The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for
the year ended 2016, 2015 and 2014:
Constant prepayment rate
Discount rate
4.24% - 9.14% 5.23% - 15.24%
10.00% - 12.00%
10.00% - 12.00%
4.16% - 13.98%
10.00% - 12.00%
Year Ended December 31,
2016
2015
2014
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, 2016
(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset
Constant prepayment rate
Decrease in fair value due to 10% adverse change
Decrease in fair value due to 20% adverse change
Discount rate
Decrease in fair value due to 10% adverse change
Decrease in fair value due to 20% adverse change
$
$
$
$
$
9,858
(220)
(430)
(51)
(103)
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 2016, 2015 and 2014 totaled $3.7 million, $4.8 million and $6.3 million,
respectively.
156
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 10 — DERIVATIVES
The following table presents the Company’s derivative assets and liabilities at December 31, 2016 and 2015:
Derivative assets:
Options tied to S&P 500 Index
Interest rate swaps not designated as hedges
Interest rate caps
Other
Derivative liabilities:
Interest rate swaps designated as cash flow hedges
Interest rate swaps not designated as hedges
Interest rate caps
Other
Interest Rate Swaps
December 31,
2016
2015
(In thousands)
$
$
$
- $
1,187
143
-
1,330 $
1,004
1,187
139
107
2,437 $
1,170
1,819
32
4
3,025
4,307
1,819
32
4
6,162
The Company enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale
borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix the Company’s
interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap
notional stated rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions, are properly
documented as such, and therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of
the cash flow hedges is recognized in other comprehensive income (loss) and is subsequently reclassified into operations in the period
during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in
accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships.
Currently, the Company 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, 2016:
Notional
Fixed
Variable
Trade
Settlement
Maturity
Type
Interest Rate Swaps
Amount
(In thousands)
36,582
36,582
$
$
Rate
Rate Index
Date
Date
Date
2.4210%
1-Month LIBOR 07/03/13
07/03/13
08/01/23
An accumulated unrealized loss of $1.0 million and $4.3 million was recognized in accumulated other comprehensive income (loss)
related to the valuation of these swaps at December 31, 2016 and 2015, respectively, and the related liability is being reflected in the
audited consolidated statements of financial condition.
At December 31, 2016 and 2015, interest rate swaps not designated as hedging instruments that were offered to clients represented an
asset of $1.2 million and $1.8 million, respectively, and were included as part of derivative assets in the consolidated statements of
financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At December 31, 2016 and
2015, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients
represented a liability of $1.2 million and $1.8 million, respectively, and were included as part of derivative liabilities in the
consolidated statements of financial condition.
157
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table shows a summary of these interest rate swaps not designated as hedging instruments and their terms at December
31, 2016:
Notional
Amount
(In thousands)
Fixed
Rate
Variable
Rate Index
Settlement
Date
Maturity
Date
$
$
$
$
12,500
5.5050% 1-Month LIBOR
04/11/09
04/11/19
12,500
12,500
12,500
5.5050%
1-Month LIBOR
04/11/09
04/11/19
Type
Interest Rate Swaps -
Derivatives Offered to
Clients
Interest Rate Swaps -
Mirror Image Derivatives
Interest Rate Caps
The Company has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their
financial results against increases in interest rates. In these cases, the Company 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, 2016 and 2015, the outstanding total notional amount of interest rate caps
was $136.1 million and $109.8 million, respectively. At December 31, 2016 and 2015, the interest rate caps sold to clients represented
a liability of $139 thousand and $32 thousand, respectively, and were included as part of derivative liabilities in the audited
consolidated statements of financial condition. At December 31, 2016 and December 31, 2015, the interest rate caps purchased as
mirror-images represented an asset of $143 thousand and $32 thousand, respectively, and were included as part of derivative assets in
the audited consolidated statements of financial condition.
Options Tied to Standard & Poor’s 500 Stock Market Index (S&P Index)
In the past, the Company offered its customers certificates of deposit with an option tied to the performance of the S&P 500 Index.
The Company used option agreements with major broker-dealers to manage its exposure to changes in this index. Under the terms of
the option agreements, the Company received the average increase in the month-end value of the index in exchange for a fixed
premium. The changes in fair value of the option agreements used to manage the exposure in the stock market in the certificates of
deposit were recorded in earnings. At December 31, 2016, there were no transactions outstanding, and given the market conditions
and lack of client demand, the Company is not offering option indexed certificates of deposit to customers. At December 31, 2015, the
purchased options used to manage exposure to the S&P 500 Index on stock indexed deposits represented an asset of $1.2 million
(notional amount of $3.4 million), and the options sold to customers embedded in the certificates of deposit and recorded as deposits
in the consolidated statements of financial condition, represented a liability of $1.1 million (notional amount of $3.2 million).
158
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable at December 31, 2016 and 2015 consists of the following:
Loans, excluding acquired loans
Investments
December 31,
2016
2015
(In thousands)
16,706 $
3,521
20,227 $
16,020
4,617
20,637
$
$
Other assets at December 31, 2016 and 2015 consist of the following:
Prepaid expenses
Other repossessed assets
Core deposit and customer relationship intangibles
Mortgage tax credits
Investment in Statutory Trust
Accounts receivable and other assets
December 31,
2016
2015
(In thousands)
17,096 $
3,224
6,160
6,277
1,083
46,525
80,365 $
11,762
6,226
7,838
6,277
1,083
42,786
75,972
$
$
Prepaid expenses amounting to $17.1 million and $11.8 million at December 31, 2016 and 2015, respectively, include prepaid
municipal, property and income taxes aggregating to $12.5 million and $7.0 million, respectively.
In connection with the FDIC-assisted acquisition and the BBVAPR Acquisition, the Company recorded a core deposit intangible
representing the value of checking and savings deposits acquired. At December 31, 2016 and 2015 this core deposit intangible
amounted to $4.3 million and $5.3 million, respectively. In addition, the Company recorded a customer relationship intangible
representing the value of customer relationships acquired with the acquisition of the securities broker-dealer and insurance agency in
the BBVAPR Acquisition. At December 31, 2016 and 2015, this customer relationship intangible amounted to $1.9 million and $2.5
million, respectively.
Other repossessed assets totaled $3.2 million and $6.2 million at December 31, 2016 and 2015, respectively, include repossessed
automobiles amounting to $3.0 million and $5.5 million, respectively, which are recorded at their net realizable value.
At December 31, 2016 and 2015, tax credits for the Company totaled $6.3 million for both periods. These tax credits do not have an
expiration date.
159
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 12— DEPOSITS AND RELATED INTEREST
Total deposits, including related accrued interest payable, as of December 31, 2016 and 2015 consist of the following:
Non-interest bearing demand deposits
Interest-bearing savings and demand deposits
Individual retirement accounts
Retail certificates of deposit
Institutional certificates of deposit
Total core deposits
Brokered deposits
Total deposits
December 31,
2016
2015
(In thousands)
848,502 $
2,219,452
265,754
563,965
190,419
4,088,092
576,395
4,664,487 $
762,009
2,208,180
268,799
441,998
253,791
3,934,777
782,974
4,717,751
$
$
Brokered deposits include $508.4 million in certificates of deposits and $68.0 million in money market accounts at December 31,
2016, and $711.4 million in certificates of deposits and $71.6 million in money market accounts at December 31, 2015.
The weighted average interest rate of the Company’s deposits was 0.62% and 0.57% at December 31, 2016, and 2015 respectively.
Interest expense for the years ended December 31, 2016, 2015 and 2014 was as follows:
2016
Year Ended December 31,
2015
(In thousands)
2014
Demand and savings deposits
Certificates of deposit
$
$
12,004 $
17,249
29,253 $
12,414 $
14,620
27,034 $
17,724
16,230
33,954
At December 31, 2016 and 2015, demand and interest-bearing deposits and certificates of deposit included deposits of Puerto Rico
Cash & Money Market Fund, Inc., which amounted to $15.3 million and $103.7 million, respectively, with a weighted average rate of
0.77% for both periods. As of December 31, 2015 deposits were collateralized with investment securities with a fair value of $81.6
million. As of December 31, 2016, these deposits were not collateralized.
The Puerto Rico Cash & Money Market Fund, Inc.("the Fund") has commenced a process for its eventual dissolution and liquidation,
as set forth in the no-objection letter issued by the OCFI on June 21, 2016.
At December 31, 2016 and 2015, time deposits in denominations of $250 thousand or higher, excluding accrued interest and
unamortized discounts, amounted to $344.0 million and $376.8 million, respectively. Such amounts include public fund time deposits
from various Puerto Rico government municipalities, agencies, and corporations of $2.1 million and $7.6 million at a weighted
average rate of 0.50% and 0.49% at December 31, 2016 and 2015, respectively.
At December 31, 2016 and 2015, total public fund deposits from various Puerto Rico government municipalities, agencies, and
corporations amounted to $170.7 million and $99.0 million, respectively. These public funds were collateralized with commercial
loans amounting to $209.2 million at December 31, 2016 and $410.9 million at December 31, 2015.
160
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Excluding accrued interest of $1.7 million, the scheduled maturities of certificates of deposit at December 31, 2016 are as follows:
Within one year:
Three (3) months or less
Over 3 months through 1 year
Over 1 through 2 years
Over 2 through 3 years
Over 3 through 4 years
Over 4 through 5 years
December 31, 2016
(In thousands)
$
$
277,621
534,548
812,169
488,440
154,545
29,701
41,949
1,526,804
The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts.
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $575 thousand and $1.5
million as of December 31, 2016 and 2015, respectively.
161
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 13 — BORROWINGS AND RELATED INTEREST
Securities Sold under Agreements to Repurchase
At December 31, 2016, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties
with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Company the same or similar
securities at the maturity of these agreements.
At December 31, 2016 and 2015, securities sold under agreements to repurchase (classified by counterparty), excluding accrued
interest in the amount of $1.5 million and $2.2 million, respectively, were as follows:
December 31,
2016
2015
Borrowing
Balance
Fair Value of
Underlying
Collateral
Borrowing
Balance
Fair Value of
Underlying
Collateral
PR Cash and Money Market Fund
JP Morgan Chase Bank NA
Credit Suisse Securities (USA) LLC
$
Total
$
70,010 $
350,219
232,000
652,229 $
(In thousands)
74,538 $
376,674
249,286
700,498 $
- $
262,500
670,000
932,500 $
-
283,483
737,887
1,021,370
The following table shows a summary of the Company’s repurchase agreements and their terms, excluding accrued interest in the
amount of $1.5 million, at December 31, 2016:
Year of Maturity
2017
$
2018
2019
$
Borrowing
Balance
(In thousands)
Weighted-
Average
Coupon
Settlement Date
Maturity
Date
70,010
47,719
232,000
202,500
25,000
75,000
652,229
0.77%
0.20%
4.78%
1.42%
1.52%
1.46%
2.47%
12/27/2016
12/7/2016
3/2/2007
1/3/2017
1/5/2017
3/2/2017
12/10/2012
4/29/2018
12/9/2016
12/9/2016
6/9/2019
12/9/2019
All the repurchase agreements referred above with maturity up to the date of this report were renewed by the Company.
A repurchase agreement in the original amount of $500 million with an original term of ten years, maturing on March 2, 2017, was
modified in February 2016 to terminate, before maturity, $268.0 million of this repurchase agreement at a cost of $12.0 million,
included as a loss on early extinguishment of debt in the consolidated statements of operations. The remaining balance of this
repurchase agreement was $232.0 million at December 31, 2016.
162
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the repurchase liability associated with the repurchase agreement transactions (excluding accrued
interest) by maturity. Also, it includes the carrying value and approximate market value of collateral (excluding accrued interest) at
December 31, 2016 and 2015. There was no cash collateral at December 31, 2016 and 2015.
December 31, 2016
Market Value of Underlying Collateral
Weighted FNMA and
Repurchase Average
FHLMC
GNMA
US
Treasury
Treasury
Liability
Rate
Certificates Certificates
Notes
Total
Less than 90 days
Over 90 days
Total
$
$
349,729
302,500
652,229
3.35% $
1.44%
2.47% $
(Dollars in thousands)
248,288 $
327,627
575,915 $
75,536 $
93
75,629 $
48,954 $
-
48,954 $
372,778
327,720
700,498
December 31, 2015
Market Value of Underlying Collateral
Weighted FNMA and
Repurchase Average
FHLMC
GNMA
US
Treasury
Treasury
Liability
Rate
Certificates Certificates
(Dollars in thousands)
Notes
Total
Less than 90 days
Over 90 days
Total
$
$
30,000 $
902,500
932,500
0.70%
31,961 $
3.18%
974,698
3.10% $ 1,006,659 $
- $
2,131
2,131
- $
12,580
12,580
31,961
989,409
1,021,370
The following summarizes significant data on securities sold under agreements to repurchase as of December 31, 2016 and 2015,
excluding accrued interest:
December 31,
2016
2015
(In thousands)
Average daily aggregate balance outstanding
Maximum outstanding balance at any month-end
Weighted average interest rate during the year
Weighted average interest rate at year end
$
$
663,845 $
902,500 $
2.83%
2.47%
1,012,756
1,158,945
2.92%
3.10%
Advances from the Federal Home Loan Bank of New York
Advances are received from the Federal Home Loan Bank of New York (the “FHLB-NY”) under an agreement whereby the Company
is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At
December 31, 2016 and 2015, these advances were secured by mortgage and commercial loans amounting to $1.4 billion and $1.3
billion, respectively. Also, at December 31, 2016 and 2015, the Company had an additional borrowing capacity with the FHLB-NY of
$1.2 billion and $770.6 million, respectively. At December 31, 2016 and 2015, the weighted average remaining maturity of FHLB’s
advances was 10.6 months and 6.3 months, respectively. The original terms of these advances range between one month and seven
years, and the FHLB-NY does not have the right to exercise put options at par on any advances outstanding as of December 31, 2016.
163
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $300 thousand,
at December 31, 2016:
Year of Maturity
Borrowing
Balance
(In thousands)
Weighted-
Average
Coupon
Settlement Date
Maturity
Date
2017 $
2018
2020
$
36,582
4,031
40,613
30,000
25,000
55,000
9,541
105,154
0.69% 12/1/2016
1.24% 4/3/2012
1/3/2017
4/3/2017
2.19% 1/16/2013
2.18% 1/16/2013
1/16/2018
1/16/2018
2.59% 7/19/2013
1.66%
7/20/2020
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 and $102.6 million at December 31, 2016 and 2015, respectively. On
September 29, 2016, the Company repaid $67.0 million of subordinated capital notes at maturity.
In August 2003, the Statutory Trust II, a special purpose entity of the Company, was formed for the purpose of issuing trust
redeemable preferred securities. In September 2003, $35.0 million of trust redeemable preferred securities were issued by the
Statutory Trust II as part of a pooled underwriting transaction.
The proceeds from this issuance were used by the Statutory Trust II to purchase a like amount of a floating rate junior subordinated
deferrable interest debenture issued by the Company. The subordinated deferrable interest debenture has a par value of $36.1 million,
bears interest based on 3-month LIBOR plus 295 basis points (3.94% at December, 2016; 3.48.% at December 31, 2015), 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
2017). The trust redeemable preferred securities have the same maturity and call provisions as the subordinated deferrable interest
debenture. The subordinated deferrable interest debenture issued by the Company is accounted for as a liability denominated as a
subordinated capital note on the consolidated statements of financial condition.
The subordinated capital note is treated as Tier 1 capital for regulatory purposes. Under the Dodd-Frank Act and the new capital rules
issued by the federal banking regulatory agencies in July 2013, bank holding companies are prohibited from including in their Tier 1
capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments
issued before May 19, 2010 by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion
as of December 31, 2009, may continue to be included as Tier 1 capital. Therefore, the Company is permitted to continue to include its
existing trust preferred securities as Tier 1 capital.
Other borrowings
As of December 31, 2015, the Company presented in the consolidated statements of financial condition other borrowings amounting
to $1.7 million, which mainly consisted of unsecured fixed-rate borrowings. On July 21, 2016, the $1.7 million outstanding as a
fixed-rate borrowing was repaid, as requested by the Trustee of the Certificate of the Fund.
164
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 14 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
The Company’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, the
Company’s securities purchased under agreements to resell and securities sold under agreements to repurchase have a right of set-off
with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default, each party
has a right of set-off against the other party for amounts owed in the related agreements and any other amount or obligation owed in
respect of any other agreement or transaction between them. Security collateral posted to open and maintain a master netting
agreement with a counterparty, in the form of cash and securities, may from time to time be segregated in an account at a third-party
custodian pursuant to a an account control agreement.
The following table presents the potential effect of rights of set-off associated with the Company’s recognized financial assets and
liabilities at December 31, 2016 and 2015:
December 31, 2016
Gross Amounts Not Offset in the
Statement of Financial Condition
Gross Amounts
Gross Amount
of Recognized
Assets
Offset in the
Statement of
Financial
Condition
Net Amount of
Assets Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Received
Net
Amount
Derivatives
$
1,330 $
- $
(In thousands)
1,330 $
2,003 $
- $
(673)
December 31, 2015
Gross Amounts Not Offset in the
Statement of Financial Condition
Gross Amounts
Gross Amount
of Recognized
Assets
Offset in the
Statement of
Financial
Condition
Net amount of
Assets Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Received
Net
Amount
(In thousands)
Derivatives
$
3,025 $
- $
3,025 $
2,000 $
- $
1,025
165
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2016
Gross Amounts Not Offset in the
Statement of Financial Condition
Gross Amount
of Recognized
Liabilities
Gross Amounts
Offset in the
Statement of
Financial
Condition
Net Amount of
Liabilities
Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Provided
Net
Amount
Derivatives
Securities sold under agreements to
repurchase
Total
$
$
2,437 $
652,229
654,666 $
- $
-
- $
2,437 $
(In thousands)
- $
1,980 $
457
652,229
654,666 $
700,498
700,498 $
-
1,980 $
(48,269)
(47,812)
December 31, 2015
Gross Amounts Not Offset in the
Statement of Financial Condition
Gross Amount
of Recognized
Liabilities
Gross Amounts
Offset in the
Statement of
Financial
Condition
Net Amount of
Liabilities
Presented
in Statement
of Financial
Condition
Financial
Instruments
Cash
Collateral
Provided
Net
Amount
Derivatives
Securities sold under agreements to
repurchase
Total
$
7,257 $
932,500
$
939,757 $
- $
-
- $
(In thousands)
7,257 $
- $
1,980 $
5,277
932,500
1,021,370
-
939,757 $
1,021,370 $
1,980 $
(88,870)
(83,593)
NOTE 15 — EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan containing a cash or deferred arrangement qualified under Sections 1081.01(a) and 1081.01(d)
of the 2011 Code, and Sections 401(a) and 401(k) of the United States Internal Revenue Code of 1986, as amended (the “U.S. Code”).
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 the Company who are age twenty-one or older. Under this plan, participants may
contribute each year up to $18,000.The Company'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 between 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. The Company contributed $792 thousand, $808 thousand and $812 thousand in cash
during 2016, 2015 and 2014, respectively. The Company’s contribution becomes 100% vested once the employee completes three
years of service.
Also, the Company 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.
166
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 16 — RELATED PARTY TRANSACTIONS
The Bank grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of
business. These loans are offered at the same terms as loans to unrelated third parties. The activity and balance of these loans for the
years ended December 31, 2016, 2015 and 2014 was as follows:
2016
Year Ended December 31,
2015
(In thousands)
2014
Balance at the beginning of year
New loans and disbursements
Repayments
Credits of persons no longer
considered related parties
Balance at the end of year
$
31,475 $
2,329
(4,784)
-
$
29,020 $
27,011 $
13,581
(9,117)
-
31,475 $
18,963
21,797
(13,725)
(24)
27,011
NOTE 17 — INCOME TAXES
The Company is subject to the dispositions of the 2011 Puerto Rico Internal Revenue Code, as amended (the "Code"). The Code
imposes a maximum corporate tax rate of 39%. The Company maintained a lower effective tax rate for the years ended December 31,
2016, 2015 and 2014.
Under Puerto Rico law, all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. The
Company 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 (benefit) for the years ended December 31, 2016, 2015 and 2014 are as follows:
2016
Year Ended December 31,
2015
(In thousands)
2014
Current income tax expense
Deferred income tax expense (benefit)
Total income tax expense (benefit)
$
$
2,768 $
23,226
25,994 $
19,775 $
(37,329)
(17,554) $
13,097
24,155
37,252
In relation to the exempt income level, for 2016, 2015, and 2014 the Bank’s investment securities portfolio and loans portfolio
generated net tax-exempt interest income of $10.0 million, $17.6 million, and $40.5 million, respectively. OIB generated exempt
income of $10.3 million, $6.3 million and $16.5 million for the years ended 2016, 2015 and 2014, respectively.
167
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s income tax expense differs from amounts computed by applying the applicable statutory rate to income (loss) before
income taxes as follow:
Income tax expense (benefit) at statutory rates
Tax effect of exempt and excluded income, net
Disallowed net operating loss carryover
Change in valuation allowance
Release of unrecognized tax benefits, net
Loan tax basis change effect
Capital (gain) loss at preferential rate
Other items, net
Income tax expense (benefit)
2016
2015
2014
Amount
Rate
Amount
Rate
Amount
Rate
Year Ended December 31,
$
$
33,220
(11,178)
1,406
(9)
(135)
-
2,394
296
25,994
(Dollars in thousands)
39.00% $
-13.12%
1.65%
-0.01%
-0.16%
0.00%
2.81%
0.34%
30.51% $
(7,823)
(8,625)
556
(2,219)
(385)
-
283
659
(17,554)
-39.00% $
-43.00%
2.77%
-11.06%
-1.92%
0.00%
1.41%
3.28%
-87.52% $
47,749
(10,002)
8,289
(958)
(1,093)
(7,642)
-
909
37,252
39.00%
-26.85%
22.25%
-2.57%
-2.94%
-20.51%
0.00%
2.00%
10.82%
The Company classifies unrecognized tax benefits in income taxes payable. These gross unrecognized tax benefits would affect the
effective tax rate if realized. At December 31, 2016 the amount of unrecognized tax benefits was $2.0 million (December 31, 2015 -
$2.2 million). The Company had accrued $229 thousand at December 31, 2016 (December 31, 2015 - $175 thousand) for the payment
of interest and penalties relating to unrecognized tax benefits. During 2016, $1.4 million was released based on the application of the
statute of limitations, and an additional accrual of $1.1 million was recorded due to other tax positions taken by management.
The following table presents a reconciliation of unrecognized tax benefits:
Year Ended December 31,
2016
2015
2014
Balance at beginning of year
Additions for tax positions of prior years
Additions (reductions) due to new tax positions
Reduction for tax positions as a result of lapse of statute of limitations
$
2,175
$
229
999
(1,363)
In thousands)
2,560
$
175
(560)
-
Balance at end of year
$
2,040
$
2,175
$
4,042
187
(1,388)
(281)
2,560
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for
current tax year positions, expiration of open income tax returns due to the statute of limitations, changes in management’s judgment
about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition elimination of uncertain tax
positions.
168
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate
temporary differences. The carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate
sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future,
the Company may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense
in the consolidated statements of operations.
Deferred tax asset:
Allowance for loan and lease losses and other reserves
Loans and other real estate valuation adjustment
Net capital and operating loss carry forwards
Alternative minimum tax
Deposit and borrowings valuation adjustment
Unrealized net loss included in other comprehensive income
S&P option contracts
Acquired portfolio
FDIC shared-loss indemnification asset
Other assets allowances
Other deferred tax assets
Total gross deferred tax asset
Less: valuation allowance
Net gross deferred tax assets
Deferred tax liability:
FDIC-assisted acquisition, net
Customer deposit and customer relationship intangibles
Loans and building valuation adjustment
Unrealized net gain on available-for-sale securities
Servicing asset
Other deferred tax liabilities
Total gross deferred tax liabilities
$
December 31,
2016
2015
(In thousands)
84,959 $
11,120
9,686
15,799
-
725
-
36,237
5,344
1,547
4,391
169,808
(3,133)
166,675
(25,862)
(2,402)
(9,522)
-
(3,844)
(845)
(42,475) $
129,234
10,759
11,043
16,240
133
1,680
393
37,523
2,802
1,547
5,612
216,966
(3,142)
213,824
(47,956)
(3,057)
(9,991)
(2,566)
(2,907)
(1,446)
(67,923)
Net deferred tax asset
$
124,200 $
145,901
In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or
the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of
future taxable income during the periods in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax
asset are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 2016. 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.
The Company and its subsidiaries have operating loss carry-forwards for income tax purposes which are available to offset future
taxable income and capital gains and are available until December 2025. These operating loss carry-forwards amount to approximately
$9.5 million as of December 31, 2016.
The Company 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.
169
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 18 — REGULATORY CAPITAL REQUIREMENTS
Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal
and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Pursuant to the Dodd-Frank Act, federal banking regulators have adopted new capital rules that became effective January 1, 2015 for
the Company and the Bank (subject to certain phase-in periods through January 1, 2019) and that replaced their general risk-based
capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other matters, the new capital rules: (i) introduce
a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets;
(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii)
mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;
and (iv) expand the scope of the deductions from and adjustments to capital as compared to prior regulations. The new capital rules
prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-
derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the
assets, and resulting in higher risk weights for a variety of asset classes.
Pursuant to the new capital rules, the minimum capital ratios requirements as of January 1, 2015 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, 2016 and 2015, the Company and the Bank met all capital adequacy requirements to which they are subject. As of
December 31, 2016 and 2015, 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.
170
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2016 and 2015 are as follows:
Company Ratios
As of December 31, 2016
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Common equity tier 1 capital to risk-weighted assets
Tier 1 capital to average total assets
As of December 31, 2015
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Common equity tier 1 capital to risk-weighted assets
Tier 1 capital to average total assets
Actual
Minimum Capital
Requirement
Minimum to be Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
$
$
$
$
$
$
$
876,657
819,662
627,733
819,662
846,748
782,912
594,482
782,912
19.62% $
18.35% $
14.05% $
12.99% $
17.29% $
15.99% $
12.14% $
11.18% $
357,404
268,053
201,040
252,344
391,723
293,792
220,344
280,009
8.00% $
6.00% $
4.50% $
4.00% $
8.00% $
6.00% $
4.50% $
4.00% $
446,756
357,404
290,391
315,430
489,654
391,723
318,275
350,011
10.00%
8.00%
6.50%
5.00%
10.00%
8.00%
6.50%
5.00%
Bank Ratios
As of December 31, 2016
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Common equity tier 1 capital to risk-weighted assets
Tier 1 capital to average total assets
As of December 31, 2015
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Common equity tier 1 capital to risk-weighted assets
Tier 1 capital to average total assets
Actual
Minimum Capital
Requirement
Minimum to be Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
$
$
$
$
$
$
$
857,259
800,544
800,544
800,544
815,458
751,886
751,886
751,886
19.23% $
17.96% $
17.96% $
12.75% $
16.70% $
15.40% $
15.40% $
10.80% $
356,596
267,447
200,585
251,200
390,688
293,016
219,762
278,399
8.00% $
6.00% $
4.50% $
4.00% $
8.00% $
6.00% $
4.50% $
4.00% $
445,745
356,596
289,734
314,000
488,360
390,688
317,434
347,999
10.00%
8.00%
6.50%
5.00%
10.00%
8.00%
6.50%
5.00%
171
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 19 – EQUITY-BASED COMPENSATION PLAN
The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units, and dividend equivalents, as well as equity-based performance awards. The Omnibus Plan
replaced and superseded the Stock Option Plans. All outstanding stock options under the Stock Option Plans continue in full force
and effect, subject to their original terms.
The activity in outstanding options for the years ended December 31, 2016, 2015 and 2014 is set forth below:
Year Ended December 31,
2016
2015
2014
Number
Of
Options
951,523 $
-
(24,752)
(9,502)
917,269 $
Weighted
Average
Exercise
Price
12.45
-
12.43
16.65
14.08
Number
Of
Options
888,571 $
179,225
(112,704)
(3,569)
951,523 $
Weighted
Average
Exercise
Price
14.12
17.44
19.78
16.09
12.45
Number
Of
Options
908,118 $
193,100
(54,397)
(158,250)
888,571 $
Weighted
Average
Exercise
Price
14.46
16.10
11.86
19.29
14.12
Beginning of year
Options granted
Options exercised
Options forfeited
End of year
The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options
outstanding at December 31, 2016:
Range of Exercise Prices
$5.63 to $8.45
8.46 to 11.26
11.27 to 14.08
14.09 to 16.90
16.91 to 19.71
19.72 to 22.53
Outstanding
Exercisable
Number of
Options
Weighted
Average
Exercise Price
4,078
1,000
437,266
302,200
171,225
1,500
917,269 $
8.28
10.29
11.91
15.37
17.44
21.86
14.08
Weighted
Average
Contract Life
Remaining
(Years)
Number of
Options
Weighted
Average
Exercise Price
2.3
0.6
3.6
6.7
8.2
1.2
5.5
4,078
1,000
401,002
110,550
-
1,500
518,130 $
8.28
10.29
11.92
15.10
-
21.86
12.60
Aggregate Intrinsic Value
$
-
$
261,189
The average fair value of each option granted was $5.77 during 2015 and 2014. The average fair value of each option granted was
estimated at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a
free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the
Company’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.
172
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following assumptions were used in estimating the fair value of the options granted during the years ended December 31, 2015
and 2014, since there were no options granted during the year ended December 31, 2016.
Weighted average assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
Year Ended December 31,
2014
2015
1.89%
40.93%
2.41%
8.0
1.87%
42.08%
2.38%
8.0
The following table summarizes the activity in restricted units under the Omnibus Plan for the years ended December 31, 2016, 2015
and 2014:
2016
Weighted
Average
Year Ended December 31,
2015
Weighted
Average
2014
Weighted
Average
Restricted
Units
Grant Date
Fair Value
Restricted
Units
Grant Date
Fair Value
Restricted
Units
Grant Date
Fair Value
138,400 $
-
(76,903)
(1,697)
59,800 $
16.17
-
16.04
17.02
16.64
153,050 $
26,700
(39,750)
(1,600)
138,400 $
14.95
16.66
11.83
15.45
16.17
158,750 $
39,200
(37,342)
(7,558)
153,050 $
13.95
16.10
12.03
14.30
14.95
Beginning of year
Restricted units granted
Restricted units lapsed
Restricted units forfeited
End of year
The total unrecognized compensation cost related to non-vested restricted units to members of management at December 31, 2016 was
$1.8 million and is expected to be recognized over a weighted-average period of 2.3 years.
173
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 20 – STOCKHOLDERS’ EQUITY
Additional Paid-in Capital
Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of
issuance. As of both periods, December 31, 2016 and 2015 accumulated issuance costs charged against additional paid in capital
amounted to $13.6 million and $10.1 million for preferred and common stock, respectively.
Legal Surplus
The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income or loss for the year be transferred to a reserve
fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At December 31, 2016 and 2015,
the Bank’s legal surplus amounted to $76.3 million and $70.4 million, respectively. The amount transferred to the legal surplus
account is not available for the payment of dividends to shareholders.
Treasury Stock
Under the Company’s current stock repurchase program it is authorized to purchase in the open market up to $70 million of its
outstanding shares of common stock, of which approximately $7.7 million of authority remains. The shares of common stock
repurchased are to be held by the Company as treasury shares. During the year ended December 31, 2016 the Company did not
purchase any shares under the program. During the year ended December 31, 2015, the Company purchased 803,985 shares under
this program for a total of $8.9 million, at an average price of $11.10 per share. During the year ended December 31, 2014, the
Company purchased 1,153,998 shares at an average price of $14.66 per share.
Period
April 2015
May 2015
June 2015
July 2015
Year Ended December 31, 2015
Total number of
shares purchased as
part of stock
repurchase programs
Average
price paid
per share
Dollar amount of
shares repurchased
(excluding
commissions paid)
(In thousands)
204,338 $
48,200
51,447
500,000
803,985 $
14.38 $
13.09
12.81
9.39
11.10 $
2,939
631
659
4,696
8,925
At December 31, 2016 the number of shares that may yet be purchased under the $70 million program is estimated at 590,141 and was
calculated by dividing the remaining balance of $7.7 million by $13.10 (closing price of the Company common stock at December 31,
2016.
174
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The activity in connection with common shares held in treasury by the Company for the years ended December 31, 2016 and 2015 is
set forth below:
Year Ended December 31,
2016
Shares
Dollar
Amount
Shares
2015
Dollar
Amount
8,757,960 $
(In thousands, except shares data)
105,379 8,012,254 $
97,070
(46,935)
(519)
(58,279)
(641)
-
-
803,985
8,950
Beginning of year
Common shares used upon lapse of restricted
stock units
Common shares repurchased as part of the stock
repurchase program
End of year
8,711,025
$
104,860
8,757,960
$
105,379
NOTE 21 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, net of income taxes, as of December 31, 2016, and 2015 consisted of:
December 31,
2016
2015
(In thousands)
$
1,617 $
22,044
-
592
2,209
(1,004)
391
(613)
1,596 $
(3,196)
(1,924)
16,924
(4,307)
1,380
(2,927)
13,997
Unrealized gain on securities available-for-sale which are not
other-than-temporarily impaired
Unrealized loss on securities available-for-sale which are
other-than-temporarily impaired
Income tax effect of unrealized gain on securities available-for-sale
Net unrealized gain on securities available-for-sale which are not
other-than-temporarily impaired
Unrealized loss on cash flow hedges
Income tax effect of unrealized loss on cash flow hedges
Net unrealized loss on cash flow hedges
Accumulated other comprehensive income, net of income taxes
$
175
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the years ended
December 31, 2016, 2015 and 2014:
Year Ended December 31,
2016
Net unrealized
Net unrealized Accumulated
gains on
securities
loss on
other
cash flow
comprehensive
available-for-sale
hedges
income
(In thousands)
Beginning balance
$
16,924 $
(2,927) $
13,997
Other comprehensive loss before reclassifications
Amounts reclassified out of accumulated other
comprehensive income (loss)
Other comprehensive income (loss)
Ending balance
$
(14,454)
(261)
(14,715)
2,209 $
(1,628)
3,942
2,314
(613) $
(16,082)
3,681
(12,401)
1,596
Year Ended December 31,
2015
Net unrealized
Net unrealized Accumulated
gains on
securities
loss on
other
cash flow
comprehensive
available-for-sale
hedges
income
(In thousands)
Beginning balance
$
25,765 $
(6,054) $
19,711
Other comprehensive loss before reclassifications
(3,250)
(3,019)
(6,269)
Other-than-temporary impairment amount
reclassified from accumulated other
comprehensive income
Amounts reclassified out of accumulated other
comprehensive income (loss)
Other comprehensive income (loss)
Ending balance
$
(4,662)
(929)
(8,841)
16,924 $
-
6,146
3,127
(2,927) $
(4,662)
5,217
(5,714)
13,997
Year Ended December 31,
2014
Net unrealized
Net unrealized Accumulated
gains on
securities
loss on
cash flow
available-for-sale
hedges
other
comprehensive
income
(In thousands)
Beginning balance
$
11,433 $
(8,242) $
Other comprehensive income (loss) before
reclassifications
Amounts reclassified out of accumulated other
comprehensive income
Other comprehensive income
Ending balance
$
14,207
(5,157)
125
14,332
25,765 $
7,345
2,188
(6,054) $
3,191
9,050
7,470
16,520
19,711
176
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents reclassifications out of accumulated other comprehensive income for the years ended December 31,
2016, 2015 and 2014:
Amount reclassified out of accumulated
other comprehensive income
Affected Line Item in
Year Ended December 31,
2015
2016
2014
Consolidated Statement
of Operations
(In thousands)
Cash flow hedges:
Interest-rate contracts
Tax effect from increase in capital gains tax rate
Available-for-sale securities:
Other-than-temporary impairment losses on investment
securities
Residual tax effect from OIB's change in applicable tax rate
Tax effect from increase in capital gains tax rate
$
$
3,642 $
300
6,443 $
(297)
6,572 Net interest expense
773 Income tax expense
-
(1,490)
32
(293)
3,681 $
45
516
5,217 $
-
Net impairment losses
recognized in earnings
170 Income tax expense
(45) Income tax expense
7,470
NOTE 22 – EARNINGS (LOSS) PER COMMON SHARE
The calculation of earnings (loss) per common share for the years ended December 31, 2016, 2015 and 2014 is as follows:
$
Net income (loss)
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)
Convertible preferred stock (Series C)
Income (loss) available to common shareholders
Effect of assumed conversion of the convertible
' ' preferred stock
$
2016
Year Ended December 31,
2015
(In thousands, except per share data)
59,186
(2,504) $
$
(6,512)
(7,350)
45,324
$
(6,512)
(7,350)
(16,366) $
7,350
7,350
Income (loss) available to common shareholders
assuming conversion
$
52,674
$
(9,016) $
Average common shares outstanding
Effect of dilutive securities:
Average potential common shares-options
Average potential common shares-assuming
' ' conversion of convertible preferred stock
Total weighted average common shares '
'outstanding and equivalents
Earnings (loss) per common share - basic
Earnings (loss) per common share - diluted
$
$
43,913
37
7,138
44,231
68
7,156
51,088
51,455
1.03
$
1.03
$
(0.37) $
(0.37) $
2014
85,181
(6,512)
(7,350)
71,319
7,350
78,669
45,024
155
7,147
52,326
1.58
1.50
In computing diluted earnings (loss) per common share, the 84,000 shares of convertible preferred stock, which remain outstanding at
December 31, 2016, 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 (loss)
per common share, the dividends declared during the years ended 2016, 2015 and 2014 on the convertible preferred stock were added
back as income available to common shareholders.
177
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the years ended 2016, 2015 and 2014, weighted-average stock options with an anti-dilutive effect on (loss) earnings per share not
included in the calculation amounted to 949,134, 887,307 and 320,772, respectively
NOTE 23 – GUARANTEES
At December 31, 2016, the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters of credit
represented a liability of $2.0 million (December 31, 2015- $14.7 million).
As a result of the BBVAPR Acquisition, the Company assumed a liability for residential mortgage loans sold subject to credit
recourse, pursuant to FNMA’s residential mortgage loan sales and securitization programs. At December 31, 2016 and 2015, the
unpaid principal balance of residential mortgage loans sold subject to credit recourse was $20.1 million and $22.4 million,
respectively.
The following table shows the changes in the Company’s liability for estimated losses from these credit recourse agreements, included
in the consolidated statements of financial condition during the years ended December 31, 2016, 2015 and 2014.
Balance at beginning of year
Net (charge-offs/terminations) recoveries
Balance at end of year
$
$
439 $
271
710 $
927 $
(488)
439 $
1,955
(1,028)
927
2016
Year Ended December 31,
2015
(In thousands)
2014
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 the Company is obligated to repurchase the loan. The recourse obligation will be
fully extinguished before the end of 2017.
If a borrower defaults, pursuant to the credit recourse provided, the Company is required to repurchase the loan or reimburse the third
party investor for the incurred loss. The maximum potential amount of future payments that the Company 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 2016, the Company repurchased approximately $515 thousand of unpaid principal balance in
mortgage loans subject to the credit recourse provisions. If a borrower defaults, the Company has rights to the underlying collateral
securing the mortgage loan. The Company 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, 2016, the Company’s liability for estimated credit losses related to loans
sold with credit recourse amounted to $710 thousand (December 31, 2015– $439 thousand).
When the Company sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the
characteristics of the loans sold. The Company'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 the Company to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified
characteristics, the Company may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to
the loans. During the year ended December 31, 2016, the Company repurchased $3.7 million (December 31, 2015 – $22.1 million) of
unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above.
During 2016, 2015 and 2014, the Company recognized $380 thousand, $1.4 million and $143 thousand, respectively, in losses from
the repurchase of residential mortgage loans sold subject to credit recourse, and $1.3 million, $2.5 million, and $2.5 million during
2016, 2015, and 2014, respectively, from the repurchase of residential mortgage loans as a result of breaches of the customary
representations and warranties.
178
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 the Company 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, 2016, the
Company serviced $799.7 million in mortgage loans for third-parties. The Company 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, the Company must
absorb the cost of the funds it advances during the time the advance is outstanding. The Company 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 the Company would not receive any future servicing income with respect to
that loan. At December 31, 2016, the outstanding balance of funds advanced by the Company under such mortgage loan servicing
agreements was approximately $334 thousand (December 31, 2015 - $301 thousand). To the extent the mortgage loans underlying the
Company's servicing portfolio experience increased delinquencies, the Company 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 24— COMMITMENTS AND CONTINGENCIES
Loan Commitments
In the normal course of business, the Company becomes a party to credit-related financial instruments with off-balance-sheet risk to
meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial
letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amount of those
instruments reflects the extent of the Company’s involvement in particular types of financial instruments.
The Company’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for
commitments to extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented
by the contractual notional 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. The Company 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, 2016 and 2015 were as follows:
Commitments to extend credit
Commercial letters of credit
December 31,
2016
2015
(In thousands)
$
492,885 $
456,720
2,721
1,508
Commitments to extend credit represent agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the counterparty.
At December 31, 2016 and 2015, 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 $667 thousand at December 31, 2016 and 2015.
179
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2016, and 2015, is as follows:
December 31,
2016
2015
(In thousands)
Standby letters of credit and financial guarantees
$
4,041 $
Loans sold with recourse
20,126
14,656
22,374
Standby letters of credit and financial guarantees are written conditional commitments issued by the Company to guarantee the
payment and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the
beneficiary may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing
letters of credit in the event of nonperformance is the face amount of the letter of credit or financial guarantee. These guarantees are
primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on
management’s credit evaluation of the customer.
Lease Commitments
The Company has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for
the years ended December 31, 2016, 2015 and 2014, amounted to $8.5 million, $9.2 million and $9.7 million, respectively, and is
included in the “occupancy and equipment” caption in the audited consolidated statements of operations. Future rental commitments
under leases in effect at December 31, 2016, exclusive of taxes, insurance, and maintenance expenses payable by the Company, are
summarized as follows:
Year Ending December 31,
2017
2018
2019
2020
2021
Thereafter
Minimum
Rent
(In thousands)
7,138
$
6,563
6,522
5,795
4,965
7,678
38,661
$
180
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contingencies
The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course
of business, the Company and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of the
Company, including the Bank (and its subsidiary OIB), Oriental Financial Services, and Oriental Insurance, are subject to regulation
by various U.S., Puerto Rico and other regulators.
The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the
Company and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or
scope of any penalties or other relief sought as appropriate in each pending matter.
Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of the Company’s management,
based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not
be likely to have a material adverse effect on the consolidated statements of financial condition of the Company. Nonetheless, given
the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an
adverse outcome in certain of these matters could, from time to time, have a material adverse effect on the Company’s consolidated
results of operations or cash flows in particular quarterly or annual periods. The Company has evaluated all litigation and regulatory
matters where the likelihood of a potential loss is deemed reasonably possible. The Company has determined that the estimate of the
reasonably possible loss is not significant.
NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the fair value measurement framework under GAAP.
Fair Value Measurement
The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer
a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Money market investments
The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial
condition as these are reasonable estimates of fair value given the short-term nature of the instruments.
Investment securities
The fair value of investment securities is based on quoted market prices, when available, or market prices provided by Interactive Data
Corporation ("IDC"), and independent, well-recognized pricing company. Such securities are classified as Level 1 or Level 2
depending on the basis for determining fair value. If listed prices or quotes are not available, fair value is based upon externally
developed models that use both observable and unobservable inputs depending on the market activity of the instrument, and such
securities are classified as Level 3. At December 31, 2016 and 2015, the Company did not have investment securities classified as
Level 3.
181
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivative instruments
The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of
interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on
earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for
rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include
discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account
for the industry sector and the credit rating of the counterparty and/or the Company.
Certain other derivative instruments with limited market activity are valued using externally developed models that consider
unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3. In
the past, the Company offered its customers certificates of deposit with an option tied to the performance of the S&P Index and used
equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value was
obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its measurement
tool for these options. The payoff of these options was linked to the average value of the S&P Index on a specific set of dates during
the life of the option. The methodology used an average rate option or a cash-settled option whose payoff was based on the difference
between the expected average value of the S&P Index during the remaining life of the option and the strike price at inception. The
assumptions, which were uncertain and required a degree of judgment, included primarily S&P Index volatility, forward interest rate
projections, estimated index dividend payout, and leverage. At December 31, 2016, there were no options tied to the S&P Index
outstanding.
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.
182
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Assets and liabilities measured at fair value on a recurring and non-recurring basis, are summarized below:
Recurring fair value measurements:
Investment securities available-for-sale
Trading securities
Money market investments
Derivative assets
Servicing assets
Derivative liabilities
Non-recurring fair value measurements:
Impaired commercial loans
Foreclosed real estate
Other repossessed assets
Recurring fair value measurements:
Investment securities available-for-sale
Trading securities
Money market investments
Derivative assets
Servicing assets
Derivative liabilities
Non-recurring fair value measurements:
Impaired commercial loans
Foreclosed real estate
Other repossessed assets
Level 1
December 31, 2016
Fair Value Measurements
Level 3
Level 2
(In thousands)
Total
$
$
$
$
$
$
$
$
-
-
5,606
-
-
-
5,606
-
-
-
-
Level 1
-
-
4,699
-
-
-
4,699
-
-
-
-
$
$
$
$
$
$
$
$
$
751,484
347
-
1,330
-
(2,437)
$
750,724
-
-
-
-
$
$
-
-
-
-
9,858
-
9,858
54,289
47,520
3,224
105,033
$
$
$
$
751,484
347
5,606
1,330
9,858
(2,437)
766,188
54,289
47,520
3,224
105,033
December 31, 2015
Fair Value Measurements
Level 3
Level 2
(In thousands)
Total
$
974,609
288
-
1,855
-
(6,162)
$
970,590
-
-
-
-
$
$
$
-
-
-
1,170
7,455
(1,095)
$
7,530
235,767
58,176
6,226
300,169
$
$
974,609
288
4,699
3,025
7,455
(7,257)
982,819
235,767
58,176
6,226
300,169
183
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2016, 2015 and 2014:
Level 3 Instruments Only
Balance at beginning of period
Gains (losses) included in earnings
New instruments acquired
Principal repayments
Amortization
Changes in fair value of servicing assets
Balance at end of period
Level 3 Instruments Only
Balance at beginning of period
Gains (losses) included in earnings
Sale of mortgage servicing rights
New instruments acquired
Principal repayments
Amortization
Changes in fair value related to price of MSR held-for-sale
Changes in fair value of servicing assets
Balance at end of period
Level 3 Instruments Only
Balance at beginning of period
Gains (losses) included in earnings
Changes in fair value of investment securities available for sale
included in other comprehensive income
New instruments acquired
Principal repayments
Amortization
Changes in fair value of servicing assets
Balance at end of period
Year Ended December 31, 2016
Other
debt
securities
available-for-sale
Derivative
asset
(S&P
Purchased
Options)
Servicing
assets
Derivative
liability
(S&P
Embedded
Options)
Total
- $
-
-
-
-
-
- $
1,171 $
(1,171)
-
-
-
-
- $
7,455 $
-
2,616
(489)
-
276
9,858 $
(1,095) $
1,067
-
-
28
-
- $
7,531
(104)
2,616
(489)
28
276
9,858
Year Ended December 31, 2015
Derivative
Derivative
Other
debt
securities
available-for-sale
asset
(S&P
Purchased
Options)
Servicing
assets
liability
(S&P
Embedded
Options)
- $
-
-
-
-
-
-
-
- $
5,555 $
(4,384)
-
-
-
-
-
-
1,171 $
13,992 $
-
(5,927)
2,620
(1,017)
-
(2,939)
726
7,455 $
(5,477) $
4,197
-
-
-
185
-
-
(1,095) $
Year Ended December 31, 2014
Derivative
Derivative
Total
14,070
(187)
(5,927)
2,620
(1,017)
185
(2,939)
726
7,531
Other
debt
securities
available-for-sale
asset
(S&P
Purchased
Options)
Servicing
assets
liability
(S&P
Embedded
Options)
Total
19,680 $
-
16,430 $
(10,875)
13,801 $
-
(15,736) $
9,659
34,175
(1,216)
320
-
(20,000)
-
-
- $
-
-
-
-
-
5,555 $
-
2,149
(1,072)
-
(886)
13,992 $
-
-
-
600
-
(5,477) $
320
2,149
(21,072)
600
(886)
14,070
$
$
$
$
$
$
During 2016, 2015 and 2014, 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.
184
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring
basis using significant unobservable inputs (Level 3) at December 31, 2016:
Fair Value
(In thousands)
Valuation Technique
Unobservable Input
Range
December 31, 2016
Servicing assets
$
9,858 Cash flow valuation
Collateral dependant
impaired loans
$
20,610
Fair value of property
or collateral
Constant prepayment rate
Discount rate
Appraised value less disposition
costs
4.24% - 9.14%
10.00% - 12.00%
22.20% - 36.20%
Other non-collateral dependant
impaired loans
$
33,679 Cash flow valuation
Discount rate
3.25% - 10.50%
Foreclosed real estate
$
47,520 Fair value of property
or collateral
Appraised value less disposition
costs
22.20% - 36.20%
Other repossessed assets
$
3,224 Fair value of property
or collateral
Appraised value less disposition
costs
22.20% - 36.20%
Information about Sensitivity to Changes in Significant Unobservable Inputs
Derivative asset (S&P Purchased Options) – The significant unobservable inputs used in the fair value measurement of the Company’s
derivative assets related to S&P purchased options are implied option volatility and counterparty credit risk. Significant changes in
any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption
used for implied option volatility is not necessarily accompanied by directionally similar or opposite changes in the assumption used
for counterparty credit risk.
Servicing assets – The significant unobservable inputs used in the fair value measurement of the Company’s servicing assets are
constant prepayment rates and discount rates. Changes in one factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a
component of total banking and financial service revenue in the 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.
Derivative liability (S&P Embedded Options) – The significant unobservable inputs used in the fair value measurement of the
Company’s derivative liability related to S&P purchased options were implied option volatility and counterparty credit risk.
Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a
change in the assumption used for implied option volatility is not necessarily accompanied by directionally similar or opposite
changes in the assumption used for counterparty credit risk.
Fair Value of Financial Instruments
The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair
value amounts presented do not necessarily represent management’s estimate of the underlying value of the Company.
The estimated fair value is subjective in nature, involves uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into
consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant
tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of retail
deposits, and premises and equipment.
185
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair value and carrying value of the Company’s financial instruments at December 31, 2016 and 2015 is as follows:
$
$
$
$
$
$
$
$
Level 1
Financial Assets:
Cash and cash equivalents
Restricted cash
Level 2
Financial Assets:
Trading securities
Investment securities available-for-sale
Investment securities held-to-maturity
Federal Home Loan Bank (FHLB) stock
Other investments
Derivative assets
Financial Liabilities:
Derivative liabilities
Level 3
Financial Assets:
Total loans (including loans held-for-sale)
Derivative assets
FDIC indemnification asset
Accrued interest receivable
Servicing assets
Accounts receivable and other assets
Financial Liabilities:
Deposits
$
Securities sold under agreements to repurchase $
$
Advances from FHLB
$
Other borrowings
$
Subordinated capital notes
$
Accrued expenses and other liabilities
$
Derivative liabilities embedded in deposits
$
$
$
$
$
$
$
December 31,
2016
December 31,
2015
Fair
Value
Carrying
Value
Fair
Value
Carrying
Value
(In thousands)
510,439 $
3,030 $
510,439 $
3,030 $
536,709 $
3,349 $
536,709
3,349
347 $
751,484 $
592,763 $
10,793 $
3 $
1,330 $
347 $
751,484 $
599,884 $
10,793 $
3 $
1,330 $
288 $
974,609 $
614,679 $
20,783 $
3 $
1,855 $
288
974,609
620,189
20,783
3
1,855
2,437 $
2,437 $
6,162 $
6,162
3,917,340 $
- $
8,669 $
20,227 $
9,858 $
46,518 $
4,644,629 $
651,898 $
106,422 $
61 $
30,230 $
95,370 $
- $
4,147,692 $
- $
14,411 $
20,227 $
9,858 $
46,518 $
4,664,487 $
653,756 $
105,454 $
61 $
36,083 $
95,370 $
- $
4,101,219 $
1,170 $
17,786 $
20,637 $
7,455 $
42,786 $
4,705,878 $
955,859 $
335,812 $
2,593 $
94,940 $
92,043 $
1,095 $
4,434,213
1,170
22,599
20,637
7,455
42,786
4,716,656
934,691
332,476
1,734
102,633
92,043
1,095
186
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31,
2016 and 2015:
• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued
interest receivable, accounts receivable and other assets and accrued expenses and other liabilities have been valued at the carrying
amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the
short-term nature of the instruments.
•
Investments in FHLB-NY stock are valued at their redemption value.
• The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when
available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed
prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable
inputs depending on the market activity of the instrument.
• The fair value of the FDIC indemnification asset represents the present value of the net estimated cash payments expected to be
received from the FDIC for future losses on covered assets based on the credit assumptions on estimated cash flows for each
covered asset and the loss sharing percentages. The ultimate collectability of the FDIC indemnification asset is dependent upon the
performance of the underlying covered loans, the passage of time and claims paid by the FDIC which are impacted by the Bank’s
adherence to certain guidelines established by the FDIC.
• The fair value of servicing asset is estimated by using a cash flow valuation model which calculates the present value of estimated
future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing
costs, and other economic factors, which are determined based on current market conditions.
• The fair values of the derivative instruments are provided by valuation experts and counterparties. Certain derivatives with limited
market activity are valued using externally developed models that consider unobservable market parameters. In the past, the
Company offered its customers certificates of deposit with an option tied to the performance of the S&P Index and used equity
indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value was
obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its
measurement tool for these options. The payoff of these options was linked to the average value of the S&P Index on a specific set
of dates during the life of the option. The methodology used an average rate option or a cash-settled option whose payoff was
based on the difference between the expected average value of the S&P Index during the remaining life of the option and the strike
price at inception. The assumptions, which were uncertain and required a degree of judgment, included primarily S&P Index
volatility, forward interest rate projections, estimated index dividend payout, and leverage. At December 31, 2016, there were no
options tied to S&P Index outstanding.
• Fair value of derivative liabilities, which include interest rate swaps and forward-settlement swaps, are based on the net discounted
value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected cash flows
are based on the forward yield curve, and discounted using current estimated market rates.
• The fair value of the loan portfolio (including loans held-for-sale) is estimated by segregating by type, such as mortgage,
commercial, consumer, auto and leasing. Each loan segment is further segmented into fixed and adjustable interest rates and by
performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows,
adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the
credit and interest rate risk inherent in the loan. This fair value is not currently an indication of an exit price as that type of
assumption could result in a different fair value estimate. Non-performing loans have been valued at the carrying amounts.
• The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market
discount rates for deposits of similar remaining maturities.
• The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB,
subordinated capital notes, and other long term borrowings 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.
187
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 26 – BUSINESS SEGMENTS
The Company 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 the Company’s organization, nature of its products, distribution channels and
economic characteristics of the products were also considered in the determination of the reportable segments. The Company
measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net
income, net interest income, loan production, and fees generated. The Company’s methodology for allocating non-interest expenses
among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among
others. These factors are reviewed on a periodical basis and may change if the conditions warrant.
Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage
loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate
mortgage loans for the Company’s own portfolio. As part of its mortgage banking activities, the Company may sell loans directly into
the secondary market or securitize conforming loans into mortgage-backed securities.
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 the Company’s asset/liability management activities, such as purchases and sales of
investment securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are
accounted for as if the sales or transfers were to third parties, that is, at current market prices.
188
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Following are the results of operations and the selected financial information by operating segment for the years ended December 31,
2016, 2015 and 2014:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income before income taxes
Total assets
Interest income
Interest expense
Net interest income (loss)
Provision for loan and lease losses
Non-interest income
Non-interest expenses
Intersegment revenue
Intersegment expenses
(Loss) income before income taxes
Total assets
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest (loss) income
Non-interest expenses
Intersegment revenue
Intersegment expenses
Income before income taxes
Total assets
Banking
Management
Treasury
Wealth
Total Major
Segments
Eliminations
Total
Consolidated
Year Ended December 31, 2016
321,868 $
(27,838)
294,030
(65,076)
35,587
(193,156)
1,521
(883)
72,023 $
5,584,866 $
(In thousands)
65 $
-
65
-
26,788
(17,443)
-
(1,108)
8,302 $
23,315 $
34,659 $
(29,327)
5,332
-
4,444
(5,391)
883
(413)
4,855 $
1,837,514 $
356,592 $
(57,165)
299,427
(65,076)
66,819
(215,990)
2,404
(2,404)
85,180 $
7,445,695 $
- $
-
-
-
-
-
(2,404)
2,404
- $
(943,871) $
356,592
(57,165)
299,427
(65,076)
66,819
(215,990)
-
-
85,180
6,501,824
Year Ended December 31, 2015
Wealth
Banking
Management
Treasury
Total Major
Segments
Consolidated
Eliminations
Total
367,620 $
(28,425)
339,195
(161,501)
23,900
(219,415)
1,427
(948)
(17,342) $
5,867,874 $
(In thousands)
95 $
-
95
-
28,288
(22,564)
-
(1,027)
4,792 $
22,349 $
38,853 $
(40,771)
(1,918)
-
284
(6,422)
948
(400)
(7,508) $
2,126,921 $
406,568 $
(69,196)
337,372
(161,501)
52,472
(248,401)
2,375
(2,375)
(20,058) $
8,017,144 $
- $
-
-
-
-
-
(2,375)
2,375
- $
(917,995) $
406,568
(69,196)
337,372
(161,501)
52,472
(248,401)
-
-
(20,058)
7,099,149
Wealth
Banking
Management
Year Ended December 2014
Total Major
Segments
Treasury
(In thousands)
Eliminations
Consolidated
Total
435,580 $
(34,721)
400,859
(60,640)
(13,389)
(213,935)
1,410
(327)
113,978 $
6,454,015 $
174 $
-
174
-
28,525
(21,748)
-
(1,089)
5,862 $
21,644 $
49,503 $
(42,061)
7,442
-
2,187
(7,042)
327
(321)
2,593 $
1,940,504 $
485,257 $
(76,782)
408,475
(60,640)
17,323
(242,725)
1,737
(1,737)
122,433 $
8,416,163 $
- $
-
-
-
-
-
(1,737)
1,737
- $
(967,054) $
485,257
(76,782)
408,475
(60,640)
17,323
(242,725)
-
-
122,433
7,449,109
$
$
$
$
$
$
$
$
$
189
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 27 – OFG BANCORP (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
As a bank holding company subject to the regulations and supervisory guidance of the Federal Reserve Board, the Company 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 the Company may also be affected by other regulatory requirements and policies, such as the maintenance of
certain regulatory capital levels. During 2016 and 2014, Oriental Insurance paid $5.0 million and $2.7 million, respectively, and
Oriental Financial Services paid $1.0 million and $3.2 million, respectively, in dividends to the Company. During 2015, Oriental
Insurance and Oriental Financial Services did not pay any dividends to the Company.
The following condensed financial information presents the financial position of the holding company only as of December 31, 2016
and 2015, and the results of its operations and its cash flows for the years ended December 31, 2016, 2015 and 2014:
OFG BANCORP
CONDENSED STATEMENTS OF FINANCIAL POSITION INFORMATION
(Holding Company Only)
ASSETS
Cash and cash equivalents
Investment securities available-for-sale, at fair value
Investment in bank subsidiary, equity method
Investment in nonbank subsidiaries, equity method
Due from bank subsidiary,net
Deferred tax asset, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Dividend payable
Due to affiliates
Accrued expenses and other liabilities
Subordinated capital notes
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2016
2015
(In thousands)
22,573
-
920,085
18,427
92
2,643
2,085
965,905
6,501
237
2,673
36,083
45,494
920,411
965,905
$
$
$
20,240
6,017
890,449
19,137
119
3,047
2,042
941,051
6,098
9
1,784
36,083
43,974
897,077
941,051
$
$
$
190
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG BANCORP
CONDENSED STATEMENTS OF OPERATIONS INFORMATION
(Holding Company Only)
Income:
Interest income
Gain on sale of securities
Investment trading activities, net and other
Total income
Expenses:
Interest expense
Operating expenses
Total expenses
(Loss) income before income taxes
Income tax (expense) benefit
(Loss) income before changes in undistributed earnings of subsidiaries
Equity in undistributed earnings from:
Bank subsidiary
Nonbank subsidiaries
Net income (loss)
2016
Year Ended December 31,
2015
(In thousands)
2014
$
174 $
211
4,066
4,451
321 $
-
4,007
4,328
1,370
7,179
8,549
(4,098)
(518)
(4,616)
1,222
6,866
8,088
(3,760)
3,088
(672)
58,580
5,222
59,186 $
(3,804)
1,972
(2,504) $
$
404
-
4,308
4,712
1,201
6,607
7,808
(3,096)
-
(3,096)
84,787
3,490
85,181
OFG BANCORP
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME INFORMATION
(Holding Company Only)
Net income (loss)
Other comprehensive (loss) income before tax:
Unrealized gain (loss) on securities available-for-sale
Other comprehensive income from bank subsidiary
Other comprehensive (loss) income before taxes
Income tax effect
Other comprehensive (loss) income after taxes
Comprehensive income (loss)
2016
Year ended December 31,
2015
(In thousands)
2014
$
59,186 $
(2,504) $
85,181
(204)
(12,238)
(12,442)
41
(12,401)
46,785 $
(170)
(5,578)
(5,748)
34
(5,714)
(8,218) $
209
16,361
16,570
(50)
16,520
101,701
$
191
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
OFG BANCORP
CONDENSED STATEMENTS OF CASH FLOWS INFORMATION
(Holding Company Only)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in undistributed earnings from banking subsidiary
Equity in undistributed earnings from nonbanking subsidiaries
Amortization of investment securities premiums, net of accretion of discounts
Realized gain on sale of securities
Other impairments on securities
Stock-based compensation
Deferred income tax, net
Net decrease in other assets
Net (decrease) in accrued expenses, other liabilities, and dividend payable
Dividends from banking subsidiary
Dividends from non-banking subsidiary
Net cash provided by operating activities
Cash flows from investing activities:
Maturities and redemptions of investment securities available-for-sale
Proceeds from sales of investment securities available-for-sale
Net decrease (increase) in due from bank subsidiary, net
Proceeds from sales of premises and equipment
Capital contribution to banking subsidiary
Capital contribution to non-banking subsidiary
Additions to premises and equipment
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from (payments to) exercise of stock options and lapsed restricted units, net
Purchase of treasury stock
Dividends paid
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2016
Year Ended December 31,
2015
(In thousands)
2014
$
59,186 $
(2,504) $
85,181
(58,580)
(5,222)
12
211
-
1,270
444
42
800
17,600
6,000
21,763
702
4,888
317
324
(894)
(68)
(381)
4,888
3,804
(1,972)
44
-
-
1,637
(3,088)
148
(221)
45,000
-
42,848
2,013
-
317
-
(1,167)
(94)
(132)
937
(315)
-
(24,003)
(24,318)
2,333
20,240
22,573 $
204
(8,950)
(31,623)
(40,369)
3,416
16,824
20,240 $
$
(84,787)
(3,490)
21
-
62
1,036
-
554
(696)
28,000
5,900
31,781
1,318
-
(218)
-
(892)
(76)
-
132
643
(16,948)
(28,341)
(44,646)
(12,733)
29,557
16,824
192
OFG BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 28 – SUBSEQUENT EVENTS
Effective 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.
Pursuant to the terms of the shared-loss agreements, the FDIC would reimburse the Bank for 80% of all qualifying losses with respect
to assets covered by such agreements, and the Bank would reimburse the FDIC for 80% of qualifying recoveries with respect to losses
for which the FDIC reimbursed the Bank. The single family shared-loss agreement provided for FDIC loss sharing and the Bank’s
reimbursement to the FDIC to last for ten years, and the commercial shared-loss agreement provided for FDIC loss sharing and the
Bank’s reimbursement to the FDIC to last for five years, with additional recovery sharing for three years thereafter. At December 31,
2016, $52.7 million in net carrying value of single family mortgages and $1.7 million in real estate owned were covered by the shared-
loss agreements.
As part of the loss share termination transaction, the Bank made a payment of $10.1 million to the FDIC and recorded a benefit of
$1.4 million. Such termination payment takes into account the anticipated reimbursements over the life of the shared-loss agreements
and the true-up payment liability of the Bank anticipated at the end of the ten year term of the single family shared-loss agreement. All
rights and obligations of the parties under the shared-loss agreements terminated as of the closing date of the agreement.
193
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’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, 2016, an evaluation was carried out
under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and
the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures. 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, the Company’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it
files or submits under the 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 the Company
to disclose material information otherwise required to be set forth in the Company’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 the Company’s internal control over financial reporting is included in Item 8 of this
report.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-
15(f) and 15d-15(f) under the Exchange Act) during the last quarter of the year ended December 31, 2016, that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
194
Items 10 through 14 are incorporated herein by reference to the Company’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.
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The Company’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based
compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend
equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and
further amended in 2010. It replaced and superseded the Company’s 1996, 1998 and 2000 Incentive Stock Option Plans (the “Stock
Option Plans”). All outstanding stock options under the Stock Option Plans continue in full force and effect, subject to their original
terms and conditions.
The following table shows certain information pertaining to the awards under the Omnibus Plan and the Stock Option Plans as of
December 31, 2016:
(a)
(b)
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans (excluding
those reflected in column (a))
Plan Category
Equity compensation plans approved by shareholders:
Omnibus Plan
Stock Option Plans
(1) Includes 872,269 stock options and 59,800 restricted stock units.
(2) Exercise price related to stock options.
932,069 (1) $
45,000
977,069
$
13.26 (2) $
(2)
12.45
13.22
1,036,869
-
1,036,869
The Company recorded approximately $1.270 million, $1.637 million and $1.036 million related to stock-based compensation
expense during the years ended December 31, 2016, 2015 and 2014, respectively.
Other information required by this Item is incorporated herein by reference to the Company’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.
195
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.
PART IV
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, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
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.
196
Exhibits
Exhibit No.:
Description Of Document:
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
12.1
21.1
23.1
31.1
Purchase and Assumption Agreement — Whole Bank, All Deposits, dated as of April 30, 2010, among the Federal
Deposit Insurance Corporation, Receiver of Eurobank, San Juan, Puerto Rico, the Federal Deposit Insurance
Corporation, and Oriental Bank and Trust.(1)
Acquisition Agreement dated as of June 28, 2012 between the Company and BBVA relating to the purchase and sale of
100% of the Common Stock of BBVAPR Holding and BBVA Securities.(2)
Composite Certificate of Incorporation. (3)
By-Laws.(4)
Certificate of Designation of the 7.125% Noncumulative Monthly Income Preferred Stock, Series A.(5)
Certificate of Designation of the 7.0% Noncumulative Monthly Income Preferred Stock, Series B.(6)
Certificate of Designations of 8.750% Non-Cumulative Convertible Perpetual Preferred Stock, Series C.(7)
Certificate of Designations of 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(8)
Form of Certificate for the 7.125% Noncumulative Monthly Income Preferred Stock, Series A.(9)
Form of Certificate for the 7.0% Noncumulative Monthly Income Preferred Stock, Series B.(10)
Form of Certificate for the 8.750% Non-Cumulative Convertible Perpetual Preferred Stock, Series C. (7)
Form of Certificate for the 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(8)
Lease Agreement between the Company and Professional Office Park V, Inc. (11)
First Amendment to Lease Agreement Dated May 18, 2004, between the Company and Professional Office Park V,
Inc.(12)
Change in Control Compensation Agreement between the Company and José R. Fernández.(13)
Change in Control Compensation Agreement between the Company and Ganesh Kumar (14)
Technology Outsourcing Agreement between the Company and Metavante Corporation.(15)
OFG Bancorp 2007 Omnibus Performance Incentive Polan, as amended and restated.(16)
Form of qualified stock option award and agreement (17)
Form of restricted stock award and agreement (18)
Form of restricted unit award and agreement (19)
Employment Agreement between the Company and José R. Fernández (20)
Amendment to Technology Outsourcing Agreement between the Company and Metavante Corporation (21)
Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends (included in Item 6
hereof )
List of subsidiaries
Consent of KPMG LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
197
31.2
32.1
32.2
101.1
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s annual report on Form 10-K for the year ended December 31, 2012,
formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Financial Condition,
(ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv)
Consolidated Statements of Comprehensive Income, and (v) Consolidated Statements of Cash Flow.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Incorporated herein by reference to Exhibit 2.1 of the Company’s current report on Form 8-K filed with the SEC on May 6, 2010.
Incorporated herein by reference to Exhibit 2.1 of the Company’s current report on Form 8-K filed with the SEC on July 3, 2012.
Incorporated herein by reference to Exhibit 3.1 of the Company’s annual report on Form 10-K filed with the SEC on March 14, 2016.
Incorporated herein by reference to Exhibit 3.1 of the Company’s quarterly report on Form 10-Q filed with the SEC on August 8, 2014.
Incorporated herein by reference to Exhibit 4.1 of the Company’s registration statement on Form 8-A filed with the SEC on April 30, 1999.
Incorporated herein by reference to Exhibit 4.1 of the Company’s registration statement on Form 8-A filed with the SEC on September 26, 2003.
Incorporated herein by reference to Exhibit 3.1 of the Company’s current report on Form 8-K filed with the SEC on July 3, 2012.
(8)
Incorporated herein by reference to Exhibit 3.1 of the Company’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 the Company’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 the Company’s registration statement on Form S-3, as amended, filed with the SEC on September 23, 2003.
(11) Incorporated herein by reference to Exhibit 10.5 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(12) Incorporated herein by reference to Exhibit 10.6 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(13) Incorporated herein by reference to Exhibit 10.12 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(14) Incorporated herein by reference to Exhibit 10.14 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005.
(15) Incorporated herein by reference to Exhibit 10.23 of the Company’s annual report on Form 10-K filed with the SEC on March 28, 2007.
(16) Incorporated herein by reference to Exhibit 4.1 of the Company’s registration statement on Form S-8 filed with the SEC on October 7, 2013.
(17) Incorporated herein by reference to Exhibit 10.1 of the Company’s registration statement on Form S-8 filed with the SEC on November 30, 2007.
(18) Incorporated herein by reference to Exhibit 10.2 of the Company’s registration statement on Form S-8 filed with the SEC on November 30, 2007.
(19) Incorporated herein by reference to Exhibit 10.1 of the Company’s quarterly report on Form 10-Q filed with the SEC on May 8, 2015.
(20) Incorporated herein by reference to Exhibit 10 of the Company’s quarterly report on Form 10-Q filed with the SEC on November 4, 2016.
(21) Incorporated herein by reference to Exhibit 10.16 of the Company’s annual report on Form 10-K filed with the SEC on March 3, 2014. Portions of this exhibit have been
omitted pursuant to a request for confidential treatment.
198
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
/s/ José Rafael Fernández
By:
José Rafael Fernández
President and Chief Executive Officer
/s/ Maritza Arizmendi Díaz
By:
Maritza Arizmendi Díaz
Executive Vice President and Chief Financial Officer
/s/ Vanessa De Armas
By:
Vanessa De Armas
Controller
Dated: March 10, 2017
Dated: March 10, 2017
Dated: March 10, 2017
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.
/s/ Julian Inclán
By:
Julian Inclán
Chairman of the Board
/s/ José Rafael Fernández
By:
José Rafael Fernández
Vice Chairman of the Board
/s/ Juan Carlos Aguayo
By:
Juan Carlos Aguayo
Director
/s/ Jorge Colón Gerena
By:
Jorge Colón Gerena
Director
/s/ Pedro Morazzani
By:
Pedro Morazzani
Director
/s/ Rafael Martínez-Margarida
By:
Rafael Martínez-Margarida
Director
/s/ Néstor de Jesús
By:
Néstor de Jesús
Director
/s/ Radamés Peña Pla
By:
Radamés Peña Pla
Director
Dated: March 10, 2017
Dated: March 10, 2017
Dated: March 10, 2017
Dated: March 10, 2017
Dated: March 10, 2017
Dated: March 10, 2017
Dated: March 10, 2017
Dated: March 10, 2017
G E N E R A L I N F O R M A T I O N
Main Office
Oriental Center
254 Muñoz Rivera Avenue
San Juan, PR 00918
Telephone: (787) 771-6800
Transfer Agent and Register
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Telephone: (718) 921-8257
Dividend Reinvestment Plan
Corporate Legal Department
OFG Bancorp
PO Box 195115
San Juan, PR 00919
Telephone: (787) 771-6800
Independent Certified Public Accountants
KPMG LLP
250 Muñoz Rivera Avenue, Suite 1100
San Juan, PR 00918
Form 10-K
Annual Report on Form 10-K filed with
the SEC is available on request at:
www.proxyvote.com
Annual Meeting
The Annual Meeting of Stockholders
will be held April 26, 2017
at 10:00 am (EST)
Oriental Center Lobby
254 Muñoz Rivera Avenue
San Juan, PR 00918
Annual Certifications
Our President and CEO has submitted to the
NYSE the Domestic Company Section 303A
Annual CEO Certification regarding our
compliance with the corporate governance listing
standards of the NYSE. Also, we have filed
with the SEC, as exhibits 31.1 and 31.2 to our
annual report on Form 10-K for fiscal 2016, the
Sarbanes-Oxley Act Section 302 Certifications of
both our CEO and CFO regarding the quality of
our public disclosures.
Branch Offices (48)
Aibonito
Aguadilla
Arecibo
Bayamón - 167
Bayamón - Minillas
Bayamón - Plaza del Sol
Caguas - Bairoa
Caguas - Las Catalinas Mall
Caguas - Plaza Centro
Canóvanas
Carolina - 65 Infantería
Carolina - Los Colobos
Carolina - Plaza Escorial
Cataño
Cayey
Ceiba
Coamo
Guaynabo - San Patricio
Guaynabo- Santa María
Guayama
Hatillo
Humacao
Isabela
Juana Díaz
Las Piedras
Manatí
Mayagüez - Main
Mayagüez - Mayagüez Mall
Peñuelas
Ponce - Hostos
Ponce - Plaza del Caribe
Ponce - Ponce Plaza
Ponce - Las Américas
Ponce - La Rambla
San Juan - Condado
San Juan - Los Paseos
San Juan - Miramar
San Juan - Oriental Center
San Juan - Plaza Las Américas
San Juan - Ponce de León
San Juan - San Roberto
San Juan - Santurce Parada 23
San Juan - Viejo San Juan
San Lorenzo
Toa Baja - Levitown
Vega Alta
Yabucoa
Yauco
Business Lines
Banking: Retail and Commercial
Auto Lending
Wealth Management
Insurance
Trust and Retirement Services
.
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CORPORATE SOCIAL RESPONSIBILITY
2016 was the second year of implementing our Corporate Social Responsibility program. Our initiatives
are based on promoting Social Innovation, Education and Entrepreneurship. At Oriental, one of our
slogans is Vive La Diferencia (Live the Difference). In our CSR program, we want to show that by taking
action, people have the power to make a difference and change their lives for the better. Oriental staff
spent more than 800 hours volunteering and giving back to our communities.
S O C I A L I N N O V A T I O N S U M M I T
We sponsored and organized a Social Innovation Summit at the
Innovation Center of Sacred Heart University in San Juan. Attend-
ed by more than 30 non-profit organizations, the event stimulated
conversation on how social innovation could contribute to econom-
ic development. Guest speaker was former White House advisor
Melissa Bradley, Director of the Center for Innovation at the Kogod
School of Business at American University.
E D U C A T I O N
Oriental people prepared more than 500 boxes of school supplies
that were delivered in time for the new school year to children of
three elementary schools and a foster home. We did this through
the Box of Hope initiative organized by the Enactus chapter of the
University of Puerto Rico at Bayamón. The boxes also included
personal messages to motivate students to stay in school and see
education as a window of opportunity.
E N T R E P R E N E U R S H I P
We sponsored three groups and created one to promote more
than 50 different entrepreneur oriented projects across the island.
We believe new business concepts can help foster Puerto Rico’s
economic revival. We partnered with Access Latina and Grupo
Guayacan to support each of their business entrepreneurial com-
petitions, and developed our own program—Atrévete (Challenge
Yourself) to provide resources and education aimed at entrepre-
neurs encouraging women in banking and finance.
OFG Bancorp (NYSE:OFG)
www.OFGBancorp.com